Abundant but Neglected: Awards as Incentives

Economists traditionally focus on monetary compensation when examining incentives, but awards are of immense practical relevance as can be inferred from their prevalence in the form of state orders, decorations and prizes, according to Bruno Frey and Susanne Neckermann. Abundant but Neglected: Awards as Incentives Bruno S. Frey and Susanne Neckermann University of Zurich, Switzerland and CREMA – Center for Research in Economics, Management and the Arts, Switzerland Awards in the form of orders, decorations, prizes, and titles, are non-material, extrinsic incentives. Economists tend to be somewhat snobbish about awards. The Economist recently featured an article on the British honors system titled “A ridiculous, outdated system that cannot be improved upon” (2004: 31). But revealed preferences do not support this view. The Economist recognizes this and does admit that “a quick glance around the globe suggests that fancy decorations are virtually universal.” Despite the prevalence of awards, economists have largely disregarded them. There may be various reasons for this neglect. Firstly, awards may be considered to be less efficient incentives than monetary compensation, because they are not fungible. Secondly, awards may just be one result of high motivation and success and not a contributing cause. However, the majority of awards do serve as incentives, be it directly or indirectly. Awards are direct incentives, when people exert effort explicitly to win the award, such as for a ‘Best Customer Service Award’. Awards serve as indirect incentives, when individuals cannot or do not consciously work towards them, for example state orders for acts of exceptional civil courage. Then, awards serve as indirect incentives as they create role models, highlight the values of a society, and bring prestige also to individuals who have acted similarly without being chosen as award recipients. Thirdly, it may be thought that awards only motivate insofar as they lead to future material or immaterial benefits whose impact on behavior can be studied directly. However, Huberman and his colleagues have demonstrated experimentally that people value status independently of any monetary consequence; they are even willing to incur material costs to obtain it. It is sometimes argued that awards are just an indirect way to compensate the recipient monetarily, as award-receiving individuals might subsequently be selected for better and higher paid jobs or might gain access to clubs with valuable networks. However, there are major differences between awards and purely monetary compensation, making it worthwhile to analyse awards as a separate phenomenon. The material costs of awards, consisting of a certificate for the wall or a small trophy, are typically low for the donors, but the value to the recipients may be very high; In contrast to monetary compensation, accepting an award establishes a special relationship, in which the recipient owes (some measure of) loyalty to the donor; Due to their vague nature and ex post performance evaluation, awards are more adequate incentive instruments than monetary payments when the recipient’s performance can only be vaguely determined ex ante and/or measured ex post; Awards are not taxed, while monetary income is. Awards are used in the corporate sector (e.g. Employee of the Month), but also in the cultural sphere (e.g. the Oscars), in sports (e.g. Sportspersonality of the Year), in domestic and international affairs (e.g. state orders and honors such as the Presidential Medal of Freedom) and other sectors of economic and social life. The arguably best source of information on the awards received by the most important personalities of society in different countries is the International Who’s Who (IWW) where entrants are asked to indicate the number of honors and awards they have received. For a selection of 82 countries a random sample of 50 persons per country was chosen in order to generate a descriptive and illuminating picture of the frequency of awards across countries and sectors. Specifically, as a first analytical step four issues of general interest are addressed. Are awards are mainly found in monarchies? In the past, awards have mainly consisted in state orders, honors and decorations and have been closely connected to monarchies. An obvious example is Great Britain, which features many dozens of honors and awards bestowed by the Queen. Table 1 demonstrates that today’s republics also widely engage in this practice.