When comes to the nature of the human behaviour, there are two types of motivation: intrinsic and extrinsic motivation. They play an important role when talking about rewards and incentives in the workplace.
Extrinsic motivation means that the individual incentive comes from external factors, such as the well-known cash awards and bonuses received by the employees.
On the other hand, intrinsic motivation refers to a stimulus that comes from within each person. For instance, having an exciting job. It is related to each individual deep-rooted desires and what he wants to achieve. And because we are not all the same and every person has different intrinsic motivations, it is important for employers to know the employees. In fact, understanding how different employees can be different motivated will enable firms to better categorize their own needs.
The relationship between employers and workers may be seen as an agency agreement where the employer plays the role of the first part (the principal), and the employee plays the role of the second part (the agent). For that reason, motivating the employee means solving the problem of the agency theory. To prevent the agent of the moral hazard, the agency agreement should offer the second part the best option he can get. When the agent avoids (or neglects) the best effort he can make, it is said that he is doing a shirking strategy. That is why the agency agreement and the principal should assure that the agent does not intend to do the shirking strategy. There is also another problem concerning the agency agreement which is weather the two parties have asymmetric information. In which concerns motivations, this problem reinforces what was mentioned before about knowing well the employees. In order to know if their effort to motivate the agents is being translated in their performance, employers can use performance measurement techniques
Although common sense makes us think that employers can only deal with extrinsic motivation type, it is becoming commonly accepted that workers can also motivate their own employees intrinsically. It may be more complex to do so, but certainly it will improve the agency agreement and it will benefit not only the employer but also the employee.
All of what was mentioned before leads us to a central question: What do employees want from work? Money is probably the first thing that crosses our mind. And in fact, work is about money. That is why fair wages and payments are the cornerstone of worker’s happiness. But people want more from work than only money. Talking about that, it is important to credit Frederick Herzberg, author of the Two-Factors Theory (1968). In his theory, Herzberg refers that individuals are not content with “low-order needs” (such as minimum salary levels). They want to accomplish more sophisticated and “higher-level” needs: achievement, recognition, responsibility, advancement, and the nature of the work itself. This is what really distinguishes jobs and what should be implemented in each individual workplace. Motivate the individual, intrinsically or extrinsically, has much to do with a firm performance and consequently with the firm’s profit.