Editing Incentive (section)

==Incentives in the economic context==
The economic analysis of incentives focuses on the systems that determine the incentives needed for an agent to achieve a desired outcome dictated by the principal.<ref name=":3">{{Cite book |last=Neilson |first=William S. |title=Personnel Economics |publisher=Pearson Education Inc |year=2007 |isbn=9780131488564 |pages=11}}</ref> Incentives can help companies link employees' rewards to their productivity. When a firm wants their employees to produce a certain amount of output, it must be prepared to offer a compensation scheme such as a monetary bonus to persuade employees to reach the target output.<ref name=":3" /> Compensation must achieve two goals. The first is to reduce employee turnover and retain the highest performing and most productive employees. Compensating employees can help attract workers to work harder and retain their ability. The second is to improve productivity. Compensation can not only stimulate the ability of workers to produce output, but also improve the enthusiasm of employees to work, thus promoting business development.<ref name=":3" /> A rise in pay variance across the firm reflects an increased demand for highly productive workers, and therefore compensation has begun shifting towards [[Performance-related pay|pay-for-performance]].<ref>{{Cite journal |last1=Lazear |first1=Edward P. |last2=Shaw |first2=Kathryn L. |date=2007 |title=Personnel Economics: The Economist's View of Human Resources |journal=The Journal of Economic Perspectives |publisher=American Economic Association |volume=21 |issue=4 |pages=91–114 |doi=10.1257/jep.21.4.91 |jstor=30033753 |url=http://www.nber.org/papers/w13653.pdf}}</ref> This helps employees recognize the direct relationship between their work output and their reward.

While incentive has become one of a powerful tool to motivate and influence certain behaviour or action, they can also have unintended consequences.<ref>{{Cite journal |last1=Edmans |first1=Alex |last2=Fang |first2=Vivian W. |last3=Huang |first3=Allen |date=2018 |title=The Long-Term Consequences of Short-Term Incentives |url=http://dx.doi.org/10.2139/ssrn.3037354 |journal=SSRN Electronic Journal |doi=10.2139/ssrn.3037354 |s2cid=53073899 |issn=1556-5068}}</ref> Recent research indicated how extensive and intrinsic can come into conflict with other motivation. For example, a poorly designed incentive system can potentially lead to unintended behaviours and actions as such, individuals or companies gaming the system to earn rewards without actually achieving the desired outcomes. This is known as the [[Principal–agent problem|"principal-agent problem]]," where the incentives of the principal (e.g., the government or a company) do not align with the incentives of the agent (e.g., individuals or employees). This incentive conflicts can lead to adverse selection and moral hazard.<ref name=":15" /> A [[moral hazard]] refers to a situation in which a particular party engage in a risky behaviour because it fails to bear the full costs of that risk. On the other hand, an [[adverse selection]] occur when there is a [[Information asymmetry|asymmetric information]] between different parties. As such, adverse selection often creates an incentive for plans to inefficiently distorts benefits. As incentive can bring conflicts between parties involve, effective management plan is required to resolve incentive conflicts.

