Frey's paper
Bruno Frey is one of those economists who make economics fun1. Like his fellow economists Yoram Barzel (1997), Gary Becker (1981), and, of course, Stephen Levitt (2005), he has an excellent intuition for applying economics to areas where nobody has hitherto thought of taking it. Like George Akerlof, but unlike Barzel, Becker, and Levitt, Frey is not satisfied with the behavioural core of mainstream economics, mainly because it tends to provide an impoverished treatment of human motivation. Thus, he is not a Becker-style economic imperialist (or, at least, the caricature thereof); but on the contrary, a scholar who is quite attentive to relevant insights in, particularly, psychology. Whereas numerous economists have taken an interest in the cognitive dimensions of psychology research – as we witnessed the recent explosion of interest in neuro-economics (Camerer et al., 2005), Frey's interest in psychology has been more concerned with motivational issues. Thus, substantial parts of Frey's enormous (and enormously impressive) production have been devoted to pushing the boundaries of economics by taking seriously psychological ideas on intrinsic motivation and the crowding effect. His work with Margit Osterloh on the motivational foundations of knowledge sharing in organizations (Osterloh and Frey, 2000) will be familiar to many readers of this journal.
The present paper is an excellent example of Frey's approach: the basic framing of the issues is essentially a principal-agent one, but he refines the rather crude treatment of motivation in this theory by means of the fundamental idea that social comparison plays a key role in human motivation (Jasso, 2002). Frey does so in order to understand a phenomenon, namely that of awards, such as orders, medals, decorations, and prizes, that in spite of being all around us is curiously under-researched. He identifies a set of conditions under which awards rather than rewards will be used, derives a set of plausible propositions, and provides empirical illustrations. In the following, I first briefly mention a few complications, and then equally and briefly discuss what management and organization scholars may learn from Frey's paper.
Complications
Frey's discussion is neat and clearcut. However, it is arguable that it misses some nuances relating to the nature and functions of awards.
Non-material compensation?
It is central to Frey's discussion that awards belong to the set of non-material kinds of compensation. He does note, however, that sometimes awards are accompanied by money. We are all familiar with those pictures in the newspaper of a happy prize recipient presenting a 2.5 
1 m cheque with the amount of money very clearly visible. Frey argues that such money is not taxed.2 Contrary to Frey, awards are in fact often taxed, at least in the harsher tax regimes (such as the current Danish one). This may reinforce the motivational problems that can arise in economic systems where income is very highly taxed and where awards are less available as a motivational instrument, because they too may be taxed (if typically, less heavily). However, there are broader lessons in noting that non-material compensation is sometimes associated with material compensation.
Thus, note that the non-material compensation in the form of awards may have material implications. Thus, a distinction, such as a Knighthood bestowed upon a businessman may conceivably do good things to his business, because it may allow him to access networks he could not access earlier and influence decision-makers in favourable ways. A Nobel Prize winner can afterwards enter the highly lucrative lecturing circuit.3 Many books are advertised on the basis of their winning prestigious awards, which of course also impacts the income of the prize winner/author, etc.
This suggests that it is conceivable that at least some awards may be pursued not just because of the social distinction they imply, but also because of the monetary compensation that accompanies them, whether directly or indirectly. It may be hypothesized that this is more likely to happen in the case of awards that are given to relatively speaking more needy persons, for example, authors and musician or even journalists (cf. the Pulitzer Prize) than for awards that are given to higher income persons (industrialists, high-ranking bureaucrats, etc.). However, it seems less likely to assume that, say, high-ranking bureaucrats are interested in awards because of their possible monetary implications; there simply may not be any. For this class of awards, Frey's reasoning would seem apply directly.
The general issue is that it may make sense to make a distinction between those awards that have material implications, and where their incentive effects and the reason that they are pursued are partly related to this, and those awards that have little or no apparent material implications. A related discussion is whether material and non-material aspects of a reward are complements, substitutes, or just unrelated. The above discussion indicates that material and non-material aspects may be complements. However, it is at least conceivable that the value of certain awards would be devalued in the eyes of the recipient if they were accompanied by material rewards, for example, monetary ones. Thus, motivation crowding out is a possibility.
