Imagine you were a manager and wanted to improve the performance of your team. What would you do? Let me guess, you would try to minimize the principle-agent problem by aligning the interests of the workers with the ones of the corporation, in a way which fitted all employees. You would take a look around, study the most commonly used sources of extrinsic motivation and finally come with the answer “money”. Why not? Who doesn’t like seeing its salary being increased and wouldn´t work harder for it? Higher salary, more effort, better performance, more profit. Pretty straight forward, right? Wrong!

Motivation is the reason for people’s actions, willingness and goals. It’s the “power” which allows us to wake up in the morning and perform difficult tasks, such as studying or going to work. There are two main types of motivation: intrinsic and extrinsic. Intrinsic motivation is the motivation which comes from “inside”, i.e., we perform a task because we enjoy it or find it interesting. Extrinsic motivation is the motivation which comes from the “outside”, i.e., when you do something for external rewards or to avoid negative consequences. Both intrinsic and extrinsic motivators can be either positive or negative. All intrinsic and extrinsic motivators, positive and negative, have its weaknesses and strengths. Intrinsic motivators differ from person to person, which makes it really difficult to apply them in large teams. However, they are much more long-lasting. Extrinsic motivators are easier to generalize. However, they may be only effective in the short-run or they may worsen the environment inside a team (in the case of negative motivators, such as threats to be fired or demoted).

Money is generally seen as a powerful extrinsic positive motivator, as it can be successfully used for motivating almost everyone. At least that’s what people believe and behave accordingly. However, they couldn’t be more wrong.

The MIT (Massachusetts Institute of Technology) conducted a study in which some of their students had to perform different tasks and received one of three levels of monetary rewards (few money, some money or a lot of money).

The students who received mechanical tasks increased their performance as the monetary rewards increased, i.e., the students who received higher rewards did a better job. However, if the challenge called for rudimentary cognitive skills, larger rewards conducted to poorer performance. In order to eliminate possible wealth variables, the researchers repeated the study in Madurai, rural India, where the purchasing power is way bellow the United States’ . Again, the study showed that, when the challenge involved cognitive skills, higher rewards led to worse performance.

This way, they concluded that the “carrots and sticks” approach (giving punishments and rewards) only works when the tasks that the employees perform are purely mechanical.

“So, the amount of money employees receive is not important?”, you may ask. Of course it is. However, it’s not the most important. If, as a manager, you don’t pay people enough for their effort, they won’t be motivated. However, if you incentivise them with monetary rewards, they may worsen their performance. This way, you should pay them enough to take the issue of money off the table, letting them focus on the work, rather than on receiving their salary.

And the question stands. What is the best way to motivate employees?

According to some scientific studies, there are three factors which lead to better performance and personal satisfaction: autonomy (the desire to be self directed), mastery (the urge to get better at performing a job) and purpose (the aim to do what we do in service of something higher than ourselves). Actually, if we look into some industry benchmarks, such as Google or Atlassian (an Australian software company) we see that these factors are taken into consideration in their management. In Google, engineers can use 20% of their working time to develop their own projects and, on a typical year, about half of the company’s new products are born during that 20% time. In Atlassian, a few times a year, employees have 24 hours to think of some new ideas and present it at a relaxed party at the end of the day. It comes that a whole array of software fixes was created during that period and may never had been created otherwise.


If we think of Wikipedia, for instance, it has a business model that economically makes no sense: it was created by employed and greatly specialised people completely FOR FREE and anyone can use it without paying. Why did the engineers provide it freely instead of profiting with their creation? On one hand, it is the desire for mastery, to overcome obstacles and create something never seen before. On the other hand, the purpose behind the platform and the free access to knowledge and information.


As a summary, people only perform difficult tasks because they are motivated to do so and, as a manager, it is vital that we keep our employees highly motivated. However, it is really difficult to find an effective motivator which fits all workers.

Money is still seen by a lot of corporations as an effective mechanism to motivate people but science proves otherwise. It may be good to incentivise mechanical tasks but, if the work involves some cognitive skills, higher monetary rewards leads to worse performance and destroys creativity. This way, managers should get rid of this extrinsic motivator, based in the “carrot and stick” approach, and replace it by the intrinsic motivator of autonomy, mastery and purpose. Besides being much long-lasting, this type of motivators engage workers and make them much more satisfied with their job, as they are contributing to a better world.

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