=== Misaligned incentives ===
A misaligned incentive refers to a situation where the goals of different parties involved in a particular situation such as a firm or system are not aligned and may even conflict with each other. Misaligned incentives can potentially arise in many other contexts, such as in government policies, healthcare, education, and environmental regulations. Principals within a firm want their agents to work for the principals' best interests, but agents often have different goals than the principals.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=7–63 |doi=10.1257/jel.37.1.7}}</ref> Due to this problem of misaligned incentives, firms must design compensation plans to induce workers to act in the firm's best interest and generate a level of output that maximizes the firm's profits.<ref name=":3" /> The problem of [[asymmetric information]] means that the principal does not know exactly how to motivate its agents to act in the firm's best interests. Consequently, compensation plans are difficult for firms to design.<ref name=":5">{{Cite web |title=Asymmetric Information: The Principal-Agent Problem |url=http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |url-status=dead |archive-url=https://web.archive.org/web/20151123003015/http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |archive-date=2015-11-23}}</ref> The [[Principal–agent problem|principal-agent theory]] is used as the guiding framework when aligning incentives with the employee's effort to obtain the efficient level of output for the firm.<ref name=":3" /> For example, a manager may want a certain level of output from an employee but does not know the capabilities of the employee in the presence of imperfect monitoring, and to achieve the best outcome, an optimal incentive scheme must be designed to motivate the worker to increase their productivity.<ref name=":5" /> Research shows that if a principal offers a high incentive, the agent will also recompense with a higher effort.<ref>{{Cite journal |last1=Irlenbusch |first1=Bernd |last2=Sliwka |first2=Dirk |date=September 2005 |title=Incentives, Decision Frames, and Motivation Crowding Out – an Experimental Investigation |journal=IZA Discussion Paper No. 1758 |ssrn=822866 |doi=10.2139/ssrn.822866|s2cid=16424059 |url=https://econpapers.repec.org/RePEc:iza:izadps:dp1758 |hdl=10419/33245 |hdl-access=free }}</ref>

However, in this relationship, an informal advantage usually exists among agents over the principal. A [[moral hazard]] could be present where principals are unable to know for sure if agents are giving their all on a delegated task, and an [[adverse selection]] could exist as principals usually have insufficient knowledge on the agents’ capabilities and face difficulties in selecting the agent best suited for a task.<ref name=":13">{{Cite journal |last1=Braun |first1=Dietmar |last2=Guston |first2=David H |date=October 2003 |title=Principal-agent theory and research policy: an introduction |journal=Science and Public Policy |volume=30 |issue=5 |pages=302–308 |doi=10.3152/147154303781780290 |s2cid=144005311 |issn=0302-3427|url=https://serval.unil.ch/resource/serval:BIB_7A523369F205.P001/REF.pdf }}</ref> In instances where principals have contradicting goals with the agents, agents would have an incentive to shirk and to leak information to competing principals.<ref>{{Cite journal |last1=Waterman |first1=Richard W. |last2=Meier |first2=Kenneth J. |date=1998 |title=Principal-Agent Models: An Expansion? |journal=Journal of Public Administration Research and Theory |volume=8 |issue=2 |pages=173–202|doi=10.1093/oxfordjournals.jpart.a024377 |doi-access=free }}</ref> Self-interested agents may also want to maximize their own interest by lying <ref>{{Cite book |last=Williamson |first=Oliver E. |title=The economic institutions of capitalism: firms, markets, relational contracting |date=1985 |publisher=The Free Press |isbn=978-0-684-86374-0 |oclc=12216444}}</ref> or deliberately hiding information from the principal to decrease their workload.<ref name=":13" />

=== Executive compensation ===
{{Main|Executive compensation}}
The board of directors in a company plays an important role in creating incentives for CEOs so that their best interest aligns with that of the shareholders. CEOs can be given incentives in many forms, including salary, bonuses, shares, and stock options to reward spectacular performance while penalties can be imposed for unsatisfactory performance. To ensure that the CEOs are appropriately incentivized, CEOs can be made the substantial owners of the company's stock by the board of directors. CEOs that own a portion of the company's stock will have an incentive to work towards the common best interest of themselves and the company shareholders. Threat to dismiss the CEOs for unsatisfactory performance can also act as an incentive to reinforce the performance of the CEOs, which can in turn maximize the company's value. The possibility of dismissal will increase CEOs’ accountability for their own actions considering that the possible dismissal would likely lead to a poor reputation for themselves. As a result, a potential increase in work engagement and performance can be seen.<ref name=":9">{{Cite journal |last1=Jensen |first1=Michael C. |last2=Murphy |first2=Kevin J. |date=Winter 2010 |title=CEO Incentives-It's Not How Much You Pay, But How |journal=Journal of Applied Corporate Finance |volume=22 |issue=1 |pages=64–76 |doi=10.1111/j.1745-6622.2010.00262.x |s2cid=219968200 |issn=1078-1196}}</ref>

