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Accounting, Organizations and Society 27 (2002) 275–295

Agency theory, performance evaluation, and the hypothetical
construct of intrinsic motivation
Alexis H. Kunza,*, Dieter Pfaffb
University of Applied Sciences Aargau (Northwestern Switzerland), Martinsberg, CH-5401 Baden, Switzerland
Institute for Accounting and Control, University of Zurich, Plattenstrasse 14, CH-8032, Zurich, Switzerland

Cognitive evaluation theory and its hypothetical construct of intrinsic motivation are enjoying increasing popularity
in the fields of business administration and economics. Consequently, intensifying skepticism towards performance
incentives and agency theory is postulated. According to cognitive evaluation theory, it is argued that performance pay
may undermine an agent’s intrinsic motivation. In contradiction to agency theory, the principal might be worse off
when providing an incentive contract to the agent than without doing so. Since the contention is substantiated by
empirical evidence, it seems worrying enough for further investigation. Restricting attention to performance pay in
business corporations, the scope of this article is to evaluate whether agency theory faces an urgent need to incorporate
the construct of intrinsic motivation and its ‘hidden costs of reward’ as postulated by supporters of the concept. The
subsequent analysis reveals good and bad news for agency theory. The bad news is that hidden costs of reward do
indeed exist. The good news is that the empirical evidence on undermining effects cannot be interpreted as being con-
tradictory to agency theory. In particular, the antecedents for such effects not only seldomly prevail in business cor-
porations, they are also easily avoidable. # 2002 Elsevier Science Ltd. All rights reserved.

There is no doubt that agency theory and its evidence for the theory’s contribution to real-life
advocated view of the firm as a complex nexus of situations (Milgrom & Roberts, 1992).
contracts constitutes one of the major pillars of Despite this, standard agency theory has often
theoretical accounting. As such it not only helps to been criticized because of its presumptions about
understand and explain the behavior of business human behavior. Especially some psychological
actors, but also provides a rich fund of practical and sociological concepts refer to disparate
implications for the design of governmental struc- assumptions about human behavior and seem to
tures such as transfer prices, the delegation of have established a certain rivalry of thoughts
residual rights or the design of managerial incen- between the disciplines. Overall, there exists quite
tive contracts. In particular, the overwhelming a disagreement about the consequences of state-
empirical preponderance of pay for performance contingent performance pay. On the one hand,
systems has often been taken as circumstantial agency theory asserts that increased performance
incentives ceteris paribus raise the agent’s pro-
ductivity when risk considerations are omitted. On
the other hand, the psychological concept of
* Corresponding author. intrinsic motivation may predict quite the oppo-
E-mail address: (A.H. Kunz). site. In accordance with cognitive evaluation
0361-3682/02/$ - see front matter # 2002 Elsevier Science Ltd. All rights reserved.
PII: S0361-3682(01)00031-9
276 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

theory, it has been pointed out that performance dant smoke signifies a fire, and the assertion is too
incentives through state-contingent extrinsic rewards strongly rooted in folk wisdom to be entirely hot
may diminish an agent’s intrinsic motivation (Ryan air.’ Restricting attention to performance evalua-
& Deci, 2000). Thus, in contradiction to agency tion in business corporations, the scope of this
theory, a principal can be worse off when provid- article is to clarify whether agency theory faces an
ing an incentive contract to his agent than without urgent need to incorporate the construct of intrin-
doing so. Such detrimental consequences of rewards sic motivation. Since this problem addresses both
have been termed the corruption effect of extrinsic empirical and theoretical aspects, a two fold ana-
motivation (Deci, 1975), hidden costs of reward lysis will be carried out. Reviewing the construct
(Lepper & Greene, 1978) or the crowding-out of intrinsic motivation, we first investigate whether
effect of intrinsic motivation (Frey, 1997). its underlying theory may serve as a model for
At present, the psychological concept of intrin- incorporating intrinsic motivation into the agency
sic motivation enjoys increasing popularity in the perspective. The second analysis concentrates on
fields of business administration and economics. the empirical phenomenon of undermining effects.
As a consequence skepticism towards performance Reviewing experimental evidence, we investigate
incentives and formal agency theory has intensi- whether the effect is of any practical relevance,
fied both in literature and in practice (Brittan, and if so, under what precise conditions we have
1997; Frey, 1997; Osterloh & Frey, 2000; Tosi, to account for it.
Katz, & Gomez-Mejia, 1997). Supporters of the Our analysis reveals good and bad news for the
intrinsic concept argue that economic theory agency perspective. The bad news is that hidden
advocates a myopic view of personal motivation costs of reward do indeed exist. The good news is
which might induce severe shortcomings when it that the empirical evidence on undermining effects
comes to real life applications. Referring to cannot be interpreted as being contradictory to
empirical evidence of detrimental effects due to agency theory. In particular, the antecedents for
extrinsic rewards, they plead for an urgent need to negative after-effects of reward seldomly prevail in
incorporate intrinsic motivation into economic business corporations. In addition they are also
theory and real life compensation plans (Frey, easily avoidable.
1997). Some authors even criticize the dominance The remainder of this article is structured as
of extrinsic-oriented rewards in business compen- follows: the second section focuses on perfor-
sation plans and request stronger intrinsic-orien- mance evaluation and agency theory from both a
ted incentive systems which from their point of theoretical and an empirical point of view. Section
view might be an as-yet unexplored competitive 2 and 3 elaborate definitions, conceptualizations
advantage (Osterloh & Frey, 2000). and theories of intrinsic motivation. Empirical
The categorical assertion that rewards lessen evidence on undermining effects, particularly on
task performance has profound practical and the- their antecedents, is scrutinized in Section 4. Sec-
oretical implications. First, any popularization of tion 5 draws some conclusions.
such views can foster public attitudes against the
use of tangible rewards to promote socially desir-
able behavior (Eisenberger & Cameron, 1996). 1. Agency theory, performance evaluation, and
Secondly, one is likely to jump to the conclusion compensation
that agency theory may map human behavior
inadequately and should therefore be modified or 1.1. The agency theoretic perspective
be skipped accordingly. So far, only a few econo-
mists have turned their attention towards the Modern economic organizations are complex
construct of intrinsic motivation. Kreps (1997, p. team-productions, since their output is jointly
360) talks about a ‘stylized fact’ but he still thinks produced by several-input owners, e.g. stake-
it may be worthwhile for future research since, holders, managers and employees (Alchian &
‘there may be nothing to explain,. . .(but) abun- Demesetz, 1972). As the team is forced to achieve
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 277

