What Leaders Get Wrong About Employee Motivation

Since managers started managing, they have questioned how to motivate employees to be productive and do good work — and, for most, their answers are still shaped by assumptions formed long ago. While modern leaders understand that the best performance comes from intrinsically motivated, highly engaged employees, many still use traditional management practices that assume people won’t work hard unless they are incentivized and monitored to make sure they deliver. Underlying that inconsistency are two theories with very different assumptions about how humans are motivated, each with significant implications for management, organizational structure, culture, and outcomes.

In our recent paper in the Journal of Management Studies, we compare agency theory and self-determination theory — both highly influential in research, business education, and practice. We suggest that agency theory has dominated management practice for decades — despite evidence about its limitations — leading to suboptimal ways of managing workers.1

Agency theory is built on the assumption that humans are self-interested, rational beings who need to be controlled and motivated through external mechanisms such as rules, monitoring, and rewards. A fundamental assumption is that employee goals and organizational goals are in opposition — organizational owners (for example, shareholders) want to pay the minimum required to get the work done in order to maximize capital gains, whereas employees want to put in minimal effort for maximum pay. This means that employees need to be persuaded to contribute to organizational goals via incentives and must be monitored and regulated to ensure they work effectively.

How is this suboptimal? Monitoring, regulating, and incentivizing people to work harder is expensive and never foolproof. It requires constant attention to close loopholes that humans find when their autonomy is limited by command-and-control systems. It’s like fighting a losing battle. Attempts to monitor and incentivize work can also lead to unintended negative consequences, including employees gaming the system, ignoring moral and ethical issues, and focusing on short-term gains over long-term sustainability. In recent decades scandals such as those at Wells Fargo, WorldCom, and GlaxoSmithKline have been linked to the use — and failure — of these mechanisms of control.

Self-determination theory, on the other hand, assumes that individuals are naturally intrinsically motivated and thrive when their basic psychological needs for autonomy, competence, and relatedness are satisfied.2 Organizations can fulfill these needs by providing people with clear strategic direction, meaningful feedback, a sense of connection to their work and colleagues, and space to work in a way that suits them. Through these practices, employees can more readily internalize organizational goals, leading to alignment between their interests and the organization’s without managers having to offer incentives and monitor people.

Research supports the effectiveness of this approach: Employees whose psychological needs are met are intrinsically motivated by finding meaning and enjoyment in their work, which leads to not only better performance but also improved well-being. Using self-determination theory to manage employees can promote ethical behavior, innovation, and long-term commitment. Of course, it’s not easy — this kind of performance management requires time and investment, and it often requires giving up some measure of control. It means investing in people and then trusting them to get on with it. That’s not always comfortable, and if it’s not done properly, it doesn’t work. For example, giving people autonomy does not mean letting them do what they want; they also need goal clarity with clear explanations about what needs to be achieved and why. Policies and procedures are sometimes necessary — for example, for legislative compliance — but when employees do not know why these policies and procedures exist, it may be hard for them to endorse and follow them volitionally. In other words, autonomy needs to come with some structure.

How Assumptions About Motivation Shape Management

Consider a business owner whose main goal is to increase profitability. If this leader believes that employees will put in effort only if they personally benefit and that their goals are focused on their self-interest (putting in minimum effort for maximum reward), that leader will implement prescribed performance targets, monitor employees to make sure they deliver on these, and tie compensation to hitting the goal. In theory, this approach makes sense, as people generally seek clear goals and want to be fairly rewarded for their work, but in practice, it implies that employees have a purely transactional relationship with their work. Research shows that precise, measured, and incentivized targets can lead people to focus only on what is measured and rewarded, while monitoring can put stress on people and make them feel like they are not trusted. This can also backfire for the organization because employees who feel untrusted reduce their effort and eventually quit.

Strict managerial control via performance targets, monitoring, and incentives also trickles down through the organization. If the business owner sets and monitors strict performance targets for their management team, these managers will do the same within their teams, leading to the micromanagement that everyone dreads. Employees at all levels focus single-mindedly on what it takes to meet (not exceed) their targets — forget about helping co-workers and finding innovative solutions to problems. That’s particularly dangerous for businesses operating in increasingly volatile environments that require them to be nimble and proactive: Rigid, controlling management won’t produce adaptive and creative employee behavior.

Organizing Work Without Command-and-Control

Agency theory and its associated management style are remarkably resilient. Particularly in times of challenge or uncertainty, leaders may be tempted to assuage their insecurities by doubling down on control. But how might they organize work if they begin with the assumption that self-determination theory is a more valid model of human motivation and behavior?

One approach is to organize work around the principles of self-management. Self-managed teams typically set their own goals — linked to the organization’s strategy — and make decisions together on how to distribute work, roles, and schedules according to individuals’ different strengths and needs. They might hire new colleagues, make decisions about how to spend their budget, build multifunctional teams to work on new projects, deal directly with clients and suppliers, and coordinate with other teams. Naturally, this level of autonomy requires training, structure, and support so that it doesn’t create chaos. Leaders must create and communicate a coherent vision and strategic goals to which teams can align their work but give them latitude to experiment and innovate. Clear guidance about who decides what allows teams to set goals and make decisions without higher-level approvals. It means saying, “We need a new photocopier? Don’t ask me — buy it if it helps the team.” In these environments employees are more likely to embrace organizational and team goals because they participated in setting them. That also makes them less likely to game the system. They understand the implications that decisions affecting one area (say, sales) will have on other areas (say, operations)because they have a broader view of the organization and feel a sense of ownership over collective goals.3

What incentives are meaningful in an organization guided by self-management principles? Here, performance means contributing to the whole organization, not focusing on specific individual goals. So people are rewarded for their whole contribution — with a fair salary that recognizes their level of expertise rather than bonuses closely tied to outputs. Their pay is important, but they do not have it at the forefront of their minds while they are doing their work. Think this is a dream? Think again. Such organizations exist all over the world.