Apart from monetary incentives, non-monetary incentives also play a part in increasing the work performance of CEOs. Non-monetary incentives can be introduced in the form of benefits such as power, public acknowledgement, prestige, and title. However, some argue that non-monetary incentives are less impactful'''.''' <ref name=":9" />

=== Tournament theory ===
[[Tournament theory]] describes a framework of compensation based on an individual's position within a firm's hierarchy.<ref name=":4" /> The theory demonstrates that individuals are not promoted on the basis of their absolute performance and output, but instead based on their performance relative to other employees in the same position within the organization.<ref name=":4" /> ''Ceteris paribus'', the larger the difference in compensation between one position to the next, the greater the incentive to exert more effort in order to achieve a promotion.<ref name=":0" /> However, that incentive is diminished as the size of the firm (and therefore the potential candidates for promotion) increases.

Firms must address the risk that a relative compensation scheme could incentivize uncooperative behavior amongst co-workers. Accordingly, firms encounter a trade-off between incentivizing workers to increase their efforts by increasing pay variance between the promoted and the unpromoted and, on the other hand, minimizing disharmony amongst co-workers by maintaining some level of pay compression.<ref name=":0" />

=== Self-selection effects of incentives ===
Employees know more about their own abilities, competitiveness and risk attitudes than potential employers. Due to this asymmetric information, firms design incentives not only to enhance employees’ motivation to act in the interests of the firm and maximize their output, but also to influence the type and quality of workers that they attract.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=14–15 |doi=10.1257/jel.37.1.7}}</ref> This is known as the self-selection or sorting effect of incentives. For example, empirical studies have shown that firms which implement pay-for-performance rather than fixed wage compensation schemes tend to attract more productive workers who are less risk averse.<ref>{{Cite journal |author1=Bram Cadsby, C. |author2=Song, F. |author3=Tapon, F. |date=April 2007 |title=Sorting and Incentive Effects of Pay for Performance: An Experimental Investigation |journal=The Academy of Management Journal |volume=50 |issue=2 |pages=389–392}}</ref> Greater risk aversion reduces workers' willingness to work for variable as opposed to fixed pay.<ref>{{Cite journal |author1=Dohmen, T. |author2=Folk, A. |date=2010 |title=Yout Get What You Pay For: Incentives and Selection in the Education System |jstor=40784482 |journal=The Economic Journal |volume=120 |issue=546 |pages=257–258|doi=10.1111/j.1468-0297.2010.02376.x |s2cid=12928709 |url=https://cris.maastrichtuniversity.nl/en/publications/4c771dbe-5bb2-4611-8ae7-814877f04261 }}</ref> Accordingly, firms may use incentives as a method of filtering out low productivity workers or workers who lack the personal characteristics that those firms are searching for.

=== Team-based incentives ===
Production is increasingly organized around teams in many large firms.<ref name=":4" /> Teamwork may enhance company productivity for firms that encounter multidimensional, complex problems. A firm may be able to solve a complex task which requires a high level of various different skills by assigning it to expert workers with complementary skills.<ref name=":4" /> Due to constantly advancing technologies, seldom does an individual employee have an [[absolute advantage]] across all skills that are required to solve the complicated problems that firms face, hence team collaboration is crucial and beneficial to ensure the success of a team.<ref name=":4" />

