Critiquing ‘Intrinsic & Extrinsic Motivation’: The Power & Limits of incentives

Two of the papers by the Nobel Prize winning Economist, Jean Tirole, ‘Intrinsic and Extrinsic Motivation’ and ‘Competitive Pay, Screening & Multi-tasking’, co-authored by Roland Benabou, are replete with examples that point to the facts that incentives are not about performance, per se, but hinge on the alignment of objectives between the principal and the agent and that higher their extrinsic value, lower is their potential to succeed, while intrinsic factors remain more entrenched in the drive for achieving self-driven goals, which may or may not serve the purpose that a principal could be bent on. The biggest malaise is however the estrangement of cooperation when extrinsic factors act as impediments between individuals or groups; the great virtues of cooperation and vulnerability seem to be missing as extrinsic incentives come to play.

Great achievements and innovations of our world never got achieved by extrinsic motivation or monetary incentives; imagine the great scientists or innovators or great artists driven by these and one would have found not many creations worth a mention, while there would be a deluge of examples on the contrary of great men driven by passion (intrinsic motivation), not by the underlying economics that their creation would induce. The more worldly examples of incentivizing behavior by extrinsic factors, include some successes in the area of Financial markets, but the data seem to point out that it was more driven for protecting the turf as talent became mobile and transitory, or it was merely to keep pace with the rising demand for wages and it would have been sheepish to keep such stratospheric levels fixed. Nothing seems to point to the fact that it was meant for driving better performance.

The real crux of the puzzle was to align the objectives of the principal and the agent under conditions of imperfect information and to create a framework where risk taking could be set within some parameters. The intrinsic motivation hypothesis failed to give plausible solutions to this puzzle as no matter how much driven by passion or the inner-urge to excel, it was impossible for the principle to fully realize whether it would be directed to something which is completely aligned to what he is motivated to achieve. Under public ownership of companies, this became the biggest pitfall that intrinsic factors failed to give a cogent solution. The principal on the other hand has limited information, expertise and knowledge to be able to fully guide an agent to the objectives, while creating goals that are consistent with the capability of the current organization is never fully tested. The somewhat middle path was to create extrinsic incentives that would make the meeting point look plausible, albeit with limits as to their chances of success.

The problem however shifts to risk aversion; an agent who has found the task more difficult would be bent on being risk averse in the next opportunity and there would be less to be achieved by further increasing the extrinsic value of the incentives. On the other hand if less difficult goals are mutually agreed, the success against them would induce risk-averseness only from the agent’s side. On both counts extrinsic incentives fail. But new variants were discovered, like the retention awards or the lump sum pay schemes, both of which were attempts to counter the risk-averseness through which the agents move as a behavioral stance.

Intrinsic motivation is about self-driven goals, about seeking cooperation through reciprocation and it is about taking risks that are hedged. This is more than present in every entrepreneur and leader but may not be sufficient propellants for agents to be driven to tasks. Therefore no matter how much we criticize the extrinsic factors, their preponderance in the motivational factors for agents is mooted in the absence of a better ploy.

Jean Tirole however in his most recent paper has talked about self-presentation by the agent and perhaps the better wisdom lies in the principal’s understanding of the strengths of the strategy under execution. The solution to the puzzle lies in the unleashing of the true power of non-monetary incentives so that the principal and agent together could combine in complementary roles and responsibilities through reciprocation and cooperation.