Since managers started managing, they have questioned how to motivate employees to be productive and do good work — and, for most, their answers are still shaped by assumptions formed long ago. While modern leaders understand that the best performance comes from intrinsically motivated, highly engaged employees, many still use traditional management practices that assume people won’t work hard unless they are incentivized and monitored to make sure they deliver. Underlying that inconsistency are two theories with very different assumptions about how humans are motivated, each with significant implications for management, organizational structure, culture, and outcomes.

In our recent paper in the Journal of Management Studies, we compare agency theory and self-determination theory — both highly influential in research, business education, and practice. We suggest that agency theory has dominated management practice for decades — despite evidence about its limitations — leading to suboptimal ways of managing workers.1

Agency theory is built on the assumption that humans are self-interested, rational beings who need to be controlled and motivated through external mechanisms such as rules, monitoring, and rewards. A fundamental assumption is that employee goals and organizational goals are in opposition — organizational owners (for example, shareholders) want to pay the minimum required to get the work done in order to maximize capital gains, whereas employees want to put in minimal effort for maximum pay. This means that employees need to be persuaded to contribute to organizational goals via incentives and must be monitored and regulated to ensure they work effectively.

How is this suboptimal? Monitoring, regulating, and incentivizing people to work harder is expensive and never foolproof. It requires constant attention to close loopholes that humans find when their autonomy is limited by command-and-control systems. It’s like fighting a losing battle. Attempts to monitor and incentivize work can also lead to unintended negative consequences, including employees gaming the system, ignoring moral and ethical issues, and focusing on short-term gains over long-term sustainability. In recent decades scandals such as those at Wells Fargo, WorldCom, and GlaxoSmithKline have been linked to the use — and failure — of these mechanisms of control.

Self-determination theory, on the other hand, assumes that individuals are naturally intrinsically motivated and thrive when their basic psychological needs for autonomy, competence, and relatedness are satisfied.2 Organizations can fulfill these needs by providing people with clear strategic direction, meaningful feedback, a sense of connection to their work and colleagues, and space to work in a way that suits them. Through these practices, employees can more readily internalize organizational goals, leading to alignment between their interests and the organization’s without managers having to offer incentives and monitor people.

Research supports the effectiveness of this approach: Employees whose psychological needs are met are intrinsically motivated by finding meaning and enjoyment in their work, which leads to not only better performance but also improved well-being. Using self-determination theory to manage employees can promote ethical behavior, innovation, and long-term commitment. Of course, it’s not easy — this kind of performance management requires time and investment, and it often requires giving up some measure of control. It means investing in people and then trusting them to get on with it. That’s not always comfortable, and if it’s not done properly, it doesn’t work. For example, giving people autonomy does not mean letting them do what they want; they also need goal clarity with clear explanations about what needs to be achieved and why. Policies and procedures are sometimes necessary — for example, for legislative compliance — but when employees do not know why these policies and procedures exist, it may be hard for them to endorse and follow them volitionally. In other words, autonomy needs to come with some structure.

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Working with organizations, we constantly hear leaders’ concerns about attracting sufficient talent and adapting to the needs and preferences of the rising generation of workers. Most business leaders, even those who subscribe to agency theory, wish they had more employees who believed in the company’s mission and were energized by their work. They might have them if they attend to the basic psychological needs of their employees instead of undermining them.

The key to putting self-determination theory into practice is to keep in mind the conditions under which employees are intrinsically motivated to do their best work: autonomy, competence, and relatedness. Delegating decisions to employees about things that affect their work builds autonomy, nurturing the skills needed to make these decisions builds competence, and supporting collaboration rather than pitting employees against one another builds relatedness. Consistently paying attention to all three qualities will help your employees be more engaged, physically and mentally healthier at work, and more proactive and innovative.

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Here is a direct  link to the complete article.