The Importance of Incentives
MANAGEMENT |

The Importance of Incentives

THOSE WHO POSSESS HUMAN CAPITAL ARE PREPARED TO INVEST IT IN A FIRM, IN EXCHANGE FOR DECISIONMAKING RIGHTS AND INCENTIVES, BUT OFTEN FIRMS ARE NOT READY TO CONCEDE THEM, ACCORDING TO ANNA GRANDORI

“The fatal tendency of mankind to leave off thinking about a thing when it is no longer doubtful is the cause of half their errors”. Anna Grandori, Full professor of Business Organization at Bocconi University, chose this John Stuart Mill quote as the epigraph of her book 10 tesi sull’impresa (Il Mulino). Among the stereotypes to debunk there are some related to human capital. “Many despise the term because they associate it to the degradation of a person. But a person is not a capital, nor a resource: he owns resources such as human capital”.

This misidentification creates a number of distortions, Grandori says. “It implies, for instance, that you can boost your human capital, but you can not invest it in a firm. Yet any knowledge-based human capital can be invested. To deny it means to lose any compensation on such investment. That is one of the reasons why people sometimes are reluctant to share knowledge: there is no investment with no incentives, guarantees or return”.

The problem is that the incentives to invest in business ideas or education are low. Let’s consider the results of a quantitative research conducted in 2002 by Crora (Bocconi’s Centro di ricerca sull’organizzazione aziendale). Questions on governance, contracts and rewards were asked to knowledge workers and their CEOs and Presidents. Managers were unexpectedly more willing to receive performance-related rewards (in return for more decision rights and representation) that their leaders were willing to concede them. “It does not apply to low skilled workers. Decision-making constantly remains in a few hands, while part of the business risk is transferred to the employees in the form of occupational risk. As a result, the latter could decide to under-invest in their human capital”.

Read the other stories on the topic of Human Capital:

We Are Who We Hire    
Gig Economy: What Rights for Workers?  
The Chosen People who Invested on Themselves
Not only CEOs, the Importance of the Manager
Investing Time in Children Pays
Uncertain Victor, Better Candidates
The Consequences of Uncertainty on Families
Autonomy in Decision Making: the Right Balance is Required
The Geography of Human Capital
Not all Directors have the Same Value

 

by Claudio Todesco

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