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Rewards and firm performance - a look into the motivation black-box

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What is the impact of performance-based rewards on firm performance? Despite substantial research in this area, we are still missing both a generally accepted theoretical model and conclusive empirical findings regarding whether, and under what conditions, the use of rewards increases firm performance. This study integrates arguments regarding the effect of rewards on individual motivation from social psychology and economics and applies them to the organizational level. The resulting conceptual framework describes how rewards influence performance through three distinct and interrelated motivational mechanisms, and allows us to look at the various, partially conflicting, arguments made in the existing literature in a more comprehensive fashion. Hypotheses derived from this model are then tested empirically on a sample of 118 management buyouts in the UK. The results of the structural equation model suggest that in this setting, rewards increase not only extrinsic, but also intrinsic forms of motivation. Surprisingly, however, the performance impact of intrinsic motivation (particularly of a hedonic nature) is much more powerful than that of extrinsic motivation, which fails to show any statistical significance. Furthermore, and contrary to "received wisdom", the three types of motivation mutually reinforce one another in their positive impact on performance. The data indicates, therefore, that rewards are an important determinant of firm performance, but only indirectly via their role as antecedents of intrinsic motivational levers.

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