Incentive system

The term incentive system may refer to a variety of fields, including biology, education and philosophy. This article takes a psychological, economic and business perspective similar to the book 'Design of Incentive Systems'. As such an incentive system denotes a structure that motivates individuals as part of an organization to act in the interest of the organization.

Since 'people make the place [organization]', a fundamental requirement of creating an incentive system that works for individuals and the organization is understanding human behavior and motivators of human behavior. Relevant theories that help to understand human behavior include: utility theory, principal-agent theory, need hierarchy theory, two factor theory, cogntive evaluation theory, expectancy theory, goal-setting theory, equity theory. The complexity of understanding human behavior gets highlighted by the many determinants that influence human judgment and decision making. Bonner grouped them into Knowledge and personal involvement, cognitive processes, task variables and environmental variables, abilities, intrinsic motivation and other person variables.

A variety of elements can be part of an incentive system:

An incentive system is thought of inducing two important effects: an incentive effect and a sorting effect. Incentive effects are direct effects resulting from the incentive system that improve performance. Sorting effects are rather indirect effects. They describe that individuals with particular characteristics may be attracted to particular incentive systems. For instance, higher skilled individuals are rather attracted to variable than fixed compensation.

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