Individualized incentives are said to be dysfunctional in an interdependent working environment where individual performance is difficult to observe<ref>{{Cite book |last1=Franco-Santos |first1=Monica |title=Team-based incentives: Creating a Culture of Collaboration, Innovation, and Performance. The Compensation Handbook. |last2=Gomez-Mejia |first2=Luis R. |publisher=McGraw-Hill |year=2015 |edition=6th |pages=199–209 |chapter=Creating a culture of collaboration, innovation and performance through team-based incentives}}</ref> and so firms may opt for team-based incentives instead. Team-based incentive refers to the incentive system that rewards employees based on performance of the team.<ref>{{Cite book |last1=DeMatteo |first1=J. S. |title=Team-based rewards: Current empirical evidence and directions for future research. Research in organizational behavior |last2=Eby |first2=L. T. |last3=Sundstrom |first3=E. |publisher=Elsevier Science/JAI Press. |year=1998 |edition=B. M. Staw & L.L. Cummings |volume=20 |pages=141–183}}</ref> Team-based incentives are described as more beneficial to companies than individual-based incentives. By paying a straight piece rate to individual employees, they would have little to no motivation to help each other as the incentives they receive are irrespective of the result of others. On the other hand, paying team incentives based on team output can promote cohesiveness, trust, cooperation, and support within a team.<ref>{{Cite journal |last1=Beersma |first1=B. |last2=Hollenbeck |first2=J. R. |last3=Humphrey |first3=S. E. |last4=Moon |first4=H. |last5=Conlon |first5=D. E. |last6=Ilgen |first6=D. R. |date=2003 |title=Cooperation, Competition, and Team Performance: Towards a Contingency Approach |journal=Academy of Management Journal |volume=46 |issue=5 |pages=572–590 |doi=10.2139/ssrn.325401 |ssrn=325401 |issn=0001-4273}}</ref> Researchers found a positive relationship between team-based incentive and employees’ work efficacy, stability, and salary<ref>{{Cite journal |last=Kruse |first=Douglas |date=May 2022 |orig-year=December 2016 |title=Does employee ownership improve performance? |journal=IZA World of Labor |at=311 |doi=10.15185/izawol.311 |doi-access=free |issn=2054-9571|hdl=10419/148536 |hdl-access=free }}</ref> as well as company output.<ref>{{Cite journal |last1=Hamilton |first1=Barton H. |last2=Nickerson |first2=Jack A. |last3=Owan |first3=Hideo |date=June 2003 |title=Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation |journal=Journal of Political Economy |volume=111 |issue=3 |pages=465–497 |doi=10.1086/374182 |s2cid=11969481 |issn=0022-3808}}</ref>

Research shows that employees prefer individual-based incentives over team-based incentives due to a few reasons. Firstly, they believe that team-based incentives are prone to unfairness. Employees with more contributions may be discouraged from seeing employees that contributed less receiving the same level of incentive.<ref name=":11">{{Cite journal |last1=Gerhart |first1=Barry |last2=Rynes |first2=Sara L. |last3=Fulmer |first3=Ingrid Smithey |date=January 2009 |title=6 Pay and Performance: Individuals, Groups, and Executives |journal=Academy of Management Annals |volume=3 |issue=1 |pages=251–315 |doi=10.5465/19416520903047269 |issn=1941-6520}}</ref> Moreover, as a team expands and the effect of team incentives weakens, employees struggle to establish a clear link between effort given and incentives received.<ref name=":11" /> It is also inevitable that team incentives could induce the [[free-rider problem]] because an employee's motivation to maximize their individual output could be diminished.<ref>{{Cite journal |last=Holmstrom |first=Bengt |date=1982 |title=Moral Hazard in Teams |jstor=3003457 |journal=The Bell Journal of Economics |volume=13 |issue=2 |pages=325–328|doi=10.2307/3003457 }}</ref> Managers may need to offer a team incentive that is strong enough to ensure that each worker's individual payoff from exerting the level of effort that allows the company to maximize its profits is greater than their individual payoff from free riding on the efforts of other team members.<ref>{{Cite journal |author1=Alchian, A. |author2=Demsetz, H. |date=1972 |title=Production, Information Costs, and Economic Organization |jstor=1815199 |journal=The American Economic Review |volume=62 |issue=5 |pages=779–781}}</ref>
[[File:Team-based incentives game.png|thumb|360x360px|Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding.]]
Using [[Game theory]] to illustrate this, firms need to implement a team-based incentive that results in the value of ‘Y’ in Game 1 being greater than 100 and enforce a punishment for free-riding that makes the value of ‘X’ less than 40. This would ensure that both team members’ dominant strategy in Game 1 is to work hard and the [[Nash equilibrium]] is (Work Hard, Work Hard).