some level of efficiency, tasks are delegated to likelihood that the desired actions were in fact
specialized production units which act on behalf taken (Holmstrom, 1979). The derivation of the
of others. Specialization inevitably involves the optimal contract results from a mathematical
dispersion of knowledge and information; in program maximizing the principal’s objective
addition, it often entails goal incongruencies function, subject to several constraints, e.g. pro-
between the participants. Since the combination of duction and technology constraints and the
both asymmetric information and conflicts of agent’s characteristics, e.g. risk and work aversion,
interest may result in an efficiency loss, procedures information, action space and reservation utility.
and mechanisms are needed to mitigate this pro- The principal offers a contract to the agent, who
blem. The function of performance evaluation in then chooses those actions that maximize his
such a setting is twofold. First, it aims to control overall utility restricted by contractual constraints.
discretionary behavior by aligning interests Since the agent simultaneously faces on- and off-
through the provision of state-contingent incen- the-job-opportunities, providing effort is costly to
tives. Secondly, it evaluates the contribution of him. When deciding upon his optimal action, the
each input-owner to the overall output, thereby agent has to trade off effort costs against the
administering compensation conditional upon expected utility resulting from the monetary (sal-
individual performance. ary) and non-monetary (prestige) consequences of
Being a theoretical branch of game theory, his decision. The precise conditions of an optimal
agency theory represents an economic methodol- contract are heavily dependent on the prevailing
ogy for analyzing and assessing the efficiency of situational characteristics, but in most cases they
such mechanisms (Baiman, 1990; Lambert, 2001). involve a variable component varying with an
The standard agency model involves a (risk-neu- indicator of the agent’s effort level.
tral) principal, employing a (risk averse) agent to The efficiency loss due to the agent’s self-inter-
act on his behalf. The agent possesses private ested behavior is measured by comparing the
information, e.g. about his effort level, the state of effective outcome under asymmetric information
nature etc. that is not costlessly available to the with a fictitious outcome under symmetric infor-
principal. It is supposed that the agent chooses mation. Since the latter serves as an unattainable
actions to maximize his utility. He is assumed to focal point of the analysis, it is referred to as the
be work averse in the sense that tempting off-the- first-best solution, whereas the former represents
job opportunities may instigate him to reallocate the so-called second-best solution. Although
his effort to maximize his overall utility resulting attainability of the first-best solution is impossible
from payoffs both, on and off the job. The com- in most cases, its approximation through an
bination of information asymmetry and the incentive contract is not. Consequently, agency
agent’s aversion both to work and risk, steer him theory represents a methodology for comparing
away from cooperative behavior. Since the output and assessing such contractual designs as far as
is conditional upon factors which are exogenous their efficiency is concerned. Although a countless
to his effort, like the state of nature, the principal number of different types of agency models exist in
cannot infer the agent’s performance from the the literature (for overviews see Mas-Colell,
overall result. Thus, while designing an incentive Whinston & Green, 1995; Milgrom & Roberts,
contract, the principal must prod the agent’s work 1992), they all share at least two main character-
effort by forcing him to bear at least some of the istics: the presumptions about conflicts of interest,
production risk. According to standard agency and informational asymmetries between the par-
theory, an optimal incentive contract involves a ties. If these necessary conditions were relaxed, the
pay-for-performance scheme which ties the agent’s problem would become trivial. On the one hand,
pay-off to production indicators which (partially) symmetric information simply allows the principal
correlate with his effort level. The intuition behind to prescribe and control the desired action. On the
this result is the mimicry of a statistical inference other hand, aligned interests between principal
problem, making pay-outs contingent upon the and agent make motivation needless, since the
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required actions already belong to the very (self)- activities (Jensen & Smith, 2000); (3) partial sub-
interest of all actors. If both conditions, asym- stitution of the incentive contract through mon-
metric information and conflicts of interest, hold itoring technologies (Beatty & Zajac, 1994); or (4)
then an optimal incentive contract needs both to noisy performance indicators (Gibbons, 1998).
partition decision rights and to control discre- On the other hand one could just as well argue
tionary behavior. In addition, it aligns interests that performance variances might be caused by
between the parties by tying compensation to variables which are beyond the scope of agency
production indicators which at least partially cor- theory. Indeed, experimental economics seems to
relate with the agent’s action (effort level). have identified some behavioral patterns which at
Although the agency perspective recommends present are not sufficiently integrated in the theo-
rewarding agents on the basis of their performance ry’s axiomatic (for overviews see Davis & Holt
while explicitly supposing that increased incentives 1993; Fehr & Gaechter 2000a, b; Kagel & Roth
usually raise productivity, the use of incentive 1995). Examples are, for instance, fairness con-
systems is not unrestrictedly advocated. Agency siderations, interpersonal reciprocity in bilateral
theory not only constitutes a balanced framework bargaining contexts (Davis & Holt 1993; Fehr &
for evaluating efficient incentive contracts, it Gaechter 2000a), violations of the theory’s ration-
additionally provides a rich fund of insights on ality assumptions (Camerer, Babcock, Loewen-
their limitations and pitfalls, thus explicitly stein & Thaler, 1997; Conlisk 1989) or
accounting for the inherent dangers of reward dysfunctional effects of fines (Gneezy & Rus-
systems. Different models discuss dysfunctional tichini, 2000). At present, there is an ongoing
effects of explicit incentives within the concept of controversy whether some of these effects are pri-
agency theory, e.g. due to the agent’s (severe) risk marily a matter of insufficient financial incentives
aversion, his limited liability, multi-tasking pro- during the experiments or whether they are really
blems or the case of sufficiently noisy indicators challenging the theory (Davis & Holt, 1993).
about the agent’s performance level (for overviews Economists argue that although such anomalies
see Baker, 1992; Gibbons, 1998; Lazear, 2000). may be troublesome, they need not be necessarily
fatal, ‘particularly if there exists no alternative
1.2. Empirical evidence theory that explains both the anomalies and the
standard patterns of behavior’ (Davis & Holt,
Assessing the empirical status of the theory 1993, p. 510). In addition, as ongoing research
provides a mixed but optimistic picture; its major demonstrates, economists are dealing seriously
predictions concerning the interaction of incen- with these anomalies, trying to reintegrate them
tives, risk-bearing properties, and monitoring into their axiomatic. Initial progress has already
technologies are in general supported by empirical been made concerning the modeling of self-per-
research (for overviews see Eisenhardt, 1989; ception and social interactions (Benabou & Tirole,
Lazear, 2000; Prendergast, 1999). Nevertheless, 2000), reciprocity (Falk & Fischbacher, 2000; Fehr
the empirical picture additionally shows that the & Schmidt, 1999; Rabin, 1993), learning (Fuden-
overall effect of incentives on subsequent perfor- berg & Levine, 1997) and the impact of social
mance might involve large variances in perfor- norms on voluntary cooperation (Fudenberg &
mance outcomes, giving a strong rationale for the Levine, 1997; Kandori, 1992; Knack, 1992). A
importance of contingency factors (Lanen & common characteristic of all these models is the
Larcker, 1992). On the one hand, performance attempt to explain voluntary cooperation (or dys-
variances of incentives are explicable by argu- functional effects of explicit incentives respec-
ments that not only are consistent with the theory tively) within the very axiomatic of economic
but also belong to its very core, e.g. (1) the agent’s theory, e.g. without referring to the concept of
risk aversion, affecting his sensitivity towards the intrinsic motivation. Benabou and Tirole (2000),
incentive contract (Haubrich, 1994; Murphy, for example, offer an explanation for hidden cost
1999; Oyer, 2000); (2) individual rent-seeking of rewards in terms of agency theory. In their
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model, the principal has superior information latter is the empirical phenomenon which has to
about the agent’s ability to successfully accom- be elucidated (explanandum) whereas the former
plish a task. In such a setting, increased monetary captures one possible theoretical position for its
incentives may backfire when interpreted by the illumination (explanans). Obviously, the latter
agent as a signal of low competence, diminishing need not imply the former. Thus, one might easily
his self-confidence and his overall motivation to explain the very same effects in different theories,
work vigorously. e.g. without necessarily referring to the construct
Summarizing, agency theory and its related of intrinsic motivation. For analytical purposes
axiomatic proves to be a powerful methodology. the following denotations will be employed
The implications of agency theory are empirically throughout the paper: the term postreward perfor-
testable and have empirical support. Nevertheless, mance lessening will refer only to the empirical
agency theory and game theoretical modifications phenomenon, whereas crowding-out will be solely
thereof have to be considered as theories which are related to the construct of intrinsic motivation, its
still in progress. So far, the permanent interplay underlying theory or conceptualizations thereof.
between theory and empirical work has induced a Existing definitions of intrinsic motivation vary
process of continuous refinement of the theory’s considerably among scholars and are usually very
axiomatic, thereby broadening its explanatory and loose, if not utterly vague (Thierry, 1990, p. 67).
predictive power rather than exposing any severe Commonly, people are said to act intrinsically
limitations. In the next section, we investigate to motivated if they value activities for their own
what extent the theory’s recommendations on the sake, such as they perform them without being
practical use of incentives might be disputed due externally induced. Reviewing the literature,
to the agent’s intrinsic motivation. Heckhausen (1989, pp. 456–460) identified six dif-
ferent conceptualizations of the construct of
intrinsic motivation, which are briefly summarized
2. Intrinsic motivation as a hypothetical construct below.

