Accounting, Organizations and Society 27 (2002) 275–295

www.elsevier.com/locate/aos

Agency theory, performance evaluation, and the hypothetical

construct of intrinsic motivation
Alexis H. Kunza,*, Dieter Pfaffb
a
University of Applied Sciences Aargau (Northwestern Switzerland), Martinsberg, CH-5401 Baden, Switzerland
b
Institute for Accounting and Control, University of Zurich, Plattenstrasse 14, CH-8032, Zurich, Switzerland

Abstract
Cognitive evaluation theory and its hypothetical construct of intrinsic motivation are enjoying increasing popularity
in the fields of business administration and economics. Consequently, intensifying skepticism towards performance
incentives and agency theory is postulated. According to cognitive evaluation theory, it is argued that performance pay
may undermine an agent’s intrinsic motivation. In contradiction to agency theory, the principal might be worse off
when providing an incentive contract to the agent than without doing so. Since the contention is substantiated by
empirical evidence, it seems worrying enough for further investigation. Restricting attention to performance pay in
business corporations, the scope of this article is to evaluate whether agency theory faces an urgent need to incorporate
the construct of intrinsic motivation and its ‘hidden costs of reward’ as postulated by supporters of the concept. The
subsequent analysis reveals good and bad news for agency theory. The bad news is that hidden costs of reward do
indeed exist. The good news is that the empirical evidence on undermining effects cannot be interpreted as being con-
tradictory to agency theory. In particular, the antecedents for such effects not only seldomly prevail in business cor-
porations, they are also easily avoidable. # 2002 Elsevier Science Ltd. All rights reserved.

There is no doubt that agency theory and its
advocated view of the firm as a complex nexus of
contracts constitutes one of the major pillars of
theoretical accounting. As such it not only helps to
understand and explain the behavior of business
actors, but also provides a rich fund of practical
implications for the design of governmental struc-
tures such as transfer prices, the delegation of
residual rights or the design of managerial incen-
tive contracts. In particular, the overwhelming
empirical preponderance of pay for performance
systems has often been taken as circumstantial
* Corresponding author.
E-mail address: a.kunz@fh-aargau.ch (A.H. Kunz).
0361-3682/02/$ - see front matter # 2002 Elsevier Science Ltd. All rights reserved.
PII: S0361-3682(01)00031-9
evidence for the theory’s contribution to real-life
situations (Milgrom & Roberts, 1992).
Despite this, standard agency theory has often
been criticized because of its presumptions about
human behavior. Especially some psychological
and sociological concepts refer to disparate
assumptions about human behavior and seem to
have established a certain rivalry of thoughts
between the disciplines. Overall, there exists quite
a disagreement about the consequences of state-
contingent performance pay. On the one hand,
agency theory asserts that increased performance
incentives ceteris paribus raise the agent’s pro-
ductivity when risk considerations are omitted. On
the other hand, the psychological concept of
intrinsic motivation may predict quite the oppo-
site. In accordance with cognitive evaluation
276 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
theory, it has been pointed out that performance
incentives through state-contingent extrinsic rewards
may diminish an agent’s intrinsic motivation (Ryan
& Deci, 2000). Thus, in contradiction to agency
theory, a principal can be worse off when provid-
ing an incentive contract to his agent than without
doing so. Such detrimental consequences of rewards
have been termed the corruption effect of extrinsic
motivation (Deci, 1975), hidden costs of reward
(Lepper & Greene, 1978) or the crowding-out
effect of intrinsic motivation (Frey, 1997).
At present, the psychological concept of intrin-
sic motivation enjoys increasing popularity in the
fields of business administration and economics.
As a consequence skepticism towards performance
incentives and formal agency theory has intensi-
fied both in literature and in practice (Brittan,
1997; Frey, 1997; Osterloh & Frey, 2000; Tosi,
Katz, & Gomez-Mejia, 1997). Supporters of the
intrinsic concept argue that economic theory
advocates a myopic view of personal motivation
which might induce severe shortcomings when it
comes to real life applications. Referring to
empirical evidence of detrimental effects due to
extrinsic rewards, they plead for an urgent need to
incorporate intrinsic motivation into economic
theory and real life compensation plans (Frey,
1997). Some authors even criticize the dominance
of extrinsic-oriented rewards in business compen-
sation plans and request stronger intrinsic-orien-
ted incentive systems which from their point of
view might be an as-yet unexplored competitive
advantage (Osterloh & Frey, 2000).
The categorical assertion that rewards lessen
task performance has profound practical and the-
oretical implications. First, any popularization of
such views can foster public attitudes against the
use of tangible rewards to promote socially desir-
able behavior (Eisenberger & Cameron, 1996).
Secondly, one is likely to jump to the conclusion
that agency theory may map human behavior
inadequately and should therefore be modified or
be skipped accordingly. So far, only a few econo-
mists have turned their attention towards the
construct of intrinsic motivation. Kreps (1997, p.
360) talks about a ‘stylized fact’ but he still thinks
it may be worthwhile for future research since,
‘there may be nothing to explain,. . .(but) abun-
dant smoke signifies a fire, and the assertion is too
strongly rooted in folk wisdom to be entirely hot
air.’ Restricting attention to performance evalua-
tion in business corporations, the scope of this
article is to clarify whether agency theory faces an
urgent need to incorporate the construct of intrin-
sic motivation. Since this problem addresses both
empirical and theoretical aspects, a two fold ana-
lysis will be carried out. Reviewing the construct
of intrinsic motivation, we first investigate whether
its underlying theory may serve as a model for
incorporating intrinsic motivation into the agency
perspective. The second analysis concentrates on
the empirical phenomenon of undermining effects.
Reviewing experimental evidence, we investigate
whether the effect is of any practical relevance,
and if so, under what precise conditions we have
to account for it.
Our analysis reveals good and bad news for the
agency perspective. The bad news is that hidden
costs of reward do indeed exist. The good news is
that the empirical evidence on undermining effects
cannot be interpreted as being contradictory to
agency theory. In particular, the antecedents for
negative after-effects of reward seldomly prevail in
business corporations. In addition they are also
easily avoidable.
The remainder of this article is structured as
follows: the second section focuses on perfor-
mance evaluation and agency theory from both a
theoretical and an empirical point of view. Section
2 and 3 elaborate definitions, conceptualizations
and theories of intrinsic motivation. Empirical
evidence on undermining effects, particularly on
their antecedents, is scrutinized in Section 4. Sec-
tion 5 draws some conclusions.
1. Agency theory, performance evaluation, and
compensation
1.1. The agency theoretic perspective
Modern economic organizations are complex
team-productions, since their output is jointly
produced by several-input owners, e.g. stake-
holders, managers and employees (Alchian &
Demesetz, 1972). As the team is forced to achieve
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
some level of efficiency, tasks are delegated to
specialized production units which act on behalf
of others. Specialization inevitably involves the
dispersion of knowledge and information; in
addition, it often entails goal incongruencies
between the participants. Since the combination of
both asymmetric information and conflicts of
interest may result in an efficiency loss, procedures
and mechanisms are needed to mitigate this pro-
blem. The function of performance evaluation in
such a setting is twofold. First, it aims to control
discretionary behavior by aligning interests
through the provision of state-contingent incen-
tives. Secondly, it evaluates the contribution of
each input-owner to the overall output, thereby
administering compensation conditional upon
individual performance.
Being a theoretical branch of game theory,
agency theory represents an economic methodol-
ogy for analyzing and assessing the efficiency of
such mechanisms (Baiman, 1990; Lambert, 2001).
