The Incentive Game: Balancing Monitoring Costs and Employee Motivation in a Quota-Based System

Abstract

Mr. Diligent, like the rest of the employees, faces a decision: to work diligently or slack off, while the firm's human resource manager, Ms. Watchful, decides whether or not to monitor their performance. Employees, including Mr. Diligent, find slacking more appealing than hard work when there’s no incentive for high performance. On the other hand, monitoring is costly for Ms. Watchful, both in terms of resources and managerial effort. Initially, workers were motivated to perform well, but over time, their morale declined due to a lack of recognition and rewards for their efforts. Ms. Watchful is under significant pressure from the firm’s owner to ensure that workers’ output exceeds their wage costs. The workers’ productivity is measured by quotas, which are quantifiable, but the quality of the output remains challenging to monitor at the production stage. Ultimately, quality issues are only identified by customers after the product reaches the market.