2.1. Definitions and conceptualizations 1. Internal drive without aiming at drive reduc-
tion. In accordance with the first qualifica-
Hypothetical constructs relate experiences by tion, intrinsic motivation originates from an
inventing a fictitious substance or process in terms internal drive without explicitly seeking drive
of which these experiences can be expressed, reduction. Hence, intrinsic motivation differs
thereby involving the supposition of entities or from drives that regulate homeostatic crisis
processes which are neither among the observed of the organism like hunger, thirst, or pain
nor can be measured directly (Benjamin, 1937; avoidance (Koch, 1956; Woodworth, 1918).
MacCorquadale & Meehl, 1948). Intrinsic moti- 2. Activities without any aim or goal. The sec-
vation and the crowding-out effect are hypothe- ond qualification involves all activities which
tical constructs in the sense that their existence is are autotelic, like leisure-time pursuit or
not empirically proven, but rather results from children’s play (Klinger, 1971).
plausible hypothesization. As imaginary (re)con- 3. Optimal operation level. According to the
structions of unobservable psychological pro- third qualification, intrinsic motivation is
cesses, they aim to explain behavioral outcomes seen as behavior which aims at reinstalling
stemming from a preceding constellation of ante- the maintenance of an optimal operation
cedents. One point is of major importance for the level, such as arousal (Hebb, 1955), incon-
following discussion: it has to be carefully dis- gruence of informational input (Berlyne,
tinguished whether one refers to intrinsic motiva- 1960) or adaptation (Helson, 1964).
tion as a hypothetical construct, or whether 4. Personal causation and evaluation theory. The
attention is directed to the empirical evidence of fourth concept defines intrinsically motivated
externally influenced performance lessening. The behavior as behavior a person chooses in
280 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

order to feel competent and self-determining Often, different qualifications are used inter-
(Deci, 1971). changeably (Bandura, 1986). In order to avoid any
5. Enjoyment or flow. According to the fifth confusion among scholars and in order to build a
concept, intrinsically motivated behavior is valuable foundation for further discussion, we
cheerful enjoyment while performing a task, or turn to the description of the two predominant
absolute absorption in an activity. It is ‘a hol- theories in this area, cognitive evaluation theory
istic sensation people feel when they act in total and overjustification research.
involvement’ (Csikszentmihalyi, 2000, p. 10).
6. Endogenity of goal and activity. The last 2.2. Personal causation and cognitive evaluation
qualification refers to the individual’s sub- theory
jective perception. Therefore, intrinsic moti-
vation is at stake as long as there is inherent According to Deci’s cognitive evaluation theory
congruity between means (action) and goals (CET), human beings strive to fulfil two basic
(behavioral results) of activities, as far as the needs: the need for competence and the need for
individual attribution process is concerned self-determination. Intrinsically motivated beha-
(Heckhausen, 1977; Kruglanski, 1975). vior can therefore be defined as behavior a person
chooses in order to feel competent and self-deter-
A core element of the construct is the attribu- mining (Deci, 1975, p. 61). Concerning the influ-
tion of behavioral sources towards internal versus ence of external rewards on intrinsic motivation,
external factors, thereby differentiating between Deci formulated three propositions which sum-
internal versus external motivators. Apart from marize the early theory (Deci, 1975, p. 139–142):
this rather abstract definition, no general distinc-
tion between intrinsic and extrinsic motivation has 1. The first process by which intrinsically moti-
been elaborated. Nevertheless, almost all con- vated behavior can be affected is a change in
ceptualizations of intrinsic motivation share at perceived locus of causality from internal to
least one of the three following qualifications: external. As a consequence intrinsic motiva-
tion can diminish when someone receives
1. Internal motivation: intrinsic motivation
extrinsic rewards for engaging in intrinsically
stems from a drive from within the person,
motivated activities.
e.g. no outside incentives force the individual
2. The second process focuses on the person’s
to act the way he does. In contrast, extrinsi-
emotions as experienced feelings. Intrinsi-
cally motivated behavior is supposed to be
cally motivated behavior increases if a per-
induced through forces outside of the person.
son’s feelings of competence and self-
2. Lacking instrumentality: intrinsically moti-
determination are enhanced; otherwise, if
vated behavior aims only at its own fruition,
these feelings are diminished, intrinsic moti-
whereas extrinsic motivation implies an
vation will abate.
instrumental relationship between behavioral
3. The third process differentiates between two
results and desired outcomes.
aspects of every reward, a controlling and an
3. Attached feelings: intrinsic motivation con-
informational one. Since rewards usually are
sists of the feelings which are attached to or
administered contingent upon the achieve-
result from the performance of certain activ-
ment of some predefined goals, the control-
ities, so that intrinsically motivated indivi-
ling aspect restricts a person’s action space,
duals experience enjoyment or satisfaction
thereby separating wanted from unwanted
during the performance of these activities.
behavior. The informational aspect provides
As shown by different conceptions, researchers the recipient with information about his
clearly do not have the same phenomenon in mind competence and self-determination. The
when referring to intrinsic motivation (Bandura, relative salience of both aspects determines
1986; Dyer & Parker, 1975; Heckhausen, 1989). whether, and if so to what extent, intrinsic
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 281

