Incentives

We are all motivated to action by the expectation that our action will result in a circumstance that is better than before we acted. According to Mises, in Chapter IV A First Analysis of the Category of Action, Human Action :
The result sought by an action is called its end, goal, or aim. One uses these terms in ordinary speech also to signify intermediate ends, goals, or aims; these are points which acting man wants to attain only because he believes that he will reach his ultimate end, goal, or aim in passing beyond them. Strictly speaking the end, goal, or aim of any action is always the relief from a felt uneasiness.
Our expectations of how the action will result in the attainment of such better circumstance will determine the means we employ. Mises further states :
A means is what serves to the attainment of any end, goal, or aim. Means are not in the given universe; in this universe there exist only things. A thing becomes a means when human reason plans to employ it for the attainment of some end and human action really employs it for this purpose.
Incentives are an attempt by others (our employer for example) to entice us to act in a particular way as a means for the expected reward (incentive). Incentives are everywhere. Business Management Daily (BMD) offers an incentive for “Leaders & Managers” to sign up for their e-letter:
Sign up for Business Management Daily’s e-letter for Leaders & Managers now and receive a FREE copy of 12 Ways to Optimize Your Employee Benefits Program…
The report is free … all you have to do is provide your email. From the look of the home page for BMD, there is a lot of information. Some of it may be valuable to a variety of professional from human resources professionals to department managers. But nothing is really free. At the core of the offer is the desire to sell something. That is not a cynical observation, it is economic necessity. Information is valuable; but it always comes at a cost. Sometimes the costs are as low as the time invested to sort through the myriad of offers. Your time is valuable. There is an incentive for you to maximize your time so you must be diligent.
In this week’s readings, Mises describes the functioning of the Market Economy :
The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf; but everybody’s actions aim at the satisfaction of other people’s needs as well as at the satisfaction of his own. Everybody in acting serves his fellow citizens. Everybody, on the other hand, is served by his fellow citizens. Everybody is both a means and an end in himself; an ultimate end for himself and a means to other people in their endeavors to attain their own ends.
In exchanges with others, in particular as it relates to the sale of labor in exchange for satisfaction of one’s needs, there must be the expectation of a means to satisfy those needs. This can come in the form of direct compensation or some other indirect reward that satisfies a perceived need. Since World War II, when the government imposed wage and price controls as part of the war effort, many companies have been providing health insurance coverage for certain employees. This has come to be an expectation among employees in many companies; but it is simply another form of incentive. It is indirect compensation. The benefit to companies and employees is that this form of compensation has until now been a non-taxable benefit to the employee while being tax deduction to the company. Changes as a result of the Affordable Care and Patient Protection Act (ACA) have changed the nature of this relationship; but it is still an expectation. Now companies are seeking other incentives to engage their employees into performing preferred action.
Think about why companies are not satisfied with direct compensation. Many of you have expressed the goal of becoming a human resources (or human capital) manager. You will be charged with the goal of finding programs that satisfy the dual objectives of motivation the desired action by the employees and providing an adequate return to the company.
Again, Mises expresses this idea in a more general; but no less insightful way :
The mental tool of the market economy is economic calculation. The fundamental notion of economic calculation is the notion of capital and its correlative income.
The notions of capital and income as applied in accountancy and in the mundane reflections of which accountancy is merely a refinement, contrast the means and the ends. The calculating mind of the actor draws a boundary line between the consumers’ goods which he plans to employ for the immediate satisfaction of his wants and the goods of all orders-including those of the first order1 – which he plans to employ for providing, by further acting, for the satisfaction of future wants. The differentiation of means and ends thus becomes a differentiation of acquisition and consumption, of business and household, of trading funds and of household goods. The whole complex of goods destined for acquisition is evaluated in money terms, and this sum-the capital-is the starting point of economic calculation. The immediate end of acquisitive action is to increase or, at least, to preserve the capital. That amount which can be consumed within a definite period without lowering the capital is called income. If consumption exceeds the income available, the difference is called capital consumption. If the income available is greater than the amount consumed, the difference is called saving. Among the main tasks of economic calculation are those of establishing the magnitudes of income, saving, and capital consumption.
In Mises terms, capital are the useful things invested in by companies with the expectation of longer term returns Human capital are the skills and knowledge in which individuals or companies invest to enable themselves or their employees to provide greater returns. The investor expects that the time and treasure they invest will result in greater satisfactions at some point in the future. Those people and companies that best anticipate the future needs will reap the highest returns.
As prospective human resources or human capital managers, you will be well served to understand the lessons of the Market Economy described by Mises.
Assignment:
• Using the Chapter XV subsection topics as an outline, develop a plan to create incentives that address the dual needs of motivating the employees and generating a su
fficient return for the employer. Address the ideas of the market expressed by Mises.