The standard agency model involves a (risk-neu-
tral) principal, employing a (risk averse) agent to
act on his behalf. The agent possesses private
information, e.g. about his effort level, the state of
nature etc. that is not costlessly available to the
principal. It is supposed that the agent chooses
actions to maximize his utility. He is assumed to
be work averse in the sense that tempting off-the-
job opportunities may instigate him to reallocate
his effort to maximize his overall utility resulting
from payoffs both, on and off the job. The com-
bination of information asymmetry and the
agent’s aversion both to work and risk, steer him
away from cooperative behavior. Since the output
is conditional upon factors which are exogenous
to his effort, like the state of nature, the principal
cannot infer the agent’s performance from the
overall result. Thus, while designing an incentive
contract, the principal must prod the agent’s work
effort by forcing him to bear at least some of the
production risk. According to standard agency
theory, an optimal incentive contract involves a
pay-for-performance scheme which ties the agent’s
pay-off to production indicators which (partially)
correlate with his effort level. The intuition behind
this result is the mimicry of a statistical inference
problem, making pay-outs contingent upon the
277
likelihood that the desired actions were in fact
taken (Holmstrom, 1979). The derivation of the
optimal contract results from a mathematical
program maximizing the principal’s objective
function, subject to several constraints, e.g. pro-
duction and technology constraints and the
agent’s characteristics, e.g. risk and work aversion,
information, action space and reservation utility.
The principal offers a contract to the agent, who
then chooses those actions that maximize his
overall utility restricted by contractual constraints.
Since the agent simultaneously faces on- and off-
the-job-opportunities, providing effort is costly to
him. When deciding upon his optimal action, the
agent has to trade off effort costs against the
expected utility resulting from the monetary (sal-
ary) and non-monetary (prestige) consequences of
his decision. The precise conditions of an optimal
contract are heavily dependent on the prevailing
situational characteristics, but in most cases they
involve a variable component varying with an
indicator of the agent’s effort level.
The efficiency loss due to the agent’s self-inter-
ested behavior is measured by comparing the
effective outcome under asymmetric information
with a fictitious outcome under symmetric infor-
mation. Since the latter serves as an unattainable
focal point of the analysis, it is referred to as the
first-best solution, whereas the former represents
the so-called second-best solution. Although
attainability of the first-best solution is impossible
in most cases, its approximation through an
incentive contract is not. Consequently, agency
theory represents a methodology for comparing
and assessing such contractual designs as far as
their efficiency is concerned. Although a countless
number of different types of agency models exist in
the literature (for overviews see Mas-Colell,
Whinston & Green, 1995; Milgrom & Roberts,
1992), they all share at least two main character-
istics: the presumptions about conflicts of interest,
and informational asymmetries between the par-
ties. If these necessary conditions were relaxed, the
problem would become trivial. On the one hand,
symmetric information simply allows the principal
to prescribe and control the desired action. On the
other hand, aligned interests between principal
and agent make motivation needless, since the
278 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
required actions already belong to the very (self)-
interest of all actors. If both conditions, asym-
metric information and conflicts of interest, hold
then an optimal incentive contract needs both to
partition decision rights and to control discre-
tionary behavior. In addition, it aligns interests
between the parties by tying compensation to
production indicators which at least partially cor-
relate with the agent’s action (effort level).
Although the agency perspective recommends
rewarding agents on the basis of their performance
while explicitly supposing that increased incentives
usually raise productivity, the use of incentive
systems is not unrestrictedly advocated. Agency
theory not only constitutes a balanced framework
for evaluating efficient incentive contracts, it
additionally provides a rich fund of insights on
their limitations and pitfalls, thus explicitly
accounting for the inherent dangers of reward
systems. Different models discuss dysfunctional
effects of explicit incentives within the concept of
agency theory, e.g. due to the agent’s (severe) risk
aversion, his limited liability, multi-tasking pro-
blems or the case of sufficiently noisy indicators
about the agent’s performance level (for overviews
see Baker, 1992; Gibbons, 1998; Lazear, 2000).
1.2. Empirical evidence
Assessing the empirical status of the theory
provides a mixed but optimistic picture; its major
predictions concerning the interaction of incen-
tives, risk-bearing properties, and monitoring
technologies are in general supported by empirical
research (for overviews see Eisenhardt, 1989;
Lazear, 2000; Prendergast, 1999). Nevertheless,
the empirical picture additionally shows that the
overall effect of incentives on subsequent perfor-
mance might involve large variances in perfor-
mance outcomes, giving a strong rationale for the
importance of contingency factors (Lanen &
Larcker, 1992). On the one hand, performance
variances of incentives are explicable by argu-
ments that not only are consistent with the theory
but also belong to its very core, e.g. (1) the agent’s
risk aversion, affecting his sensitivity towards the
incentive contract (Haubrich, 1994; Murphy,
1999; Oyer, 2000); (2) individual rent-seeking
activities (Jensen & Smith, 2000); (3) partial sub-
stitution of the incentive contract through mon-
itoring technologies (Beatty & Zajac, 1994); or (4)
noisy performance indicators (Gibbons, 1998).
On the other hand one could just as well argue
that performance variances might be caused by
variables which are beyond the scope of agency
theory. Indeed, experimental economics seems to
have identified some behavioral patterns which at
present are not sufficiently integrated in the theo-
ry’s axiomatic (for overviews see Davis & Holt
1993; Fehr & Gaechter 2000a, b; Kagel & Roth
1995). Examples are, for instance, fairness con-
siderations, interpersonal reciprocity in bilateral
bargaining contexts (Davis & Holt 1993; Fehr &
Gaechter 2000a), violations of the theory’s ration-
ality assumptions (Camerer, Babcock, Loewen-
stein & Thaler, 1997; Conlisk 1989) or
dysfunctional effects of fines (Gneezy & Rus-
tichini, 2000). At present, there is an ongoing
controversy whether some of these effects are pri-
marily a matter of insufficient financial incentives
during the experiments or whether they are really
challenging the theory (Davis & Holt, 1993).
Economists argue that although such anomalies
may be troublesome, they need not be necessarily
fatal, ‘particularly if there exists no alternative
theory that explains both the anomalies and the
standard patterns of behavior’ (Davis & Holt,
1993, p. 510). In addition, as ongoing research
demonstrates, economists are dealing seriously
with these anomalies, trying to reintegrate them
into their axiomatic. Initial progress has already
been made concerning the modeling of self-per-
ception and social interactions (Benabou & Tirole,
2000), reciprocity (Falk & Fischbacher, 2000; Fehr
& Schmidt, 1999; Rabin, 1993), learning (Fuden-
berg & Levine, 1997) and the impact of social
norms on voluntary cooperation (Fudenberg &
Levine, 1997; Kandori, 1992; Knack, 1992). A
common characteristic of all these models is the
attempt to explain voluntary cooperation (or dys-
functional effects of explicit incentives respec-
tively) within the very axiomatic of economic
theory, e.g. without referring to the concept of
intrinsic motivation. Benabou and Tirole (2000),
for example, offer an explanation for hidden cost
of rewards in terms of agency theory. In their
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
model, the principal has superior information
about the agent’s ability to successfully accom-
plish a task. In such a setting, increased monetary
incentives may backfire when interpreted by the
agent as a signal of low competence, diminishing
his self-confidence and his overall motivation to
work vigorously.
Summarizing, agency theory and its related
axiomatic proves to be a powerful methodology.