motivation will be affected. If the informa- performance lessening on the basis of ‘over-
tional aspect prevails, feelings of competence justification of one’s behavior’ (Lepper & Greene,
and self-determination will be initiated, 1978; Lepper, Greene, & Nisbett, 1973). The the-
whereas if the controlling aspect is more oretical background of overjustification research is
salient, the change in locus of causality rooted in the theories of self-perception (Bem,
described above will be induced. 1967a, 1967b) and self-attribution processes (Kel-
ley, 1967, 1973). According to this paradigm peo-
Recent research on intrinsic motivation shows ple have no direct knowledge of their motives, but
that although intrinsic and extrinsic motivation infer them from their actions and contingencies.
were initially conceived as a dichotomy, nowadays People are assumed to engage in postbehavioral
many researchers no longer hold to this notion inferences about their motivational states in order
(Harter & Jackson, 1992; Rigby, Deci, Patrick, & to self-justify or explain their behavior (Bem,
Ryan 1992; Sansone & Harackiewicz, 2000b). 1972; Kelley, 1973). To the extent that external
Several studies showed that extrinsic rewards contingencies of reinforcement are salient, unam-
enhance intrinsic motivation (Ryan, 1982; Ryan, biguous and psychologically sufficient to explain
Mims, & Koestner, 1983). Therefore, it became one’s actions, such self-justification processes are
increasingly clear that extrinsic rewards need not hypothesized to attribute behavior to these exter-
necessarily be detrimental, but rather can play a nal constraints. On the other hand, if external
complementary role to intrinsic motivation. As a contingencies of reinforcement appear to be
consequence, Deci and his colleagues clearly dis- absent, or are perceived as weak, unclear or psy-
sociated themselves from the former misleading chologically insufficient, a person is supposed to
dichotomy of intrinsic and extrinsic motivation attribute his behavior to personal dispositions,
(Rigby et al., 1992, p. 167). They argue that a interest, or desires (Bem, 1972; Lepper & Greene,
person’s relative autonomy of behavior is a better 1978).
way of describing the motivational basis of one’s As a theoretical proposition the overjustification
performance than the old dichotomy was. In their effect states that if rewards are administered for
modified concept, they assume that individuals performing an activity which is already rewarding
tend to internalize and integrate the regulations of in itself, people will attribute their behavior to
extrinsically motivated behavior in order to cope these rewards. As a consequence, if these rewards
effectively with their social world. Therefore, the are withdrawn, performance will ceteris paribus
traditional dichotomy is replaced by a con- decrease to a level that is lower than the original
ceptualization of extrinsic motivation as a con- level, before rewards were administered (Lepper &
tinuum of internalization and integration. Greene, 1978; Lepper et al., 1973). The self-per-
Although extrinsically motivated behavior ception perspective explains this effect in terms of
remains instrumental by definition, external reg- cognitive reevaluation of an activity’s intrinsic
ulations may be perceived as competence-enhan- characteristics due to the mis-attribution of one’s
cing and self-determining when integrated. Thus, causes, leading to changed expectations and atti-
contrary to former theorizing, extrinsic incentives tudes towards the activity. According to the the-
need not be detrimental to intrinsic motivation per ory, mis-attributions are triggered by the
se. Rather, they represent opportunities to disclosure of an external instrumentality between
enhance intrinsic motivation, when administered an activity and salient reinforcement con-
correctly (Rigby et al., 1992, p. 169–171). tingencies. Before rewards are administered, a
subject attributes his behavior to his own interests,
2.3. Self-perception theory and the inferring that he likes the activity or that he
overjustification effect believes in it. Thus, the imposition of rewards for
an activity one would have executed anyway
Following a more cognitive approach, some ‘overjustifies’ one’s behavior. Additionally, one’s
attribution theorists account for postreward attitude towards the activity is likely to change.
282 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

Since behavior is now attributed to external 1990; Morgan, 1984; Notz, 1975; Thierry, 1990).
rewards, the activity’s intrinsic characteristics were Most criticism focuses on the different con-
cognitively reevaluated. The subject concludes ceptualizations of intrinsic motivation and their
that since he was performing the activity for some implications, without disputing that postreward
external reward, it must not be as interesting or performance lessening might occur under special
enjoyable as he thought it would be. conditions. Since empirical evidence has not been
The overjustification hypothesis predicts nega- considered yet, we first turn to theoretical criticism
tive after-effects of rewards only if all additional of the concept. The psychological literature sum-
factors besides the imposition and removal of marizes three major shortcomings of the concept:
rewards are held constant. Therefore, attribution
theorists emphasize that when dealing with 1. Confusing terminology: Detractors point out
applied reward programs, ‘there is nothing in the that the concept lacks an unequivocal termi-
present line of reasoning or in the present data to nology and a consistent theoretical founda-
suggest that contracting to engage in an activity tion (see among others Bandura, 1986;
for an extrinsic reward will always, or even Dickinson, 1989; Dyer & Parker, 1975; Heck-
usually, result in a decrement in intrinsic interest hausen, 1989; Thierry, 1990). Since no pre-
in the activity’ (Lepper & Greene, 1976, p. 33). cise distinction between intrinsic and
Conversely, it is pointed out that external con- extrinsic motivation has been elaborated, the
tingencies of reinforcement will prove to be bene- term inevitably lumps together quite distinct
ficial: (1) if people expect continued reinforcement issues, like internal drives (motivation), one’s
in the same or in similar situations; (2) if rewards behavior (being performed for its own sake),
convey information about ability or competence, behavior of others (recognition) or one’s
leading a person to believe that he is personally feelings (satisfaction). Besides the jumbled
responsible for his behavior; or (3) if rewards terminology, the concept also involves some
promote the acquisition of new skills, which are conceptual confusion. The distinction
necessary for the perception of intrinsic interest in between intrinsic and extrinsic motivations
that activity. Attribution theorists emphasize that has convinced many people that motivation
the heuristic value of the overjustification per- either originates from within or from outside
spective does not lie in discouraging the use of a person, thereby implying the well-known
rewards systems to promote socially desirable person-situation subject area, although
behavior. Rather, it is pointed out that instead of phrased in terms of a contrast. This view of
exclusively focusing on immediate effects of motivation may be deceptive, because it
incentive schemes, more attention should be diverts theoretical reasoning from the com-
directed to the possibility of harmful long-term plex interaction between personal and situa-
effects of such systems, particularly in settings tional characteristics as they jointly—and
where subsequent extrinsic contingencies are likely not mutually exclusively determine human
to be absent (Lepper & Greene, 1976). motivation (Thierry, 1990). Consequently, it
is pointed out that a great deal of conceptual
confusion still surrounds the notion of
3. Theoretical criticism of the construct of intrinsic motivation (Dickinson, 1989; Notz,
intrinsic motivation 1975); designations are said to be ‘shrouded
in ambiguity’ (Bandura, 1986, p. 241) or to
Despite its popularity, the concept of intrinsic be ‘equivocal at best’ (Thierry, 1990, p. 69).
motivation is heavily disputed in the literature; 2. Major mechanisms are unclear: The precise
positions tend from (gradual) acceptance to total mechanisms through which intrinsic and
rejection (for overviews of shortcomings see Ban- extrinsic motivation interact are still widely
dura, 1986; Bates, 1979; Bernstein, 1990; Dick- unclear (Deci & Ryan, 1985). Newer research
inson, 1989; Eisenberger & Cameron, 1996; Flora, even seems to indicate that these interactions
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 283

