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The preference between salary increase and more vacation time

A study of employees in Swedish IT companies

Written by H. Löfqvist, A. Barbouti & M. Tariq

Paper category

Master Thesis


Business Administration>General




Master Thesis: Employee Motivation According to Merchant (2012), the purpose of motivation or reward should be "to provide motivation for the alignment of employees' natural interests with organizational goals". In other words, assuming that the goals of the organization are different from those of the employees, incentives can be used as a guide to align the interests of the employees with the interests of the organization. The hypothesis mentioned is related to the principal-agent theory, which will be explained below. Rosentiel (1975) and Weinert (1998) believe that the incentive and reward part is responsible for motivating employees not only to perform well for his/her employer, but also to join the company and choose to continue working for the company. Later, Merchant (2012) recognized the three main control benefits of incentives as: xInformational. They attract and direct the attention of employees to the key areas of the organization. If the organization focuses on customer service, employees’ attention will be focused on whether the incentive system is associated with customer service success (Merchant and Stede, 2012). x Inspirational. They are the motivation for hard work. Some employees may need this "carrot" to perform boring tasks that are in the best interest of the organization. This control benefit is the main benefit related to this paper. x Attract and retain people. In order to attract and retain key personnel, these systems can be designed to attract certain people. For example, performance-related higher-than-average salary packages tend to attract employees who are confident in their ability to perform well. This paper uses models of human motivation and incentive systems. For any incentive measures, Merchant (2012) repeatedly emphasized that incentive measures should be valued, large enough, timely, understandable, durable, reversible and cost-effective. Failure to meet any of the first four items will offset some of the expected incentive effects of incentives. Failure to meet either of the latter two conditions is closely related to the company and its cost efficiency, with the exception of reverse incentives, such as withdrawing promotions, the consequences of which can be very expensive for all parties. In the Rosenstiel model, the factors that actually constitute incentives are widely considered to include all monetary and non-monetary incentives provided by the organization. Monetary incentives are common, but not unique (Rosenstiel, 1975). This thesis will focus on two specific incentives provided by employers, namely the permanent increase in base salary and the permanent increase in vacation time. Holidays are not money-you cannot use holidays to pay for your mortgage, but employers can attribute the cost of money to holiday time, so they can all be regarded as money in this respect. In short, the company provides incentives to motivate employees to work in the company's best interests. 2.1.1. Principal-agent theory The core of the principal-agent problem is simply to ensure that one party (agent) acts in the best interests of the other party (principal), not his/her own best interests. Agency theory uses contract metaphors to reflect the relationship between principals and agents who engage in cooperative behavior but have different goals and attitudes toward risk (Eisenhardt, 1989). From the same source, we come to the "core" of the principal-agent theory, which is to weigh the cost of 1) the cost of measuring behavior and 2) the cost of measuring the result and transferring the risk to the agent (Eisenhardt, 1989). Various types of problems will arise in the principal-agent relationship. These are questions about establishing an appropriate level of control, understanding whether the contract is fulfilled, understanding whether the future employee (agent) is suitable for the job, and the differences in risk appetite between the two parties. For this paper, when the employer (the principal) provides incentives to the employee (the agent), there are two questions directly related to the different levels of information that either party has. Moral hazard is the problem of the agent concealing information from the principal out of its own interests. There is a corresponding part of information called information asymmetry, which is the possibility that the principal knows more about the agent, for example, the reward prospect (Stiglitz, 2002). In Figure 1 below, the principal-agent relationship model is shown. In order to overcome the conflict of information asymmetry, Eisenhardt (1989) proposed that the time factor plays a role in alleviating this problem, because the longer the principal-agent relationship is maintained, the more participants will understand each other. If the agency relationship repeats over time, it can induce the agent to produce the result that the principal wants (Sappington, 1991). In other words, repeated long-term agency relationships or shorter agency relationships can alleviate information asymmetry because the principal and the agent "understand" their relationship. 2.2. Types of motivations There is no one definition of motivation, but through the "helicopter perspective" of different definitions, we can see that they often have several common words: desire, want, desire, purpose, goal, need and incentive measures ( Tella et al., 2007). Two examples of definitions start from Luthans (1998) as "a process that starts from a physical defect or need, which activates the behavior or driving force aimed at achieving a goal incentive", while Svenska Nationalencyklopedin defines it as "[a] psychological Refers to the factors that trigger, shape, and target different goals in an individual” (translated from Svenska Nationalencyklopedin, 2013). Bernard et al. (2005) Define motivation based on goal-oriented thoughts and behaviors. Read Less