In contrast, some studies have shown that peer pressure and employees’ intrinsic incentive to perform well in a team environment may mitigate the free-rider problem associated with team-based incentives.<ref name=":8">{{Cite journal |author1=Frederiksen, A. |author2=Hansen, D. |author3=Manchester, C. |date=2022 |title=Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process |url=https://www.iza.org/publications/dp/14986/does-group-based-incentive-pay-lead-to-higher-productivity-evidence-from-a-complex-and-interdependent-industrial-production-process |journal=IZA Institute of Labor Economics |pages=2–4}}</ref><ref>{{Cite journal |author1=Kandel, E. |author2=Lazear, E. |date=1992 |title=Peer Pressure and Partnerships |jstor=2138688 |journal=Journal of Political Economy |volume=100 |issue=4 |pages=803–811|doi=10.1086/261840 |s2cid=16757647 }}</ref> Such case studies demonstrate that team incentives increase firm productivity in settings that involve complex, interdependent production where peer pressure and intrinsic incentives outweigh selfish preferences.<ref name=":8" /> Peer rating system can also be introduced for team members to rate each other's contribution to a task. Research findings show that imposing a penalty on free riders is useful in decreasing the tendency of free riding.<ref>{{Cite conference |last1=Hashim |first1=Matthew J. |last2=Bockstedt |first2=Jesse C. |date=5–8 January 2015 |title=Overcoming Free-Riding in Information Goods: Sanctions or Rewards? |book-title=2015 48th Hawaii International Conference on System Sciences |place=Kauai, HI, USA |publisher=IEEE |pages=4834–4843 |doi=10.1109/hicss.2015.574}}</ref>

=== Cultural differences in incentives ===
Studies have found that the effectiveness of pay-for-performance incentives varies across cultures. For example, one study randomly assigned people in the US, UK, China, India, Mexico, and South Africa to complete basic work tasks for money or psychological [[Nudge theory|nudges]], such as social norms.<ref>{{Cite journal |last=Medvedev |first=Danila |last2=Davenport |first2=Diag |last3=Talhelm |first3=Thomas |last4=Li |first4=Yin |date=March 2024 |title=The motivating effect of monetary over psychological incentives is stronger in WEIRD cultures |url=https://www.nature.com/articles/s41562-023-01769-5 |journal=Nature Human Behaviour |language=en |volume=8 |issue=3 |pages=456–470 |doi=10.1038/s41562-023-01769-5 |issn=2397-3374}}</ref> In general, people worked harder in response to money than the nudges, but the relative power of money was stronger in Western cultures than non-Western cultures. Similarly, researchers paid students in the US and China for getting questions correct on a math test.<ref>{{Cite journal |last=Gneezy |first=Uri |last2=List |first2=John A. |last3=Livingston |first3=Jeffrey A. |last4=Qin |first4=Xiangdong |last5=Sadoff |first5=Sally |last6=Xu |first6=Yang |date=December 2019 |title=Measuring Success in Education: The Role of Effort on the Test Itself |url=https://www.aeaweb.org/articles?id=10.1257/aeri.20180633 |journal=American Economic Review: Insights |language=en |volume=1 |issue=3 |pages=291–308 |doi=10.1257/aeri.20180633 |issn=2640-205X}}</ref> Money made students get more answers correct on the test in the US, but not in China.