might be much more complicated than pre- Greene, 1978). Consequently, it is argued
viously supposed; multi-goal perspectives that there is not much prediction in the
(Pinrich & Garcia, 1991; Wentzel, 1991), the intrinsic concept since almost anything goes.
question whether and under what conditions
intrinsic motivation is a trait (Harter & After reviewing the theoretical concept and its
Jackson, 1992), whether it is stable or under- shortcomings, we next turn to its empirical evi-
goes continuing changes (Sansone & Morgan, dence and the effects of postreward performance
1992; Sansone, Weir, Harpster & Morgan, lessening.
1992) raise more questions than answers.
3. Circularity: Whether a factor is perceived as
intrinsic or extrinsic is highly subjective, 4. Experimental evidence
depending on the individual attribution pro-
cess. Unfortunately, the theories are of very 4.1. Experimental designs, early results and
little help in differentiating under what pre- criticism
cise conditions intrinsic or extrinsic motiva-
tion are supposedly at stake. The same During the 1970s, many experiments were con-
confusion prevails for the crowding-out ducted in order to find empirical evidence for the
effect, regardless of whether cognitive eva- crowding-out effect (for overviews and further
luation theory or overjustification research is references see Deci & Ryan, 1985; Lepper &
concerned. According to cognitive evaluation Greene, 1978; Sansone & Harackiewicz, 2000a).
theory, incentives diminish intrinsic motiva- Experimental designs consisted in most cases of
tion when they appear to be controlling, but three phases: (1) subjects, mostly children or stu-
increase motivation when conveying infor- dents, were observed while performing a rather
mation about competence. It is criticized that attractive task for which no incentive but the
since the theory fails to provide objective activity itself had been apparent; (2) in a second
criteria for classifying rewards as controlling phase external rewards were given for the perfor-
or informative, empirical and theoretical mance of the same activity; (3) in a third phase,
research in this area rests on intuitive and rewards were withdrawn and the subjects were
post hoc classifications of incentive systems offered a free-choice situation, e.g. they could
(Bandura, 1986, p. 244). In addition, since continue performing the same activity without
performance-improving rewards have been being rewarded externally or they could do what-
redefined as being informative, ‘the circular- ever they liked. Different indicators were
ity of the concepts strips the theory of any employed during the third phase in order to
predictive value’ (Bandura, 1986, p. 245). A measure intrinsic motivation, like (1) resumption
similar problem crops up with the attribu- or rejection of the activity, (2) amount of time
tional explanation of negative after-effects in spent, (3) subject ratings of enjoyment, or (4) self-
terms of overjustification research. Since peo- reports of the participants. These data were com-
ple have many different possibilities to justify pared with the results of a control group, which
their behavior, it is almost impossible to had not been influenced by external interventions
predict reliably what the target of sufficiency during the second phase. In particular research
of justification may be. If, for instance, focused on different antecedents of the effect, like
monetary rewards are absent or weak, people (1) monetary incentives vs. verbal or symbolical
are not inevitably forced to attribute their incentives, (2) contingent vs. non-contingent pay-
behavior to the interestingness of their task. ment, (3) expected vs. non-expected payment or
They may as well think of themselves as being (4) salience vs. non-salience of the reward.
motivated by the social contacts their work The first results seemed to indicate a pre-
provides or by the goals the organization ponderance of empirical evidence for postreward
strives for (Pearce, 1983, 1987; Lepper & performance lessening. Nevertheless, its theoretical
284 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

explanation through the construct of intrinsic and are therefore flawed (for critical over-
motivation was and still is disputed (see among views see Bandura, 1986; Bates, 1979; Dick-
others Bandura, 1986; Boal & Cummings, 1981; inson, 1989). In addition, addressing the
Heckhausen, 1989; Locke & Henne, 1986; Thierry, external validity of the concept, three major
1990). Critics mainly accept the existence of exter- arguments are pointed out. First, the experi-
nally influenced conditions which might be dele- mental environments which characterize the
terious to performance, but they doubt whether research cannot be equated with the scope
diminution of intrinsic motivation is the proper they purport to investigate, no matter whe-
concept to account for this effect. In order to ther classrooms (Bates, 1979) or work envir-
clarify this point of view the major criticism is onments (Staw, 1989) are concerned.
briefly summarized. Secondly, additional criticism focuses on
subject selection, stressing that children of
1. Lacking internal validity, insufficient oper- three and four years are hardly capable of
ationalization of intrinsic motivation: Many accounting for their actions in the complex
researchers claim that cognitive evaluation way attribution theory predicts (Morgan,
theory as a whole has not been tested in a 1983; Sandelands, Ashford, & Dutton, 1983).
single experiment (Bandura, 1986; Boal & Thirdly, it is pointed out that little effort has
Cummings, 1981; Locke & Henne, 1986). been made to investigate long-term effects of
First, distinctions between the needs for extrinsic rewards (Bandura, 1986; Bates,
competence and self-determination and the 1979). Laboratory experiments and field
sheer enjoyment of an activity have rarely studies indicate that intrinsic motivation is
been made (Locke & Henne, 1986). Secondly not static but seems to vary between indivi-
and more seriously, it is advocated that for duals, activities, surrounding contexts and
testing the theory, intrinsic motivation has time (Sansone & Morgan, 1992; Sansone et
been insufficiently operationalized for al., 1992). Currently not a single study exists
empirical purposes. It is argued that in order reliably proving that undermining effects are
to test the theory, drives have to be measured transitory for adults (Deci, Ryan, & Koest-
independently of the behavior they suppo- ner, 1999a, p. 650). Some studies measuring
sedly activate. However, most empirical task interest at several points in time revealed
work asserts that intrinsic motivation ‘must’ that postreward detrimental effects do not
be at stake when no (observable) external persist over time; subjects showed as much or
incentives are apparent. Therefore, intrinsic even more interest in the previously rewar-
motivation is measured in terms of perfor- ded activity (Feingold & Mahoney, 1975;
mance variations after withdrawal of extrin- Sagotsky & Lewis, 1978; Vasta & Stirpe,
sic rewards. This leads to severe 1979). Consequently, critics doubt whether
shortcomings, since ‘if variations in task postreward performance lessening is an endur-
performance are taken as evidence of varia- ing effect, and stress that any generalizations of
tions in strength of a competence drive, the experimental findings to real-life situations and
circularity strips the theory of predictive adult behavior stand on tenuous ground.
value. Unless the strength of a drive is mea- 3. Different interpretation of experimental
sured separately from its postulated effects the results: Detractors often point out that
functional properties ascribed to it are not rewards can decrease later performance
empirically verifiable’ (Bandura, 1986, p. 245). through a variety of processes without neces-
2. Lacking external validity, lacking general- sarily transforming motivational systems.
izability: Extensive reviews of experimental Therefore, experimental findings can be
findings concerning postreward performance interpreted differently through other psycho-
lessening revealed that many studies suffer logical theories and need not refer to intrinsic
from severe methodological inadequacies motivation (Bandura, 1986; Eisenberger &
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 285