The implications of agency theory are empirically
testable and have empirical support. Nevertheless,
agency theory and game theoretical modifications
thereof have to be considered as theories which are
still in progress. So far, the permanent interplay
between theory and empirical work has induced a
process of continuous refinement of the theory’s
axiomatic, thereby broadening its explanatory and
predictive power rather than exposing any severe
limitations. In the next section, we investigate to
what extent the theory’s recommendations on the
practical use of incentives might be disputed due
to the agent’s intrinsic motivation.
2. Intrinsic motivation as a hypothetical construct
2.1. Definitions and conceptualizations
Hypothetical constructs relate experiences by
inventing a fictitious substance or process in terms
of which these experiences can be expressed,
thereby involving the supposition of entities or
processes which are neither among the observed
nor can be measured directly (Benjamin, 1937;
MacCorquadale & Meehl, 1948). Intrinsic moti-
vation and the crowding-out effect are hypothe-
tical constructs in the sense that their existence is
not empirically proven, but rather results from
plausible hypothesization. As imaginary (re)con-
structions of unobservable psychological pro-
cesses, they aim to explain behavioral outcomes
stemming from a preceding constellation of ante-
cedents. One point is of major importance for the
following discussion: it has to be carefully dis-
tinguished whether one refers to intrinsic motiva-
tion as a hypothetical construct, or whether
attention is directed to the empirical evidence of
externally influenced performance lessening. The
279
latter is the empirical phenomenon which has to
be elucidated (explanandum) whereas the former
captures one possible theoretical position for its
illumination (explanans). Obviously, the latter
need not imply the former. Thus, one might easily
explain the very same effects in different theories,
e.g. without necessarily referring to the construct
of intrinsic motivation. For analytical purposes
the following denotations will be employed
throughout the paper: the term postreward perfor-
mance lessening will refer only to the empirical
phenomenon, whereas crowding-out will be solely
related to the construct of intrinsic motivation, its
underlying theory or conceptualizations thereof.
Existing definitions of intrinsic motivation vary
considerably among scholars and are usually very
loose, if not utterly vague (Thierry, 1990, p. 67).
Commonly, people are said to act intrinsically
motivated if they value activities for their own
sake, such as they perform them without being
externally induced. Reviewing the literature,
Heckhausen (1989, pp. 456–460) identified six dif-
ferent conceptualizations of the construct of
intrinsic motivation, which are briefly summarized
below.
1. Internal drive without aiming at drive reduc-
tion. In accordance with the first qualifica-
tion, intrinsic motivation originates from an
internal drive without explicitly seeking drive
reduction. Hence, intrinsic motivation differs
from drives that regulate homeostatic crisis
of the organism like hunger, thirst, or pain
avoidance (Koch, 1956; Woodworth, 1918).
2. Activities without any aim or goal. The sec-
ond qualification involves all activities which
are autotelic, like leisure-time pursuit or
children’s play (Klinger, 1971).
3. Optimal operation level. According to the
third qualification, intrinsic motivation is
seen as behavior which aims at reinstalling
the maintenance of an optimal operation
level, such as arousal (Hebb, 1955), incon-
gruence of informational input (Berlyne,
1960) or adaptation (Helson, 1964).
4. Personal causation and evaluation theory. The
fourth concept defines intrinsically motivated
behavior as behavior a person chooses in
280 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
order to feel competent and self-determining
(Deci, 1971).
5. Enjoyment or flow. According to the fifth
concept, intrinsically motivated behavior is
cheerful enjoyment while performing a task, or
absolute absorption in an activity. It is ‘a hol-
istic sensation people feel when they act in total
involvement’ (Csikszentmihalyi, 2000, p. 10).
6. Endogenity of goal and activity. The last
qualification refers to the individual’s sub-
jective perception. Therefore, intrinsic moti-
vation is at stake as long as there is inherent
congruity between means (action) and goals
(behavioral results) of activities, as far as the
individual attribution process is concerned
(Heckhausen, 1977; Kruglanski, 1975).
A core element of the construct is the attribu-
tion of behavioral sources towards internal versus
external factors, thereby differentiating between
internal versus external motivators. Apart from
this rather abstract definition, no general distinc-
tion between intrinsic and extrinsic motivation has
been elaborated. Nevertheless, almost all con-
ceptualizations of intrinsic motivation share at
least one of the three following qualifications:
1. Internal motivation: intrinsic motivation
stems from a drive from within the person,
e.g. no outside incentives force the individual
to act the way he does. In contrast, extrinsi-
cally motivated behavior is supposed to be
induced through forces outside of the person.
2. Lacking instrumentality: intrinsically moti-
vated behavior aims only at its own fruition,
whereas extrinsic motivation implies an
instrumental relationship between behavioral
results and desired outcomes.
3. Attached feelings: intrinsic motivation con-
sists of the feelings which are attached to or
result from the performance of certain activ-
ities, so that intrinsically motivated indivi-
duals experience enjoyment or satisfaction
during the performance of these activities.
As shown by different conceptions, researchers
clearly do not have the same phenomenon in mind
when referring to intrinsic motivation (Bandura,
1986; Dyer & Parker, 1975; Heckhausen, 1989).
Often, different qualifications are used inter-
changeably (Bandura, 1986). In order to avoid any
confusion among scholars and in order to build a
valuable foundation for further discussion, we
turn to the description of the two predominant
theories in this area, cognitive evaluation theory
and overjustification research.
2.2. Personal causation and cognitive evaluation
theory
According to Deci’s cognitive evaluation theory
(CET), human beings strive to fulfil two basic
needs: the need for competence and the need for
self-determination. Intrinsically motivated beha-
vior can therefore be defined as behavior a person
chooses in order to feel competent and self-deter-
mining (Deci, 1975, p. 61). Concerning the influ-
ence of external rewards on intrinsic motivation,
Deci formulated three propositions which sum-
marize the early theory (Deci, 1975, p. 139–142):
1. The first process by which intrinsically moti-
vated behavior can be affected is a change in
perceived locus of causality from internal to
external. As a consequence intrinsic motiva-
tion can diminish when someone receives
extrinsic rewards for engaging in intrinsically
motivated activities.
2. The second process focuses on the person’s
emotions as experienced feelings. Intrinsi-
cally motivated behavior increases if a per-
son’s feelings of competence and self-
determination are enhanced; otherwise, if
these feelings are diminished, intrinsic moti-
vation will abate.
3. The third process differentiates between two
aspects of every reward, a controlling and an
informational one. Since rewards usually are
administered contingent upon the achieve-
ment of some predefined goals, the control-
ling aspect restricts a person’s action space,
thereby separating wanted from unwanted
behavior. The informational aspect provides
the recipient with information about his
competence and self-determination. The
relative salience of both aspects determines
whether, and if so to what extent, intrinsic
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
motivation will be affected. If the informa-
tional aspect prevails, feelings of competence
and self-determination will be initiated,
whereas if the controlling aspect is more
salient, the change in locus of causality
described above will be induced.
Recent research on intrinsic motivation shows
that although intrinsic and extrinsic motivation
were initially conceived as a dichotomy, nowadays
many researchers no longer hold to this notion
(Harter & Jackson, 1992; Rigby, Deci, Patrick, &
Ryan 1992; Sansone & Harackiewicz, 2000b).
