This paper attempts to examine the effect of the intensity of financial incentives (i.e. the proportion of workers' salary that is tied to bonuses) on job satisfaction. Understanding the influence of monetary incentives on job satisfaction is important given that the composition of an employee's remuneration package is an integral element of his/her overall working conditions. According to the standard microeconomic paradigm, in long-run equilibrium one would not expect to observe any differences in the marginal utilities of comparable workers under fixed or variable payment schemes. This should hold since the expected value of the higher wages paid under performance-related pay (PRP) should be just sufficient to compensate for the additional earnings risk and the disutility of extra effort. However, once the standard assumptions of the agency model are relaxed, and psychological arguments such as those of motivation crowding out theory ( Frey and Jegen, 2001 ) are taken into account, it is expected that PRP is likely to have a non-negligible impact on job satisfaction. To the extent that incentive schemes allow for optimization of effort, facilitate worker autonomy and enhance self-determination they should increase job satisfaction, other things equal. Yet increasing earnings risk, crowding out of the inherent pleasantness in performing one's job and lower morale can lead to disgruntled employees. Copyright � 2010 Blackwell Publishing Ltd.
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