Dutch mortgage company Viisi lives by its purpose: “people first, customers second, shareholders third.” At the fintech firm, founded in 2010, team leader roles are rotated among team members, and the team decides whom to hire into their team and what to pay them. Processes are in place to guide how decisions are made, and pay is transparent so that everyone knows that decisions are fair. Everyone is thoroughly onboarded into this way of working to make sure they know how to contribute effectively, and they are given the autonomy to do so in a way that works for them. It works so well that former employees have returned to the company after they’ve moved elsewhere to gain new experiences.

Supercell, the game design company behind Clash of Clans, also structures its operations around teams who set their own goals, with high levels of trust and psychological safety to take risks while working together to fulfill the company purpose.4

The Brazilian manufacturing company Semco doesn’t have managers but rather counselors and coordinators who support democratically managed teams. Semco employees set their own salaries and compensation scheme (which can include profit sharing), and individual salaries are public. Not only has Semco been consistently successful in its business endeavors for the past 40 years, with a less than 1% turnover rate, but it works so well that the company can hire without posting job openings and has a backlog of a few thousand applications.

Many more companies are succeeding with self-managed teams. In our research, we have identified almost 400 organizations around the world operating in this way, across commercial sectors, government organizations, and nonprofits.

Shifting Assumptions to Shift Practice

To create workplaces that feed employees’ internal motivation and help them feel engaged and proactive at work, leaders must question their own assumptions about human motivation. Do they square with what a strong body of psychological research has found about what enables people to thrive in their jobs? The most effective leaders communicate a clear vision and organizational goals, allow employees to decide how to organize their work while providing guidelines to ensure alignment and coordination, and provide fair and stable pay that is not contingent on meeting targets. These practices are synonymous with trust and respect, in contrast with the mutual distrust and misalignment that agency theory presumes.

It’s important to note that organizing fully around self-management isn’t easy, and it takes time to put the necessary structure, processes, and training in place. We’re also not suggesting that all organizations should become self-managing. Shifting toward this management philosophy doesn’t have to mean fully committing to a new organizational structure. Here are some ways that an individual manager can explore and experiment with this approach.

1. If your organization is very hierarchical with a strict chain of command, consider where it might be flatter. Who makes decisions (and about what)? Consider the management time that could be saved if many decisions were made lower down in the organization, by the people doing the work. Identify decisions that are appropriate to delegate and who should make them. Look for ways to make decision-making more decentralized and participative. Involve people in this process from the start.

2. Review how policies and procedures are organized and implemented in your organization. Identify which are necessary and which might be eliminated or made more flexible. For those you deem necessary, be prepared to explain why they are important so that employees see their value and follow them — but also keep an open mind and look deeper when engaged employees challenge their necessity. If it’s not meeting the needs of the people in the organization, why are you doing it?

3. Take a comprehensive look at your performance appraisal processes. Is the primary function to evaluate, reward, and sanction, or is it a tool to help employees develop their skills and talents and see the impact they make through their work? Work with HR leaders to redesign performance management tools and processes so that they emphasize ongoing informal feedback and a forward-looking growth orientation. Consider eliminating the traditional annual, backward-looking performance review. If your organization uses individual pay-for-performance schemes, experiment with dropping them in some functions to test whether they are really effective and necessary to help people do good work. Get employees involved in this because who knows better whether the incentives are meeting their needs than the people being incentivized?

4. Watch for old habits of mind that persist. Deeply held assumptions may guide your instincts as a manager during times of stress, such as when you are frustrated with an underperforming employee or when fast decisions need to be made. Practice self-awareness to catch yourself before unthinkingly perpetuating unproductive practices like offering rewards or threatening to sanction or monitor the person constantly. Instead, engage them person-to-person by starting a conversation about what you are seeing and probing for what lies behind the behavior. Flagging motivation can stem from stress, overwork, overwhelm, conflict, and many other causes. An empathetic approach that encourages employees to reflect on their own motivation through constructive conversations may be more effective at getting a struggling employee back on track than using the proverbial carrot or stick.5

Working with organizations, we constantly hear leaders’ concerns about attracting sufficient talent and adapting to the needs and preferences of the rising generation of workers. Most business leaders, even those who subscribe to agency theory, wish they had more employees who believed in the company’s mission and were energized by their work. They might have them if they attend to the basic psychological needs of their employees instead of undermining them.

The key to putting self-determination theory into practice is to keep in mind the conditions under which employees are intrinsically motivated to do their best work: autonomy, competence, and relatedness. Delegating decisions to employees about things that affect their work builds autonomy, nurturing the skills needed to make these decisions builds competence, and supporting collaboration rather than pitting employees against one another builds relatedness. Consistently paying attention to all three qualities will help your employees be more engaged, physically and mentally healthier at work, and more proactive and innovative.

“The MIT Sloan Management Review is a research-based magazine and digital platform for business executives published at the MIT Sloan School of Management.”

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