Cameron, 1996; Locke & Henne, 1986; Staw, when conducting meta-analyses. Meta-analyses
1989). For instance, it is suggested that det- provide a methodology that allows quantifying
rimental effects may be caused by satiation effect sizes and combining them across different
or tedium (Bandura, 1986), learned help- experiments in order to test whether certain
lessness (Eisenberger & Cameron, 1996) or hypotheses constitute behavioral regularities
by violating a situational norm of no pay- which persist reliably over all studies included in
ment (Bandura, 1986; Staw, 1989; Staw, the analysis. Such an approach seems particularly
Calder, & Hess, 1975). Conflicting explana- appealing since it allows drawing conclusions
tions through other theories have profound about the statistical significance of undermining
implications for both theory and practice. In effects of distinct reward categories across differ-
the case of learned helplessness for instance, ent studies. Nevertheless, the limits of this
external rewards would improve rather than approach are that results vary dramatically with
damage postreward performance. In this case, the researchers’ selection of relevant experiments,
diminution of intrinsic motivation would be as well as with their definition of theoretically
inappropriate to explain the problem at hand. meaningful cells (Lepper, Henderlong, & Gingras,
4. Contradictory findings: Moreover, much 1999). Besides, results must be interpreted with
experimental evidence exists which does not caution because of an expected publication bias in
fit the theory. Newer empirical work points favor of finding detrimental effects.1 A detailed
out that the style and the language with review of all existing meta-analyses is beyond the
which external regulations are administered scope of this article. We therefore turn to the
may influence their effects to quite an extent findings of the two newest and most elaborated
(Ryan et al., 1983); it is found that autonomy studies by Eisenberger and Cameron (1996) and
supportive social contexts do enhance intrin- Deci et al. (1999a), hereafter denoted EC-96 and
sic motivation (Grolnick & Ryan, 1989; DRK-99, respectively. Both analyses assess the
Williams, 1991). subjects’ intrinsic motivation in terms of their self-
reported interest in the activity (self-reported
Given the diverse findings reported in the litera- interest) as well as the time they spent on the
ture, the empirical evidence for the crowding-out activity during a free choice period subsequent to
effect proves to be messier than previously sup- the experimental phase (free choice behavior). The
posed. Results and their interpretation are con- EC-96 meta-analysis covers 61 studies on free
tentious, and overall no general commitment choice behavior and 64 studies on self-reported
exists about the relevance of the bulk of empirical task interest published in the period 1971 to Sep-
work. In view of this unsatisfactory situation some tember 1991, whereas the DRK-99 analysis focu-
psychologists have already signaled serious skep- ses on 101 experiments on free choice behavior
ticism: ‘If results continue to indicate that slight and 84 studies on self-reported task interest from
changes in methodology dramatically influence 1971 to August 1997. In contrast to the EC-96
performance or subjective judgments of task study, the DRK-99 analysis includes unpublished
interest, and that different measures of the same doctoral dissertations. Subjects in both studies are
variable respond differently to the same experi- pre-school children and college students.
mental treatments, then one may question both Figs. 1 and 2 show the summary statistics for
the practical value and the psychological validity both meta-analyses. Analyses are arranged hier-
of the construct of intrinsic motivation’ (Bates, achically, desegregating the general classification
1979, p. 574). of extrinsic incentives into more specific types of
reward. Definitions of the reward categories are
4.2. Meta-analyses given in Table 1. For each analysis, effects-sizes
measured in terms of standard deviation units
Since experimental findings vary considerably
between studies, one might gain additional insight 1
We are grateful to one referee for pointing this out.
286 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

Fig. 1. Summary statistics of the Eisenberger and Cameron (1996) meta-analysis.

were accumulated across individual studies and performance-contingent rewards in the DRK-99
weighted by the number of participants in each study, respectively. The summary statistics of the
group. The pair of numbers in parentheses refers EC-96 analysis reveal that undermining effects due
to the 95%-confidence interval for the composite to quality-dependent rewards prove to be statisti-
effect-size d. Since the mean of the control group cally insignificant on the measure of free choice
was subtracted from the mean of the reward behavior. Quality-dependent rewards even induce
group, a negative d-value reflects an undermining a reliable increasing (!) effect on the measure of
effect, while a positive d-value shows an enhance- self-reported interest. In contrast to these findings,
ment effect. Statistically reliable effects are given in Deci et al., (1999a) report a reliable undermining
boldface with an asterisk next to a d-value. The effect of performance-contingent rewards on the
symbol k refers to the number of studies, (i.e. to measure of free choice behavior. If those studies
the number of effect-sizes in each composite effect- that are methodologically questionable due to the
size) while outliers and studies with insufficient lack of adequate feedback control, are excluded,
information are excluded. the effect proves to be supported by only 10
Of greatest interest are those rewards that are in experiments. Like Eisenberger and Cameron,
accord with the agency perspective. As shown, (1996), Deci et al. (1999a) fail to provide statistical
agency theory generally advocates the use of pay- significance for an undermining effect on the
for-performance systems, with the exceptions of measure of self-reported interest. Thus, restricting
(severe) risk considerations, limited liability and attention to economically meaningful rewards,
the case of sufficiently noisy indicators about the (i.e. rewards that induce an incentive effect), the
agent’s performance. Since experimental designs EC-96 analysis clearly contradicts CET, whereas
do not fit one of these exceptions, our main inter- the theory is only partially supported by the
est lies in those rewards categories that induce DRK-99 study.
performance-contingent incentive effects, i.e. qual- Supporters of the intrinsic concept heavily criti-
ity-dependent rewards in the EC-96 analysis and cized the EC-96 study because of methodological
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 287

Fig. 2. Summary statistics of the Deci et al. (1999a) meta-analysis.
288 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

Table 1
Reward categories

Reward category Description

Eisenberger and Cameron (1996)
Verbal Rewards are given only in terms of positive feedback.
Tangible Rewards are tangible, i.e. they are nonverbal.
Unexpected Rewards are not announced beforehand, i.e. subjects are performing the activity
without any expectation of reward.
Expected Rewards are announced beforehand, i.e. subjects are performing the activity with
the expectation of being rewarded afterwards.
Quality-dependent Rewards are contingent on the achievement or surpassing of a pre-defined quality
Completion dependent Rewards are administerd upon the completion of a task with no regard to how the
activity is performed.
Performance independent Rewards are administered for simply taking part in the activity, no matter whether the
activity is completed or whether the pre-defined performance standards are met.

Deci et al. (1999a)
Verbal Rewards are only given in terms of positive feedback.
Tangible Rewards are tangible, i.e. they are nonverbal.
Unexpected Rewards are not announced beforehand, i.e. subjects performe a target activity without
any expectation of being rewarded afterwards.
Expected Rewards are announced beforehand, i.e. subjects performe the activity with the expectation
of being rewarded afterwards.
Task-noncontingent Rewards are administered for something other than engaging in the target activity, such as
simply participating in the study.
Engagement-contingent Rewards are administered for simply engaging in the target activity, without the requirement
that the activity has to be completed.
Completion-contingent Rewards are administered upon the completion of the target activity with no regard to how
it is performed.
Performance-contingent Rewards are administered contingent upon the achievement or surpassing of a pre-defined
quality standard, set for the target activity.
Positive/negative feedback control The control group also gets the positive/negative feedback conveyed by the reward.
No-feedback control The control group does not get the feedback conveyed by the reward.
Maximum reward All participants receive the maximum reward.
Not maximum reward Participants that perform less than optimal, receive less than the maximum reward.