Several studies showed that extrinsic rewards
enhance intrinsic motivation (Ryan, 1982; Ryan,
Mims, & Koestner, 1983). Therefore, it became
increasingly clear that extrinsic rewards need not
necessarily be detrimental, but rather can play a
complementary role to intrinsic motivation. As a
consequence, Deci and his colleagues clearly dis-
sociated themselves from the former misleading
dichotomy of intrinsic and extrinsic motivation
(Rigby et al., 1992, p. 167). They argue that a
person’s relative autonomy of behavior is a better
way of describing the motivational basis of one’s
performance than the old dichotomy was. In their
modified concept, they assume that individuals
tend to internalize and integrate the regulations of
extrinsically motivated behavior in order to cope
effectively with their social world. Therefore, the
traditional dichotomy is replaced by a con-
ceptualization of extrinsic motivation as a con-
tinuum of internalization and integration.
Although extrinsically motivated behavior
remains instrumental by definition, external reg-
ulations may be perceived as competence-enhan-
cing and self-determining when integrated. Thus,
contrary to former theorizing, extrinsic incentives
need not be detrimental to intrinsic motivation per
se. Rather, they represent opportunities to
enhance intrinsic motivation, when administered
correctly (Rigby et al., 1992, p. 169–171).
2.3. Self-perception theory and the
overjustification effect
Following a more cognitive approach, some
attribution theorists account for postreward
281
performance lessening on the basis of ‘over-
justification of one’s behavior’ (Lepper & Greene,
1978; Lepper, Greene, & Nisbett, 1973). The the-
oretical background of overjustification research is
rooted in the theories of self-perception (Bem,
1967a, 1967b) and self-attribution processes (Kel-
ley, 1967, 1973). According to this paradigm peo-
ple have no direct knowledge of their motives, but
infer them from their actions and contingencies.
People are assumed to engage in postbehavioral
inferences about their motivational states in order
to self-justify or explain their behavior (Bem,
1972; Kelley, 1973). To the extent that external
contingencies of reinforcement are salient, unam-
biguous and psychologically sufficient to explain
one’s actions, such self-justification processes are
hypothesized to attribute behavior to these exter-
nal constraints. On the other hand, if external
contingencies of reinforcement appear to be
absent, or are perceived as weak, unclear or psy-
chologically insufficient, a person is supposed to
attribute his behavior to personal dispositions,
interest, or desires (Bem, 1972; Lepper & Greene,
1978).
As a theoretical proposition the overjustification
effect states that if rewards are administered for
performing an activity which is already rewarding
in itself, people will attribute their behavior to
these rewards. As a consequence, if these rewards
are withdrawn, performance will ceteris paribus
decrease to a level that is lower than the original
level, before rewards were administered (Lepper &
Greene, 1978; Lepper et al., 1973). The self-per-
ception perspective explains this effect in terms of
cognitive reevaluation of an activity’s intrinsic
characteristics due to the mis-attribution of one’s
causes, leading to changed expectations and atti-
tudes towards the activity. According to the the-
ory, mis-attributions are triggered by the
disclosure of an external instrumentality between
an activity and salient reinforcement con-
tingencies. Before rewards are administered, a
subject attributes his behavior to his own interests,
inferring that he likes the activity or that he
believes in it. Thus, the imposition of rewards for
an activity one would have executed anyway
‘overjustifies’ one’s behavior. Additionally, one’s
attitude towards the activity is likely to change.
282 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
Since behavior is now attributed to external
rewards, the activity’s intrinsic characteristics were
cognitively reevaluated. The subject concludes
that since he was performing the activity for some
external reward, it must not be as interesting or
enjoyable as he thought it would be.
The overjustification hypothesis predicts nega-
tive after-effects of rewards only if all additional
factors besides the imposition and removal of
rewards are held constant. Therefore, attribution
theorists emphasize that when dealing with
applied reward programs, ‘there is nothing in the
present line of reasoning or in the present data to
suggest that contracting to engage in an activity
for an extrinsic reward will always, or even
usually, result in a decrement in intrinsic interest
in the activity’ (Lepper & Greene, 1976, p. 33).
Conversely, it is pointed out that external con-
tingencies of reinforcement will prove to be bene-
ficial: (1) if people expect continued reinforcement
in the same or in similar situations; (2) if rewards
convey information about ability or competence,
leading a person to believe that he is personally
responsible for his behavior; or (3) if rewards
promote the acquisition of new skills, which are
necessary for the perception of intrinsic interest in
that activity. Attribution theorists emphasize that
the heuristic value of the overjustification per-
spective does not lie in discouraging the use of
rewards systems to promote socially desirable
behavior. Rather, it is pointed out that instead of
exclusively focusing on immediate effects of
incentive schemes, more attention should be
directed to the possibility of harmful long-term
effects of such systems, particularly in settings
where subsequent extrinsic contingencies are likely
to be absent (Lepper & Greene, 1976).
3. Theoretical criticism of the construct of
intrinsic motivation
Despite its popularity, the concept of intrinsic
motivation is heavily disputed in the literature;
positions tend from (gradual) acceptance to total
rejection (for overviews of shortcomings see Ban-
dura, 1986; Bates, 1979; Bernstein, 1990; Dick-
inson, 1989; Eisenberger & Cameron, 1996; Flora,
1990; Morgan, 1984; Notz, 1975; Thierry, 1990).
Most criticism focuses on the different con-
ceptualizations of intrinsic motivation and their
implications, without disputing that postreward
performance lessening might occur under special
conditions. Since empirical evidence has not been
considered yet, we first turn to theoretical criticism
of the concept. The psychological literature sum-
marizes three major shortcomings of the concept:
1. Confusing terminology: Detractors point out
that the concept lacks an unequivocal termi-
nology and a consistent theoretical founda-
tion (see among others Bandura, 1986;
Dickinson, 1989; Dyer & Parker, 1975; Heck-
hausen, 1989; Thierry, 1990). Since no pre-
cise distinction between intrinsic and
extrinsic motivation has been elaborated, the
term inevitably lumps together quite distinct
issues, like internal drives (motivation), one’s
behavior (being performed for its own sake),
behavior of others (recognition) or one’s
feelings (satisfaction). Besides the jumbled
terminology, the concept also involves some
conceptual confusion. The distinction
between intrinsic and extrinsic motivations
has convinced many people that motivation
either originates from within or from outside
a person, thereby implying the well-known
person-situation subject area, although
phrased in terms of a contrast. This view of
motivation may be deceptive, because it
diverts theoretical reasoning from the com-
plex interaction between personal and situa-
tional characteristics as they jointly—and
not mutually exclusively determine human
motivation (Thierry, 1990). Consequently, it
is pointed out that a great deal of conceptual
confusion still surrounds the notion of
intrinsic motivation (Dickinson, 1989; Notz,
1975); designations are said to be ‘shrouded
in ambiguity’ (Bandura, 1986, p. 241) or to
be ‘equivocal at best’ (Thierry, 1990, p. 69).
2. Major mechanisms are unclear: The precise
mechanisms through which intrinsic and
extrinsic motivation interact are still widely
unclear (Deci & Ryan, 1985). Newer research
even seems to indicate that these interactions
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
might be much more complicated than pre-
viously supposed; multi-goal perspectives
(Pinrich & Garcia, 1991; Wentzel, 1991), the
question whether and under what conditions
intrinsic motivation is a trait (Harter &
Jackson, 1992), whether it is stable or under-
goes continuing changes (Sansone & Morgan,
1992; Sansone, Weir, Harpster & Morgan,
1992) raise more questions than answers.