Other economic functions
Frey rightly notes that awards have a 'broad nature' and 'differ in many respects' (p. 4). However, he tends to explain all awards in terms of sophisticated, non-material ways of solving latent principal-agent problems, so that awards are fundamentally instruments to influence motivation. This arguably leaves out some possible economic functions of awards.4
One such function is that rewards may coordinate actions because they have a strong signalling effect. As an example, book awards may serve as a sort of focal points that authors, publishers, and the reading public (and perhaps the state to the extent that books are subsidized) can coordinate their expectations and actions on. These kinds of focal points reduce search and information costs.
Another function is that awards may constrain rent seeking. At least in universities, casual empiricism indicates that awards are good predictors of success in the career dimension. Of course, ability is arguably the main reason why this is so. However, there may also be a rent-seeking aspect: if players understand the award–career link, the conferment of an academic distinction on one of their peers may reduce their rent-seeking efforts because university management signals that they have decided on a preferred candidate. Obviously, however, this may only result in shifting rent-seeking efforts towards the award itself, so whether rent seeking as a whole is reduced depends on the relative sizes of these two effects.
Implications for management and organizations
Firms and awards
Most of the examples that Frey provides relate to public hierarchies, the military, sports, and volunteering, humanitarian and religious organizations, where awards are bestowed upon employees or members, or to public organizations/the state/the monarch bestowing awards upon citizens. The only example from for-profit organizations he mentions is that of the employee-of-the-month awards. This does indeed appear to be a fairly widespread practice in for-profit organizations (if perhaps more in the US than in Europe). However, it is actually hard to think of other kinds of awards that firms systematically use. As average job tenure has decreased, so has the use of award rituals such as the bank manager giving the retiring clerk a gold watch for his long and faithful tenure with the bank. In fact, for-profit firms would seem to constitute relatively award-free zones, and perhaps increasingly so.
There may be several reasons for this. The basic one is that public hierarchies are usually more constrained in respect to how high-powered they can make the incentives employees face. To supply incentives, they have to make relatively more use of other incentive instruments. Another reason may be that public hierarchies organize relatively more of those hard-to-measure activities that may require relatively soft incentive instruments and where it is essential to not crowd out intrinsic motivation. A third reason is path-dependence, the public sector being a sort of heir to earlier state apparatuses that were essentially identical to the monarch's administration. In contrast, historically, merchants and industrialists have seldom bestowed awards upon each other.
Kinds of motivation
The broad literature on motivation in organizations has had a tendency to dichotomize the issues (cf. Reinholt, 2006). Thus, organizational behaviour scholars have had a tendency to exalt intrinsic motivation and downplay extrinsic motivation, whereas economics perspectives have focused almost exclusively on extrinsic motivation. More recent work in management has started to explicitly acknowledge both intrinsic and extrinsic motivation, although in a rather binary way, whereas the underlying psychology literature represents the extrinsic–intrinsic distinction not as poles but rather as a continuum (Reinholt, 2006).
A broader lesson of Frey's paper is that management scholars recognize that motivational issues do not fall neatly into extrinsic/intrinsic poles, but that there are kinds of, for example, extrinsic motivation that may not lie that far away from intrinsic motivation. The use of awards would seem to be an incentive instrument that is not so easy to categorize. Frey places it in the extrinsic category, but it is not clear whether all kinds of awards belong there. Are awards given for lifetime achievements really instances of 'external control,' which is necessary if they are placed in the extrinsic category?
Social comparison processes in firms
Another broad lesson that management and organization scholars – perhaps particularly those who approach organizations from an economics-based position – may draw from Frey's paper has to do with the importance of social comparison processes. Social comparison is, of course, the basis for Frey's argument, and it is hard to deny its strong presence and pervasive effects in society, and in the smaller societies that are firms and other organizations. Several observations are pertinent.
Labour economists and organizational economists routinely note that firms are, in general, characterized by wage compression (because performance and rewards are relatively disconnected). Moreover, the phenomenon of envy is by no means neglected in economics. However, few have explicitly related wage compression to social comparison processes (but see Zenger, 1992). More generally, social comparison processes at best enter economics-based treatments of incentives, hierarchies, and influence activities in a highly casual manner. Organizational economists may neglect these 'psycho-sociological' phenomena at their peril.