issues like study selection and cell definition. They rationalizations are not very convincing. Particu-
pointed out that the DRK-99 analysis is more larly not since the same authors have suggested
accurate in mapping CET (Deci, Ryan, & Koest- elsewhere that the best way to assess intrinsic
ner, 1999b; Lepper, Henderlong, & Gingras, motivation is to measure both free choice behavior
1999). However, even this analysis provides only and self-reported interest and to consider them as
weak support for undermining effects when refer- intrinsic motivation only when they are correlated
ring to economically meaningful incentive systems. within conditions and studies (Ryan, Koestner, &
Its failure to prove detrimental effects on the self- Deci, 1991).
report measure, despite an expected publication Another result of the DRK-99 study is of great-
bias in favor of finding such effects, evidently calls est interest. The analysis found considerable age
their relevance into question. Deci et al., (1999a, p. effects showing that tangible rewards are more
655f.) try to explain this fact in that subjects might detrimental for children than for college students
have been confusing their interest in the activity on both measures of intrinsic motivation (Deci et
with their enjoyment of receiving a reward. Such al., 1999a, p. 656). This set of findings has never
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 289

been predicted before. Possible explanations are reward not only conveys that (1) the person, group
that college students, having greater cognitive or organization giving the reward lacks control
capacity and being more accustomed to the use of over the performance of the potential reward reci-
reward, have more expectations about whether pient, but additionally that (2) the potential reci-
rewards are appropriate, and are thus more likely pient can, if he or she so wishes, decline the reward
to interpret rewards as indicators of their effective and not act as requested. Thus, the expectation of
performance than as controllers of their behavior performance-contingent reward may increase
(Deci et al., 1999a, p. 656). This account provides experienced self-determination, thereby enhancing
a strong rationale for limitations of detrimental rather than reducing intrinsic motivation.
effects due to the subjects’ cognitive capacity and Before, effects of performance-contingent
socialization while dealing with rewards, indicating reward on perceived autonomy have not been
that from an empirical point of view any general- investigated in one published study (Eisenberger et
ization about undermining effects in corporations al., 1999, p. 1026). Testing their hypothesis in
may have to be made with greatest caution. three studies, the authors found strong empirical
Summarizing, the empirical evidence on postre- support for it, no matter whether subjects were
ward performance lessening, even in the meta- students performing a novel task or employees
analysis that provides the strongest support for engaged in their daily work activities. Results
CET, remains scant, when it comes to performance indicate that performance-contingent rewards
contingent rewards. Relying on only 10 studies increase students’ subsequent expression of task
concerning the measure of free choice behavior, it enjoyment and free time spent performing the
fails to be supported by the self-reported interest task. Perceived self-determination reliably medi-
measure. Additional restrictions are given by the ated the effect of reward on task enjoyment, but
supposition that the subjects’ maturity may play an not on free task behavior (Eisenberger et al., 1999,
important role in determining whether postreward pp. 1029–1031; study 1). High performance-
performance lessening will happen or not. reward expectancy reliably contributed to
employees’ perceived self-determination. Employ-
4.3. Newer experiments on pay for performance ees who perceived increased autonomy owing to
and intrinsic motivation performance reward expectancies, experienced
more organizational support, a more positive
Three new studies by Eisenberger, Rhoades and mood at work, and also showed superior work
Cameron (1999), none of them included in the performance (Eisenberger et al., 1999, p. 1031–
above meta-analyses, provide a strong rationale 1034; study 2). The incremental relationship found
for the assumption that previous experiments may between employees’ expected reward for superior
have been addressing the role of incentives inade- performance and expressed work interest was reli-
quately. In everyday life, the question may not be ably greater for employees with a high or medium
whether rewards diminish intrinsic motivation, desire for control. Expectation of reward for high
but rather whether their administration counters performance reliably lead to greater perceived self-
any motivational loss already produced by the determination, attracting the interest of individuals
heteronomous imposition of tasks and perfor- who had a high desire for control (Eisenberger et
mance objectives (Eisenberger, Rhoades, & al., 1999, p. 1034–1038; study 3).
Cameron, 1999, p. 1027). People in everyday life Since performance-contingent reward increased
learn that rewards are based on utilitarian con- perceived autonomy, intrinsic motivation, and
siderations, being believed necessary to induce related outcomes in all three studies, their findings
desired behavior. Precisely because this is so, contradict the assumption that performance-con-
reward may not convey social control, as sug- tingent reward constitutes an invasive form of
gested by CET, but rather freedom of action. In social control. Practical implications of these
view of Eisenberger et al., (1999, p. 1027) the pro- results are that pay for high performance may
mise or repeated use of performance-contingent constitute an adequate means to increase the
290 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

intrinsic motivation of persons who have been strable in the laboratory reveals that these condi-
assigned performance objectives. These results are tions are highly specialized. Undermining effects
in accord with previous findings demonstrating could only be demonstrated when all of the
incremental effects due to a symbolic function of following conditions were met:
tangible rewards received for high performance
1. High level of initial task interest: The activity
(Bandura 1997; Harackiewicz, Abrahams, &
performed by the subjects needed to be highly
Wageman, 1987; Sansone & Harackiewicz,
attractive in itself, so much so that individuals
2000b). Consequently, the authors suggest repla-
possessed sufficient preexisting interest in per-
cing CET’s presumption of an inverse relationship
forming it without any expectation or promise
between reward and perceived autonomy by the
of reward.
assumption that reward for high performance may
2. Lack of control during the undermining phase:
increase perceived self-determination (Eisenberger
The situation in which undermining effects
et al., 1999, p. 1039).
were measured was free of any kind of social
surveillance, demand or expectation of
continued reward.
5. Implications for agency theory
3. Exclusion of performance improvement: Per-
forming the activity provided no possibility
After elaborating both a theoretical and empiri-
for performance improvement, presumably
cal analysis, we now want to draw some conclu-
instigating feelings of satisfaction, thereby
sions. Restricting attention to performance pay in
enhancing rather than reducing the subjects’
business corporations, the starting point of this
interest in the activity (Bandura, 1986;
paper was to clarify whether the agency perspec-
Calder & Staw, 1975).
tive faces an urgent need to incorporate the con-
4. Rewards were situationally inappropriate:
struct of intrinsic motivation. Incorporation may
Those experiments that succeeded in doc-
be worthwhile if undermining effects prove to be a
umenting detrimental effects of reward did so
reliable empirical phenomenon, whose theoretical
by rewarding subjects for activities for which
explanation by the construct of intrinsic motiva-
one normally does not expect to be compen-
tion helps understanding and modelling these
sated for. Hence, a crucial antecedent seems
effects. The empirical analysis reveals good and
to be that the provision of incentives is
bad news for agency theory. Obviously, since
situationally inappropriate, indicating that
many experiments succeeded in documenting det-
undermining effects appear to be produced
rimental effects, it is bad news for agency theory
by the violation of a situational norm of no
that ‘hidden costs of reward’ do indeed exist.
payment (Dickinson, 1989; Snelders & Lea,
Nevertheless, it is good news that the empirical
1996; Staw, 1989).
evidence on undermining effects cannot be inter-
preted as being contradictory to agency theory. It must be emphasized that these conditions
First, antecedents for postreward performance rarely prevail in real life work settings. Within
lessening are highly stylized and easily avoidable business corporations, people expect to be paid in
in real life situations. Secondly, recent research has exchange for selling their labor. Thus rewards are
found conditions under which reward will have the norm rather than being situationally inap-
positive effects on subsequent behavior, even if the propriate. Moreover, most jobs involve super-
deleterious antecedents were prevailing. Thirdly, vision and social surveillance of some kind, either
the way agency theory recommends designing by superiors, subordinates, shareholders or the
incentive schemes appears to be one of these con- public. Likewise, most positions involve possibi-
ditions. All three arguments are briefly discussed lities for performance improvement which may
below. lead to increased task interest. In addition, a large
Inspection of the circumstances under which number of jobs are not inherently interesting
detrimental effects of reward became demon- enough to foster high intrinsic motivation. Some
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 291