3. Circularity: Whether a factor is perceived as
intrinsic or extrinsic is highly subjective,
depending on the individual attribution pro-
cess. Unfortunately, the theories are of very
little help in differentiating under what pre-
cise conditions intrinsic or extrinsic motiva-
tion are supposedly at stake. The same
confusion prevails for the crowding-out
effect, regardless of whether cognitive eva-
luation theory or overjustification research is
concerned. According to cognitive evaluation
theory, incentives diminish intrinsic motiva-
tion when they appear to be controlling, but
increase motivation when conveying infor-
mation about competence. It is criticized that
since the theory fails to provide objective
criteria for classifying rewards as controlling
or informative, empirical and theoretical
research in this area rests on intuitive and
post hoc classifications of incentive systems
(Bandura, 1986, p. 244). In addition, since
performance-improving rewards have been
redefined as being informative, ‘the circular-
ity of the concepts strips the theory of any
predictive value’ (Bandura, 1986, p. 245). A
similar problem crops up with the attribu-
tional explanation of negative after-effects in
terms of overjustification research. Since peo-
ple have many different possibilities to justify
their behavior, it is almost impossible to
predict reliably what the target of sufficiency
of justification may be. If, for instance,
monetary rewards are absent or weak, people
are not inevitably forced to attribute their
behavior to the interestingness of their task.
They may as well think of themselves as being
motivated by the social contacts their work
provides or by the goals the organization
strives for (Pearce, 1983, 1987; Lepper &
283
Greene, 1978). Consequently, it is argued
that there is not much prediction in the
intrinsic concept since almost anything goes.
After reviewing the theoretical concept and its
shortcomings, we next turn to its empirical evi-
dence and the effects of postreward performance
lessening.
4. Experimental evidence
4.1. Experimental designs, early results and
criticism
During the 1970s, many experiments were con-
ducted in order to find empirical evidence for the
crowding-out effect (for overviews and further
references see Deci & Ryan, 1985; Lepper &
Greene, 1978; Sansone & Harackiewicz, 2000a).
Experimental designs consisted in most cases of
three phases: (1) subjects, mostly children or stu-
dents, were observed while performing a rather
attractive task for which no incentive but the
activity itself had been apparent; (2) in a second
phase external rewards were given for the perfor-
mance of the same activity; (3) in a third phase,
rewards were withdrawn and the subjects were
offered a free-choice situation, e.g. they could
continue performing the same activity without
being rewarded externally or they could do what-
ever they liked. Different indicators were
employed during the third phase in order to
measure intrinsic motivation, like (1) resumption
or rejection of the activity, (2) amount of time
spent, (3) subject ratings of enjoyment, or (4) self-
reports of the participants. These data were com-
pared with the results of a control group, which
had not been influenced by external interventions
during the second phase. In particular research
focused on different antecedents of the effect, like
(1) monetary incentives vs. verbal or symbolical
incentives, (2) contingent vs. non-contingent pay-
ment, (3) expected vs. non-expected payment or
(4) salience vs. non-salience of the reward.
The first results seemed to indicate a pre-
ponderance of empirical evidence for postreward
performance lessening. Nevertheless, its theoretical
284 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
explanation through the construct of intrinsic
motivation was and still is disputed (see among
others Bandura, 1986; Boal & Cummings, 1981;
Heckhausen, 1989; Locke & Henne, 1986; Thierry,
1990). Critics mainly accept the existence of exter-
nally influenced conditions which might be dele-
terious to performance, but they doubt whether
diminution of intrinsic motivation is the proper
concept to account for this effect. In order to
clarify this point of view the major criticism is
briefly summarized.
1. Lacking internal validity, insufficient oper-
ationalization of intrinsic motivation: Many
researchers claim that cognitive evaluation
theory as a whole has not been tested in a
single experiment (Bandura, 1986; Boal &
Cummings, 1981; Locke & Henne, 1986).
First, distinctions between the needs for
competence and self-determination and the
sheer enjoyment of an activity have rarely
been made (Locke & Henne, 1986). Secondly
and more seriously, it is advocated that for
testing the theory, intrinsic motivation has
been insufficiently operationalized for
empirical purposes. It is argued that in order
to test the theory, drives have to be measured
independently of the behavior they suppo-
sedly activate. However, most empirical
work asserts that intrinsic motivation ‘must’
be at stake when no (observable) external
incentives are apparent. Therefore, intrinsic
motivation is measured in terms of perfor-
mance variations after withdrawal of extrin-
sic rewards. This leads to severe
shortcomings, since ‘if variations in task
performance are taken as evidence of varia-
tions in strength of a competence drive, the
circularity strips the theory of predictive
value. Unless the strength of a drive is mea-
sured separately from its postulated effects the
functional properties ascribed to it are not
empirically verifiable’ (Bandura, 1986, p. 245).
2. Lacking external validity, lacking general-
izability: Extensive reviews of experimental
findings concerning postreward performance
lessening revealed that many studies suffer
from severe methodological inadequacies
and are therefore flawed (for critical over-
views see Bandura, 1986; Bates, 1979; Dick-
inson, 1989). In addition, addressing the
external validity of the concept, three major
arguments are pointed out. First, the experi-
mental environments which characterize the
research cannot be equated with the scope
they purport to investigate, no matter whe-
ther classrooms (Bates, 1979) or work envir-
onments (Staw, 1989) are concerned.
Secondly, additional criticism focuses on
subject selection, stressing that children of
three and four years are hardly capable of
accounting for their actions in the complex
way attribution theory predicts (Morgan,
1983; Sandelands, Ashford, & Dutton, 1983).
Thirdly, it is pointed out that little effort has
been made to investigate long-term effects of
extrinsic rewards (Bandura, 1986; Bates,
1979). Laboratory experiments and field
studies indicate that intrinsic motivation is
not static but seems to vary between indivi-
duals, activities, surrounding contexts and
time (Sansone & Morgan, 1992; Sansone et
al., 1992). Currently not a single study exists
reliably proving that undermining effects are
transitory for adults (Deci, Ryan, & Koest-
ner, 1999a, p. 650). Some studies measuring
task interest at several points in time revealed
that postreward detrimental effects do not
persist over time; subjects showed as much or
even more interest in the previously rewar-
ded activity (Feingold & Mahoney, 1975;
Sagotsky & Lewis, 1978; Vasta & Stirpe,
1979). Consequently, critics doubt whether
postreward performance lessening is an endur-
ing effect, and stress that any generalizations of
experimental findings to real-life situations and
adult behavior stand on tenuous ground.
3. Different interpretation of experimental
results: Detractors often point out that
rewards can decrease later performance
through a variety of processes without neces-
sarily transforming motivational systems.
Therefore, experimental findings can be
interpreted differently through other psycho-
logical theories and need not refer to intrinsic
motivation (Bandura, 1986; Eisenberger &
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
Cameron, 1996; Locke & Henne, 1986; Staw,
1989). For instance, it is suggested that det-
rimental effects may be caused by satiation
or tedium (Bandura, 1986), learned help-
lessness (Eisenberger & Cameron, 1996) or
by violating a situational norm of no pay-
ment (Bandura, 1986; Staw, 1989; Staw,
Calder, & Hess, 1975). Conflicting explana-
tions through other theories have profound
implications for both theory and practice. In
the case of learned helplessness for instance,
external rewards would improve rather than
damage postreward performance. In this case,
diminution of intrinsic motivation would be
inappropriate to explain the problem at hand.
4. Contradictory findings: Moreover, much
experimental evidence exists which does not
fit the theory. Newer empirical work points
out that the style and the language with
which external regulations are administered
may influence their effects to quite an extent
(Ryan et al., 1983); it is found that autonomy
supportive social contexts do enhance intrin-
sic motivation (Grolnick & Ryan, 1989;
Williams, 1991).
