Personnel Economics: The Economist’s View of Human Resources

Monetary incentives are the petri dish where motivation grows in work environments, particularly in sales. Whether the culture that forms is a healthy one or not depends on context. Customers’ expectations of service providers are changing. People expect service not just sales. So how do you design an incentive scheme that supports customer service and results in sales?

I don’t pretend to know the answers. All I know from my experience as a service designer is that incentives (and remuneration) are factors that someone needs to be thinking about when change is being rolled out.

The paper “Personnel Economics: The Economist’s View of Human Resources” provides an overview of HR from an economic perspective. I hope to share enough of it so that you might read the whole piece. Here’s the teaser:

Personnel economics drills deeply into the firm to study human resource management practices like compensation, hiring practices, training, and teamwork. Many questions are asked. Why should pay vary across workers within firms–and how “compressed” should pay be within firms? Should firms pay workers for their performance on the job or for their skills or hours of work? How are pay and promotions structured across jobs to induce optimal effort from employees? Why do firms use teams and how are teams used most effectively? How should all these human resource management practices, from incentive pay to teamwork, be combined within firms? Personnel economics offers new tools and new answers to these questions.

The paper theorises on how pay determines culture in its discussion of piece rate pay versus performance pay. It talks about pay conditions that foster team work and cooperation and the trade-offs that they involve. It’s not all about money though, so the paper also considers “hedonic” factors like prestige, recognition, and working conditions. 

It’s easy to measure the output of sales people, but how “service” is measured needs to be considered if the behaviour of staff needs to change to meet new objectives. 

The article is by Edward P. Lazear and Kathryn L. Shaw can be downloaded via It is available for free for those with access to academic databases. If you don’t have access the paper is $5, and worth every cent.