What Really Motivates Employees?

Once upon a time in the bustling world of corporate management, a theory known as agency theory held sway over the hearts and minds of managers and business educators alike. Agency theory was founded on a simple, yet powerful assumption: Humans are inherently self-interested and rational beings who must be controlled and incentivized to align their actions with organizational goals.

Source: Dall.e/OpenAI

The Reign of Agency Theory

Under the reign of agency theory, management practices are designed to harness this assumed self-interest. Compensation systems are built on the premise that employees would only work hard if they were financially rewarded. This led to the creation of complex incentive structures, where bonuses and pay raises are tightly linked to performance metrics.

In business schools, many future leaders are taught the principles of agency theory. They learn that control mechanisms like monitoring, performance appraisals, and detailed procedures are necessary to ensure that employees do not stray from their tasks. This education perpetuates a culture of distrust and control, where managers view their employees as potential shirkers needing constant oversight.

The consequences of this approach have been far-reaching. Electronic surveillance is becoming increasingly widespread. Compensation systems designed to incentivize performance often backfire, leading to unethical behaviors and gaming the system. Financial scandals too often highlight how reliance on incentives drives individuals to engage in deceitful practices.

The Alternative: Self-Determination Theory

What if management practices were based on self-determination theory (SDT) instead?

Unlike agency theory, SDT posited that humans have an inherent drive to thrive when their basic psychological needs for autonomy, competence, and relatedness are met. It suggests that employees are not merely motivated by external rewards, but also by intrinsic factors such as personal growth, meaningful work, and a sense of belonging. If management was done with the satisfaction of autonomy, competence, and relatedness in mind, the theory goes, workers would be more likely to internalize the goals of their employers and wholeheartedly pursue them.

Under the influence of SDT, compensation systems could rely much less on performance-based incentives but would still pay well and fairly, while better communication of organisational goals and how each employee's role contributes to attaining them would be enhanced. Employees would be trusted to make decisions themselves as they would be trained for it and information would be shared so they can make good decisions.

Performance evaluations would focus on developing employees rather than evaluating and ranking them for rewards. Work would be enriched to provide challenge and feedback, develop skills, give discretionary power to employees, and connect them to stakeholders.

Over-reliance on coercive control mechanisms would wane as managers realize that trust and autonomy are more effective and cost-effective than constant oversight. They would replace rigid procedures with guidelines that provided structure while allowing for flexibility and would eliminate useless reporting requirements. If surveillance and measurement are used at all to monitor employees, it would be done minimally and with the goal of providing feedback to help employees be more efficient in their work.

You could even shift public policies as governments and regulators could move away from treating safety management and unemployment as a motivation problem that required sanctions and monitoring. Instead, policies could be aimed at fostering engagement in safety management and supporting job seekers by providing relevant training, removing barriers to employment, and helping individuals find jobs that match their skills and interests.

What Do We Need to Do to Make This Shift Happen?

The first thing would be to revolutionize management education. Business school curriculum is currently heavy on agency theory-based assumptions in economics, finance, accounting, strategy, and human resource management.

Yet in organizational behavior and leadership classes, students are exposed to motivational assumptions that are closer to SDT. How do they reconcile these contradictory principles? Can we influence curriculum changes to adjust motivational assumptions behind taught practice?

Leadership Essential Reads

3 Strategies to Reclaim Ownership of Your Work Day

Why High-Potential Women Are Ambivalent About Leadership

Once they enter the workforce, it might not be enough for young professionals to challenge the traditional control-based mindset their predecessors were taught. This means that we would also need to intervene directly in organizations.

If we could achieve this, I argue that we would be likely to solve some of the problems caused by agency theory, including the over-reliance on monitoring, regulation, and incentives that cause loss of meaningful work and stress, and increase the risk of unethical behaviors.