Given the diverse findings reported in the litera-
ture, the empirical evidence for the crowding-out
effect proves to be messier than previously sup-
posed. Results and their interpretation are con-
tentious, and overall no general commitment
exists about the relevance of the bulk of empirical
work. In view of this unsatisfactory situation some
psychologists have already signaled serious skep-
ticism: ‘If results continue to indicate that slight
changes in methodology dramatically influence
performance or subjective judgments of task
interest, and that different measures of the same
variable respond differently to the same experi-
mental treatments, then one may question both
the practical value and the psychological validity
of the construct of intrinsic motivation’ (Bates,
1979, p. 574).
4.2. Meta-analyses
Since experimental findings vary considerably
between studies, one might gain additional insight
285
when conducting meta-analyses. Meta-analyses
provide a methodology that allows quantifying
effect sizes and combining them across different
experiments in order to test whether certain
hypotheses constitute behavioral regularities
which persist reliably over all studies included in
the analysis. Such an approach seems particularly
appealing since it allows drawing conclusions
about the statistical significance of undermining
effects of distinct reward categories across differ-
ent studies. Nevertheless, the limits of this
approach are that results vary dramatically with
the researchers’ selection of relevant experiments,
as well as with their definition of theoretically
meaningful cells (Lepper, Henderlong, & Gingras,
1999). Besides, results must be interpreted with
caution because of an expected publication bias in
favor of finding detrimental effects.1 A detailed
review of all existing meta-analyses is beyond the
scope of this article. We therefore turn to the
findings of the two newest and most elaborated
studies by Eisenberger and Cameron (1996) and
Deci et al. (1999a), hereafter denoted EC-96 and
DRK-99, respectively. Both analyses assess the
subjects’ intrinsic motivation in terms of their self-
reported interest in the activity (self-reported
interest) as well as the time they spent on the
activity during a free choice period subsequent to
the experimental phase (free choice behavior). The
EC-96 meta-analysis covers 61 studies on free
choice behavior and 64 studies on self-reported
task interest published in the period 1971 to Sep-
tember 1991, whereas the DRK-99 analysis focu-
ses on 101 experiments on free choice behavior
and 84 studies on self-reported task interest from
1971 to August 1997. In contrast to the EC-96
study, the DRK-99 analysis includes unpublished
doctoral dissertations. Subjects in both studies are
pre-school children and college students.
Figs. 1 and 2 show the summary statistics for
both meta-analyses. Analyses are arranged hier-
achically, desegregating the general classification
of extrinsic incentives into more specific types of
reward. Definitions of the reward categories are
given in Table 1. For each analysis, effects-sizes
measured in terms of standard deviation units
1
We are grateful to one referee for pointing this out.
286 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
Fig. 1. Summary statistics of the Eisenberger and Cameron (1996) meta-analysis.
were accumulated across individual studies and
weighted by the number of participants in each
group. The pair of numbers in parentheses refers
to the 95%-confidence interval for the composite
effect-size d. Since the mean of the control group
was subtracted from the mean of the reward
group, a negative d-value reflects an undermining
effect, while a positive d-value shows an enhance-
ment effect. Statistically reliable effects are given in
boldface with an asterisk next to a d-value. The
symbol k refers to the number of studies, (i.e. to
the number of effect-sizes in each composite effect-
size) while outliers and studies with insufficient
information are excluded.
Of greatest interest are those rewards that are in
accord with the agency perspective. As shown,
agency theory generally advocates the use of pay-
for-performance systems, with the exceptions of
(severe) risk considerations, limited liability and
the case of sufficiently noisy indicators about the
agent’s performance. Since experimental designs
do not fit one of these exceptions, our main inter-
est lies in those rewards categories that induce
performance-contingent incentive effects, i.e. qual-
ity-dependent rewards in the EC-96 analysis and
performance-contingent rewards in the DRK-99
study, respectively. The summary statistics of the
EC-96 analysis reveal that undermining effects due
to quality-dependent rewards prove to be statisti-
cally insignificant on the measure of free choice
behavior. Quality-dependent rewards even induce
a reliable increasing (!) effect on the measure of
self-reported interest. In contrast to these findings,
Deci et al., (1999a) report a reliable undermining
effect of performance-contingent rewards on the
measure of free choice behavior. If those studies
that are methodologically questionable due to the
lack of adequate feedback control, are excluded,
the effect proves to be supported by only 10
experiments. Like Eisenberger and Cameron,
(1996), Deci et al. (1999a) fail to provide statistical
significance for an undermining effect on the
measure of self-reported interest. Thus, restricting
attention to economically meaningful rewards,
(i.e. rewards that induce an incentive effect), the
EC-96 analysis clearly contradicts CET, whereas
the theory is only partially supported by the
DRK-99 study.
Supporters of the intrinsic concept heavily criti-
cized the EC-96 study because of methodological
A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295 287

Fig. 2. Summary statistics of the Deci et al. (1999a) meta-analysis.

288 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295

Table 1
Reward categories

Reward category Description

Eisenberger and Cameron (1996)

Verbal Rewards are given only in terms of positive feedback.
Tangible Rewards are tangible, i.e. they are nonverbal.
Unexpected Rewards are not announced beforehand, i.e. subjects are performing the activity
without any expectation of reward.
Expected Rewards are announced beforehand, i.e. subjects are performing the activity with
the expectation of being rewarded afterwards.
Quality-dependent Rewards are contingent on the achievement or surpassing of a pre-defined quality
standard.
Completion dependent Rewards are administerd upon the completion of a task with no regard to how the
activity is performed.
Performance independent Rewards are administered for simply taking part in the activity, no matter whether the
activity is completed or whether the pre-defined performance standards are met.

Deci et al. (1999a)

Verbal Rewards are only given in terms of positive feedback.
Tangible Rewards are tangible, i.e. they are nonverbal.
Unexpected Rewards are not announced beforehand, i.e. subjects performe a target activity without
any expectation of being rewarded afterwards.
Expected Rewards are announced beforehand, i.e. subjects performe the activity with the expectation
of being rewarded afterwards.
Task-noncontingent Rewards are administered for something other than engaging in the target activity, such as
simply participating in the study.
Engagement-contingent Rewards are administered for simply engaging in the target activity, without the requirement
that the activity has to be completed.
Completion-contingent Rewards are administered upon the completion of the target activity with no regard to how
it is performed.
Performance-contingent Rewards are administered contingent upon the achievement or surpassing of a pre-defined
quality standard, set for the target activity.
Positive/negative feedback control The control group also gets the positive/negative feedback conveyed by the reward.
No-feedback control The control group does not get the feedback conveyed by the reward.
Maximum reward All participants receive the maximum reward.
Not maximum reward Participants that perform less than optimal, receive less than the maximum reward.

issues like study selection and cell definition. They
pointed out that the DRK-99 analysis is more
accurate in mapping CET (Deci, Ryan, & Koest-
ner, 1999b; Lepper, Henderlong, & Gingras,
1999). However, even this analysis provides only
weak support for undermining effects when refer-
ring to economically meaningful incentive systems.
Its failure to prove detrimental effects on the self-
report measure, despite an expected publication
bias in favor of finding such effects, evidently calls
their relevance into question. Deci et al., (1999a, p.
655f.) try to explain this fact in that subjects might
have been confusing their interest in the activity
with their enjoyment of receiving a reward. Such
rationalizations are not very convincing. Particu-
larly not since the same authors have suggested
elsewhere that the best way to assess intrinsic
motivation is to measure both free choice behavior
and self-reported interest and to consider them as
intrinsic motivation only when they are correlated
within conditions and studies (Ryan, Koestner, &
Deci, 1991).