These findings are consistent with cultural differences in how common pay-for-performance incentives are across cultures. Studies have found that pay-for-performance is more common among companies in individualistic cultures, such as the US and UK.<ref>{{Cite web |last=Gomez-Mejia |first=Luis R. |last2=Welbourne |first2=Theresa |date=1991-03-01 |title=Compensation Strategies in a Global Context. {{!}} EBSCOhost |url=https://openurl.ebsco.com/EPDB:gcd:1:9635505/detailv2?sid=ebsco:plink:scholar&id=ebsco:gcd:7700836&crl=c&link_origin=scholar.google.com |access-date=2025-05-06 |website=openurl.ebsco.com |language=en}}</ref><ref>{{Cite journal |last=Schuler |first=Randall S. |last2=Rogovsky |first2=Nikolai |date=1998-03-01 |title=Understanding Compensation Practice Variations Across Firms: The Impact of National Culture |url=https://link.springer.com/article/10.1057/palgrave.jibs.8490030 |journal=Journal of International Business Studies |language=en |volume=29 |issue=1 |pages=159–177 |doi=10.1057/palgrave.jibs.8490030 |issn=1478-6990|url-access=subscription }}</ref> It is unclear whether the pay structures cause the cultural differences in the effectiveness of pay-for-performance incentives or if they are a result of cultural differences.

=== Potential issues associated with the use of incentives in firms ===

==== Ratchet effect ====
Incentives are arguably beneficial in increasing productivity, however, they can also have an adverse effect on the firm.<ref name=":3" /> This is evident through the [[ratchet effect]]. A firm may use its observation of an employee's output level when they are first employed as a guide to set performance standard and objectives for the future.<ref name=":6">{{Cite journal |last1=Kanemoto |first1=Yoshitsugu |last2=MacLeod |first2=W. Bentley |date=1992 |title=The Ratchet Effect and the Market for Secondhand Workers |journal=Journal of Labor Economics |publisher=University of Chicago Press |volume=10 |issue=1 |pages=85–98 |doi=10.1086/298279 |jstor=2535130 |s2cid=154244118}}</ref> Knowing this, an employee may deliberately reduce their output level when first employed or hide their ability to produce at a higher output with the intent of exploiting being rewarded in the future when they strategically increase their output level.<ref name=":6" /> Best performances of employees can be limited from it. Thus, the ratchet effect can significantly diminish production levels of a firm and planned economies.<ref>{{Cite journal |last1=Cooper |first1=David J. |last2=Kagel |first2=John H. |last3=Lo |first3=Wei |last4=Gu |first4=Qing Liang |date=1999 |title=Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers |journal=The American Economic Review |volume=89 |issue=4 |pages=781–804 |doi=10.1257/aer.89.4.781 |jstor=117159 |issn=0002-8282 |url=http://s3.amazonaws.com/fieldexperiments-papers2/papers/00038.pdf}}</ref>

==== Crowding-out effect ====
Additionally, in the 1970s psychologists began exploring the relationship between extrinsic and intrinsic motivation whilst economists were simultaneously studying the "crowding-out" effects of monetary incentives. This came as a result of Richard Titmuss' 1970 publication, "The Gift Relationship", which explained how the constant use of extrinsic incentives can result in conflict with intrinsic motivators and lead to the desired behavior being "crowded out".<ref name="auto5">{{cite journal |last1=Gneezy |first1=Uri |last2=Meier |first2=Stephan |last3=Rey-Biel |first3=Pedro |title=When and Why Incentives (Don't) Work to Modify Behavior |journal=Journal of Economic Perspectives |date=Fall 2011 |volume=25 |issue=4 |page=192 |doi=10.1257/jep.25.4.191 |doi-access=free }}</ref> In his publication, Titmuss argued that the use of monetary incentives was disrupting social norms around the idea of voluntary contribution and would ultimately have a crowding-out effect. He acknowledged that if the incentives are large enough, they are more likely to offset crowding-out effects (at least in the short run while the incentives are being offered). However, Titmuss noted that making the incentives too large could also have an adverse effect due to the possibility of negative inferences being drawn from the size of the incentives.<ref>{{cite journal |last1=Ariely |first1=Dan |last2=Gneezy |first2=Uri |last3=Loewenstein |first3=George |last4=Mazar |first4=Nina |title=Large Stakes and Big Mistakes |journal=The Review of Economic Studies |date=2009 |volume=76 |issue=2 |pages=451–469 |doi=10.1111/j.1467-937X.2009.00534.x |url=https://rady.ucsd.edu/_files/faculty-research/uri-gneezy/large-stakes.pdf |access-date=3 May 2022 |archive-date=March 26, 2023|archive-url=https://web.archive.org/web/20230326043518/https://rady.ucsd.edu/_files/faculty-research/uri-gneezy/large-stakes.pdf|url-status=live}}</ref> Crowding-out effects can also occur when temporary incentives are removed in the long run. In the workplace, the complete removal of extrinsic incentives can result in employee effort levels being lower than they were when the incentives were offered, thereby hindering motivation and performance.<ref name="auto5"/>