Frey notes that '[a]wards may have not only a positive incentive effect on the persons receiving them, or hoping to receiving them, but may also have a negative external effect on the persons who are disappointed or angry at not having received them' (p. 13). Thus, in addition to the rent-seeking costs mentioned above, social comparison processes may introduce distinct costs related to envy in organizations. For example, envy may place constraints on the provision of high-powered incentives and may give rise to inefficient rent-seeking efforts. In fact, in a recent paper, Nickerson and Zenger (2006) build a whole theory of organizational and managerial failure around the notion of organizational costs induced by envy.
While awards may be a rather unusual phenomenon in firms, positional goods would seem to be an important part of organizational life. Managers do care about the size of their office, number of secretaries, whether their position with the firm is sufficient to secure a reservation with the hippest restaurant, etc., and they clearly compete for these positional goods. Traditionally, competition for pure positional goods is analysed as a zero sum game (Hirsch, 1976), but the inclusion of the influence costs that this competitive activity introduces makes it a negative sum game. Awards clearly have a positional good character, so when Frey recommends paying more attention to awards in organizations, this may be interpreted as a call for paying more attention to positional goods and their management in organizations.
Conclusion
Bruno Frey has produced another excellent example of his ability to take economic reasoning into terrain that is unfamiliar to economists. His story is neat, coherent, does not stray too far from accepted economic modelling methodology, and is in principle testable. I have argued, however, that he may overdo his emphasis on the non-material dimension of awards and that awards may serve other functions than managing motivation. I have also noted that somewhat contrary to impression given by his paper, firms may be rather award-free zones, and that there are basic economic reasons for this. In a broader context, his paper suggests that we should take a more sophisticated view of extrinsic motivation in organizations and that social comparison processes should enter our basic understanding of the nature of the firm. However, the next step in the programme that Frey outlines must surely be to give it an empirical dimension that goes beyond narratives.
Notes
1 This is a comment on Bruno Frey's paper, 'Awards as Compensation,' forthcoming in the European Management Review.
2 Sometimes quite a substantial amount, as in the case of the Nobel Prize. However, it is apparently common to recipients of this particular prize to donate the money to altruistic purposes.
3 There is a parallel here to the Lerner and Tirole (2002) discussion of motivation in open source production.
4 There are, of course, also possible aspects of awards that are distinctly political. Thus, the conferment of the Nobel Prize in the literature to Elfriede Jelinek in 2003 was widely seen as a political statement.
References
- Barzel, Yoram, 1997, Economic Analysis of Property Rights. Cambridge: Cambridge University Press.
- Becker, Gary, 1981, A Treatise on the Family. Harvard: Harvard University Press.
- Camerer, Colin, George Loewenstein and Drazen Prelec, 2005, "Neuroeconomics: How neuroscience can inform economics". Journal of Economic Literature, 43: 9–64. | Article |
- Hirsch, Fred, 1976, The Social Limits to Growth. London: Routledge & Kegan Paul.
- Jasso, Guillermina, 2002, Handbook of Sociological Theory. New York: Kluwer Academic Publishers.
- Lerner, Josh and Jean Tirole, 2002, "Some Simple Economics of Open Source". Journal of Industrial Economics, 50: 197–234.
- Levitt, Stephen, 2005, Freakonomics. New York: Free Press.
- Nickerson, Jackson and Todd Zenger, 2006, "Envy, Comparison Costs, and the Economic Theory of the Firm". unpublished manuscript.
- Osterloh, Margit and Bruno Frey, 2000, "Motivation, knowledge transfer and organizational form". Organization Science, 11: 538–550. | Article |
- Reinholt, Mia, 2006, "No More Polarization, Please!" Working Paper, Center for Strategic Management and Globalization, Copenhagen Business School.
- Zenger, Todd, 1992, "Why do employers only reward extreme performance?". Administrative Science Quarterly, 37: 198–219. | Article |