Another result of the DRK-99 study is of great-
est interest. The analysis found considerable age
effects showing that tangible rewards are more
detrimental for children than for college students
on both measures of intrinsic motivation (Deci et
al., 1999a, p. 656). This set of findings has never
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
been predicted before. Possible explanations are
that college students, having greater cognitive
capacity and being more accustomed to the use of
reward, have more expectations about whether
rewards are appropriate, and are thus more likely
to interpret rewards as indicators of their effective
performance than as controllers of their behavior
(Deci et al., 1999a, p. 656). This account provides
a strong rationale for limitations of detrimental
effects due to the subjects’ cognitive capacity and
socialization while dealing with rewards, indicating
that from an empirical point of view any general-
ization about undermining effects in corporations
may have to be made with greatest caution.
Summarizing, the empirical evidence on postre-
ward performance lessening, even in the meta-
analysis that provides the strongest support for
CET, remains scant, when it comes to performance
contingent rewards. Relying on only 10 studies
concerning the measure of free choice behavior, it
fails to be supported by the self-reported interest
measure. Additional restrictions are given by the
supposition that the subjects’ maturity may play an
important role in determining whether postreward
performance lessening will happen or not.
4.3. Newer experiments on pay for performance
and intrinsic motivation
Three new studies by Eisenberger, Rhoades and
Cameron (1999), none of them included in the
above meta-analyses, provide a strong rationale
for the assumption that previous experiments may
have been addressing the role of incentives inade-
quately. In everyday life, the question may not be
whether rewards diminish intrinsic motivation,
but rather whether their administration counters
any motivational loss already produced by the
heteronomous imposition of tasks and perfor-
mance objectives (Eisenberger, Rhoades, &
Cameron, 1999, p. 1027). People in everyday life
learn that rewards are based on utilitarian con-
siderations, being believed necessary to induce
desired behavior. Precisely because this is so,
reward may not convey social control, as sug-
gested by CET, but rather freedom of action. In
view of Eisenberger et al., (1999, p. 1027) the pro-
mise or repeated use of performance-contingent
289
reward not only conveys that (1) the person, group
or organization giving the reward lacks control
over the performance of the potential reward reci-
pient, but additionally that (2) the potential reci-
pient can, if he or she so wishes, decline the reward
and not act as requested. Thus, the expectation of
performance-contingent reward may increase
experienced self-determination, thereby enhancing
rather than reducing intrinsic motivation.
Before, effects of performance-contingent
reward on perceived autonomy have not been
investigated in one published study (Eisenberger et
al., 1999, p. 1026). Testing their hypothesis in
three studies, the authors found strong empirical
support for it, no matter whether subjects were
students performing a novel task or employees
engaged in their daily work activities. Results
indicate that performance-contingent rewards
increase students’ subsequent expression of task
enjoyment and free time spent performing the
task. Perceived self-determination reliably medi-
ated the effect of reward on task enjoyment, but
not on free task behavior (Eisenberger et al., 1999,
pp. 1029–1031; study 1). High performance-
reward expectancy reliably contributed to
employees’ perceived self-determination. Employ-
ees who perceived increased autonomy owing to
performance reward expectancies, experienced
more organizational support, a more positive
mood at work, and also showed superior work
performance (Eisenberger et al., 1999, p. 1031–
1034; study 2). The incremental relationship found
between employees’ expected reward for superior
performance and expressed work interest was reli-
ably greater for employees with a high or medium
desire for control. Expectation of reward for high
performance reliably lead to greater perceived self-
determination, attracting the interest of individuals
who had a high desire for control (Eisenberger et
al., 1999, p. 1034–1038; study 3).
Since performance-contingent reward increased
perceived autonomy, intrinsic motivation, and
related outcomes in all three studies, their findings
contradict the assumption that performance-con-
tingent reward constitutes an invasive form of
social control. Practical implications of these
results are that pay for high performance may
constitute an adequate means to increase the
290 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
intrinsic motivation of persons who have been
assigned performance objectives. These results are
in accord with previous findings demonstrating
incremental effects due to a symbolic function of
tangible rewards received for high performance
(Bandura 1997; Harackiewicz, Abrahams, &
Wageman, 1987; Sansone & Harackiewicz,
2000b). Consequently, the authors suggest repla-
cing CET’s presumption of an inverse relationship
between reward and perceived autonomy by the
assumption that reward for high performance may
increase perceived self-determination (Eisenberger
et al., 1999, p. 1039).
5. Implications for agency theory
After elaborating both a theoretical and empiri-
cal analysis, we now want to draw some conclu-
sions. Restricting attention to performance pay in
business corporations, the starting point of this
paper was to clarify whether the agency perspec-
tive faces an urgent need to incorporate the con-
struct of intrinsic motivation. Incorporation may
be worthwhile if undermining effects prove to be a
reliable empirical phenomenon, whose theoretical
explanation by the construct of intrinsic motiva-
tion helps understanding and modelling these
effects. The empirical analysis reveals good and
bad news for agency theory. Obviously, since
many experiments succeeded in documenting det-
rimental effects, it is bad news for agency theory
that ‘hidden costs of reward’ do indeed exist.
Nevertheless, it is good news that the empirical
evidence on undermining effects cannot be inter-
preted as being contradictory to agency theory.
First, antecedents for postreward performance
lessening are highly stylized and easily avoidable
in real life situations. Secondly, recent research has
found conditions under which reward will have
positive effects on subsequent behavior, even if the
deleterious antecedents were prevailing. Thirdly,
the way agency theory recommends designing
incentive schemes appears to be one of these con-
ditions. All three arguments are briefly discussed
below.
Inspection of the circumstances under which
detrimental effects of reward became demon-
strable in the laboratory reveals that these condi-
tions are highly specialized. Undermining effects
could only be demonstrated when all of the
following conditions were met:
1. High level of initial task interest: The activity
performed by the subjects needed to be highly
attractive in itself, so much so that individuals
possessed sufficient preexisting interest in per-
forming it without any expectation or promise
of reward.
2. Lack of control during the undermining phase:
The situation in which undermining effects
were measured was free of any kind of social
surveillance, demand or expectation of
continued reward.
3. Exclusion of performance improvement: Per-
forming the activity provided no possibility
for performance improvement, presumably
instigating feelings of satisfaction, thereby
enhancing rather than reducing the subjects’
interest in the activity (Bandura, 1986;
Calder & Staw, 1975).
4. Rewards were situationally inappropriate:
Those experiments that succeeded in doc-
umenting detrimental effects of reward did so
by rewarding subjects for activities for which
one normally does not expect to be compen-
sated for. Hence, a crucial antecedent seems
to be that the provision of incentives is
situationally inappropriate, indicating that
undermining effects appear to be produced
by the violation of a situational norm of no
payment (Dickinson, 1989; Snelders & Lea,
1996; Staw, 1989).
It must be emphasized that these conditions
rarely prevail in real life work settings. Within
business corporations, people expect to be paid in
exchange for selling their labor. Thus rewards are
the norm rather than being situationally inap-
propriate. Moreover, most jobs involve super-
vision and social surveillance of some kind, either
by superiors, subordinates, shareholders or the
public. Likewise, most positions involve possibi-
lities for performance improvement which may
lead to increased task interest. In addition, a large
number of jobs are not inherently interesting
enough to foster high intrinsic motivation. Some
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
jobs are even performed solely because of their
extrinsic inducements. In such cases, detrimental
effects due to increased extrinsic rewards must be
precluded because of the person’s initial lack of a
sufficiently high level of intrinsic interest.