==== Stock options ====
Incentives are not always effective at aligning employees' incentives with those of the firm.<ref>{{Cite book |last1=Chiappori |last2=Salanié |year=2003 |chapter=Testing contract theory: a survey of some recent work |editor=M. Dewatripont |editor2=L. Hansen |editor3=S. Turnovsky |title=Advances in Economics and Econometrics |volume=1 |pages=115–149 |place=Cambridge |publisher=Cambridge University Press |doi=10.1017/CBO9780511610240.005 |isbn=9780511610240 |s2cid=3067063 |url=http://crest.science/RePEc/wpstorage/2002-11.pdf}}</ref> For example, some [[corporation|corporate]] policies popular during the 1990s aimed to encourage productivity have led to failures as a result of unintended consequences.<ref name=":7">{{Cite book |last=Jain |first=Abha |title=Sports Psychology |publisher=Friends Publications |year=2019 |isbn=978-93-88457-75-0 |location=India |pages=215}}</ref> Moreover, providing [[stock option]]s was intended to boost [[CEO]] productivity through offering a remunerative incentive to align the CEOs' interests with those of the shareholders to improve company performance.<ref name=":7" /> However, CEOs were found to either make good decisions which resulted in a reward of a long-term price increase of the stock, or were found to have fabricated the accounting information to give the illusion of economic success and to retain their incentive-based pay.<ref name=":7" /> Furthermore, it has been found to be extremely costly for firms to incentivize CEOs with stock options. Nevertheless, firms are forced to pay substantial amounts of money to ensure that CEOs act in the best interest of the firms.<ref name=":3" />

==== Conflicts generated by pay variance ====
Incentives can have a bipolar effect on the company.
On the one hand, the company's incentives to employees may create a pay gap. For example, low-paid employees may reduce their production or contribution to the company. Low-paid employees and high-paid employees may not be able to communicate and cooperate effectively, causing low-paid employees to gradually lose their enthusiasm for work.<ref>{{cite journal |last1=Breza |first1=Emily |last2=Kaur |first2=Supreet |last3=Shamdasani |first3=Yogita |title=The Morale Effects of Pay Inequality* |journal=The Quarterly Journal of Economics |date=10 October 2017 |volume=133 |issue=2 |pages=611–663 |doi=10.1093/qje/qjx041|doi-access=free }}</ref> Firms should provide a fair amount of incentives for both low-paid and other employees, incentives for low-paid workers can be breaks rather than monetary incentives. Motivating employees with financial rewards may make a difference. That's because if the company is profitable in the first year, it may have plenty of bonuses to hand out to employees. However, if the company makes less money in the second year than it did in the first year, the company may not be able to give employees the same bonuses as in the first year even though they put in the same effort. This also reduces employees' motivation to work. Therefore, incentives may be counterproductive. Firm can provide other types of incentives rather than monetary incentives, such as promotion or vacation breaks for high-performing employees.