jobs are even performed solely because of their authors found considerable age effects showing
extrinsic inducements. In such cases, detrimental that undermining effects were far more detri-
effects due to increased extrinsic rewards must be mental for pre-school children than for students
precluded because of the person’s initial lack of a (Deci et al., 1999a). Three new studies are also
sufficiently high level of intrinsic interest. supportive of this view. They all found that per-
Nevertheless, even if all jobs were interesting formance pay reliably increased perceived auton-
enough to foster high intrinsic motivation, a pow- omy, work interest, work mood, and work
erful norm exists in the business world for extrin- performance with adults who had been assigned
sic payment. An instrumental relationship performance standards (Eisenberger et al., 1999).
between professional behavior and extrinsic These results are in accord with previous findings,
rewards is supported by both social and legal showing that rewards can enhance intrinsic moti-
standards; moreover, pay even seems to have vation due to their symbolic value (Harackiewicz
become of great symbolic importance as a surro- et al., 1987; Sansone & Harackiewicz, 2000b).
gate of worth and social status in modern business Reviewing the whole empirical evidence on
society (Pearce, 1987). Since extrinsic reinforce- undermining effects revealed that the experimental
ment is the norm, tasks are likely to be experi- findings cannot be interpreted as being contra-
enced as more valuable or more interesting if they dictory to agency theory. This is particularly so
lead to higher compensation, thereby tending to when referring to economically meaningful incen-
increase rather than diminish postreward perfor- tive systems. Two recent meta-analyses, conden-
mance. Thus, in practice the danger may not be sing the whole empirical research in this area
that rewards are perceived as inappropriate, but found deleterious effects only for reward cate-
rather that not rewarding good performance gories that are generally not among the ones
might be perceived as unfair, leading to frustration advocated by the agency perspective, e.g. engage-
and diminution of interest and commitment ment-contingent, completion-contingent and task-
towards the activity. noncontingent rewards. Both meta-analyses failed
Recent findings report on some contextual and to prove undermining effects of performance-con-
personal patterns successfully countering negative tingent rewards. One even found increasing effects.
after-effects of rewards, indicating that such effects Thus, when considering the condensed empirical
are easily avoidable. The style and the language in material of more than a quarter of a century, the
which rewards are administered are such factors current criticism against agency theory is not sup-
(Ryan et al., 1983). If rewards are administered in ported by empirical data. It even seems as if pro-
an autonomy supportive context, they enhance viding incentives according to economic theory
rather than diminish intrinsic motivation (Deci, violates the necessary conditions for postreward
Conell, & Ryan, 1989; Grolnick & Ryan, 1989; performance lessening, and therefore helps to
Williams, 1991). The subjects’ cognitive capacity supersede its detrimental effects.
and socialization in dealing with rewards appears Summarizing, the empirical evidence on postre-
to be another limiting factor. Adults, being accus- ward performance lessening indicates that such
tomed to the use of rewards, are likely to interpret effects constitute stylized exceptions rather than a
performance pay as a sign of freedom, conveying rule. Two meta-analyses fail to prove detrimental
the reward-giver’s lack of control over the perfor- effects when referring to performance-contingent
mance of the potential recipient. Thus, previous pay. In addition, the experimental evidence show-
studies mostly involving pre-school children may ing such effects primary relied on pre-school chil-
have found detrimental effects mainly because dren and college students, and not on adults in
children were less accustomed to the use of business corporations. Moreover, the scant
rewards and thus were less likely to interpret empirical evidence we have on incentive schemes
rewards as indicators of their autonomy and in business corporations suggests that detrimental
competence. This conjecture appears to be sub- effects of rewards are avoidable. Not only are their
stantiated by the latest meta-analysis, since the antecedents too artificial to prevail in real-life
292 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

work places, in addition, by making rewards con- incorporation of behavioral effects similar to per-
tingent upon performance and administering them formance lessening are increasingly being taken
in an autonomy supportive context, will violate into account by the theory of implicit contracts
these antecedents. Thus, when considering the (MacLeod, 1995), research on self-perception and
entire empirical material on undermining effects, social interactions (Benabou & Tirole, 2000), fair-
at least when in comes to business corporations, ness and reciprocity (Falk & Fischbacher, 2000;
we do not find much evidence substantiating any Fehr & Schmidt, 1999; Rabin, 1993), social
claims in favor of incorporating postreward per- norms (Fudenberg & Levine, 1997; Kandori,
formance lessening into economic theory. 1992; Knack, 1992) and the analyses of fuzzy
Nevertheless, the experimental evidence showed incentives in organizations (Bernheim, 1994;
that undermining effects exist under special cir- Kreps, 1997).
cumstances. One might think that incorporating Thus, although the standard agency model does
intrinsic motivation into agency models may help not account for non-monetary behavioral aspects
economic theory to understand and deal with such per se, game theoretic variations thereof increas-
exceptional behavioral patterns. Unfortunately, ingly do. Consequently, as fas as economics is
the literature review revealed that the construct of concerned, we argue in favor of skipping any rea-
intrinsic motivation is not of much help in so soning about incorporating intrinsic motivation
doing. Overall, the construct fails to provide into agency models, and think it more worthwhile
objective criteria for classifying rewards as being to continue along the promising paths where eco-
controlling, informative or expressive of some nomic theory is presently heading.
other aspect. Consequently, its main contribution Nonetheless, we by no means question the
lies in intuitive post-hoc classifications of reward importance of psychological insight for economic
systems, without being capable of predicting theory and real life situations, nor do we think
behavioral outcomes beforehand. Since major that the agency model is perfectly elaborated.
mechanisms through which postreward perfor- Owing to cognitive evaluation theory, we learned
mance lessening occurs still remain widely unclear, about possibly deleterious consequences of auton-
the construct’s actual state of the art obviously omy restrictions and negative feedback on human
cannot serve as a model for incorporating postre- motivation. We merely argue that the current
ward performance lessening into the agency per- empirical material on undermining effects does
spective. Agency theory would inevitably lose its not indicate that performance pay in business
predictive quality at the gain of being able to corporations will always or even usually be
model a stylized but still largely unclear phenom- interpreted that way. Consequently, neither the
enon. Thus, since the dichotomy between intrinsic phenomenon of postreward performance lessening
and extrinsic motivation does not help in explain- nor its theoretical explanation by the construct of
ing and overall predicting the problem at hand, we intrinsic motivation challenge economic theory to
plead for skipping this terminology and for the the extent many contributions have lead us to
pursuit of more promising paths in research. believe.
What are these new paths? Obviously, answers
have to vary across disciplines. As shown, most
psychologists have already recognized the dis-
advantages of polarizing between intrinsic and Acknowledgements
extrinsic motivation and are currently focusing on
the complex interaction between both personal We are grateful to Armin Falk, Ernst Fehr, Bruno
and situational variables. As far as economics is S. Frey, Simon Gaechter, Anthony Hopwood (the
concerned, the need to develop the theory in order editor), Margit Osterloh, and two anonymous
to incorporate additional behavioral aspects has referees for helpful comments and discussions. A. H.
long been understood. Consequently, the theory Kunz gratefully acknowledges financial aid by
has noticeably matured in the past years. Overall, research grant FHA-99-U-049-4040.
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 293

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