Incentives in the Age of Knowledge Work

Classic incentive theory holds that offering a performance-based reward is an effective way for organizations to motivate workers’ efforts in service of desired performance. The theory assumes that performance is assessable. This paper aims to answer a smoldering question: How effective are performance-based rewards when level of performance is ambiguous, as is often true with contemporary work that increasingly involves performing conversions of knowledge from one form to another by exchanging and combining knowledge? We argue and find using a cross-industry dataset that social incentives (rewards in the form of commendation and development opportunities) are more effective than financial incentives (pecuniary rewards). Unlike financial incentives, which are the cornerstone of classic incentive theory, social incentives were positively associated with workers’ motivation to exchange and combine knowledge in the belief that this activity creates value, which in turn, promoted organizations’ capability for this activity. When combined, the two incentives positively interacted to cultivate capability emerging from workers’ motivation; however, the direct effect of their interaction on capability was negative, after accounting for workers’ motivation. The net effect of these positive and negative effects was positive for the average organization. However, organizations with the highest use of financial incentives neutralized the positive effect of social incentives, holding workers’ motivation constant. This research informs optimal organizational governance - what Weick (1979) termed grammars of organizing - by providing reasoning and evidence for the importance of social incentives vis-à-vis classical financial incentives in the age of knowledge work.