Nevertheless, even if all jobs were interesting
enough to foster high intrinsic motivation, a pow-
erful norm exists in the business world for extrin-
sic payment. An instrumental relationship
between professional behavior and extrinsic
rewards is supported by both social and legal
standards; moreover, pay even seems to have
become of great symbolic importance as a surro-
gate of worth and social status in modern business
society (Pearce, 1987). Since extrinsic reinforce-
ment is the norm, tasks are likely to be experi-
enced as more valuable or more interesting if they
lead to higher compensation, thereby tending to
increase rather than diminish postreward perfor-
mance. Thus, in practice the danger may not be
that rewards are perceived as inappropriate, but
rather that not rewarding good performance
might be perceived as unfair, leading to frustration
and diminution of interest and commitment
towards the activity.
Recent findings report on some contextual and
personal patterns successfully countering negative
after-effects of rewards, indicating that such effects
are easily avoidable. The style and the language in
which rewards are administered are such factors
(Ryan et al., 1983). If rewards are administered in
an autonomy supportive context, they enhance
rather than diminish intrinsic motivation (Deci,
Conell, & Ryan, 1989; Grolnick & Ryan, 1989;
Williams, 1991). The subjects’ cognitive capacity
and socialization in dealing with rewards appears
to be another limiting factor. Adults, being accus-
tomed to the use of rewards, are likely to interpret
performance pay as a sign of freedom, conveying
the reward-giver’s lack of control over the perfor-
mance of the potential recipient. Thus, previous
studies mostly involving pre-school children may
have found detrimental effects mainly because
children were less accustomed to the use of
rewards and thus were less likely to interpret
rewards as indicators of their autonomy and
competence. This conjecture appears to be sub-
stantiated by the latest meta-analysis, since the
291
authors found considerable age effects showing
that undermining effects were far more detri-
mental for pre-school children than for students
(Deci et al., 1999a). Three new studies are also
supportive of this view. They all found that per-
formance pay reliably increased perceived auton-
omy, work interest, work mood, and work
performance with adults who had been assigned
performance standards (Eisenberger et al., 1999).
These results are in accord with previous findings,
showing that rewards can enhance intrinsic moti-
vation due to their symbolic value (Harackiewicz
et al., 1987; Sansone & Harackiewicz, 2000b).
Reviewing the whole empirical evidence on
undermining effects revealed that the experimental
findings cannot be interpreted as being contra-
dictory to agency theory. This is particularly so
when referring to economically meaningful incen-
tive systems. Two recent meta-analyses, conden-
sing the whole empirical research in this area
found deleterious effects only for reward cate-
gories that are generally not among the ones
advocated by the agency perspective, e.g. engage-
ment-contingent, completion-contingent and task-
noncontingent rewards. Both meta-analyses failed
to prove undermining effects of performance-con-
tingent rewards. One even found increasing effects.
Thus, when considering the condensed empirical
material of more than a quarter of a century, the
current criticism against agency theory is not sup-
ported by empirical data. It even seems as if pro-
viding incentives according to economic theory
violates the necessary conditions for postreward
performance lessening, and therefore helps to
supersede its detrimental effects.
Summarizing, the empirical evidence on postre-
ward performance lessening indicates that such
effects constitute stylized exceptions rather than a
rule. Two meta-analyses fail to prove detrimental
effects when referring to performance-contingent
pay. In addition, the experimental evidence show-
ing such effects primary relied on pre-school chil-
dren and college students, and not on adults in
business corporations. Moreover, the scant
empirical evidence we have on incentive schemes
in business corporations suggests that detrimental
effects of rewards are avoidable. Not only are their
antecedents too artificial to prevail in real-life
292 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
work places, in addition, by making rewards con-
tingent upon performance and administering them
in an autonomy supportive context, will violate
these antecedents. Thus, when considering the
entire empirical material on undermining effects,
at least when in comes to business corporations,
we do not find much evidence substantiating any
claims in favor of incorporating postreward per-
formance lessening into economic theory.
Nevertheless, the experimental evidence showed
that undermining effects exist under special cir-
cumstances. One might think that incorporating
intrinsic motivation into agency models may help
economic theory to understand and deal with such
exceptional behavioral patterns. Unfortunately,
the literature review revealed that the construct of
intrinsic motivation is not of much help in so
doing. Overall, the construct fails to provide
objective criteria for classifying rewards as being
controlling, informative or expressive of some
other aspect. Consequently, its main contribution
lies in intuitive post-hoc classifications of reward
systems, without being capable of predicting
behavioral outcomes beforehand. Since major
mechanisms through which postreward perfor-
mance lessening occurs still remain widely unclear,
the construct’s actual state of the art obviously
cannot serve as a model for incorporating postre-
ward performance lessening into the agency per-
spective. Agency theory would inevitably lose its
predictive quality at the gain of being able to
model a stylized but still largely unclear phenom-
enon. Thus, since the dichotomy between intrinsic
and extrinsic motivation does not help in explain-
ing and overall predicting the problem at hand, we
plead for skipping this terminology and for the
pursuit of more promising paths in research.
What are these new paths? Obviously, answers
have to vary across disciplines. As shown, most
psychologists have already recognized the dis-
advantages of polarizing between intrinsic and
extrinsic motivation and are currently focusing on
the complex interaction between both personal
and situational variables. As far as economics is
concerned, the need to develop the theory in order
to incorporate additional behavioral aspects has
long been understood. Consequently, the theory
has noticeably matured in the past years. Overall,
incorporation of behavioral effects similar to per-
formance lessening are increasingly being taken
into account by the theory of implicit contracts
(MacLeod, 1995), research on self-perception and
social interactions (Benabou & Tirole, 2000), fair-
ness and reciprocity (Falk & Fischbacher, 2000;
Fehr & Schmidt, 1999; Rabin, 1993), social
norms (Fudenberg & Levine, 1997; Kandori,
1992; Knack, 1992) and the analyses of fuzzy
incentives in organizations (Bernheim, 1994;
Kreps, 1997).
Thus, although the standard agency model does
not account for non-monetary behavioral aspects
per se, game theoretic variations thereof increas-
ingly do. Consequently, as fas as economics is
concerned, we argue in favor of skipping any rea-
soning about incorporating intrinsic motivation
into agency models, and think it more worthwhile
to continue along the promising paths where eco-
nomic theory is presently heading.
Nonetheless, we by no means question the
importance of psychological insight for economic
theory and real life situations, nor do we think
that the agency model is perfectly elaborated.
Owing to cognitive evaluation theory, we learned
about possibly deleterious consequences of auton-
omy restrictions and negative feedback on human
motivation. We merely argue that the current
empirical material on undermining effects does
not indicate that performance pay in business
corporations will always or even usually be
interpreted that way. Consequently, neither the
phenomenon of postreward performance lessening
nor its theoretical explanation by the construct of
intrinsic motivation challenge economic theory to
the extent many contributions have lead us to
believe.
Acknowledgements
We are grateful to Armin Falk, Ernst Fehr, Bruno
S. Frey, Simon Gaechter, Anthony Hopwood (the
editor), Margit Osterloh, and two anonymous
referees for helpful comments and discussions. A. H.
Kunz gratefully acknowledges financial aid by
research grant FHA-99-U-049-4040.
 A.H. Kunz, D. Pfaff / Accounting, Organizations and Society 27 (2002) 275–295
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