Performance-based incentives in knowledge work: are agency models relevant?

The economic importance of "knowledge work" has become widely accepted. Less widely accepted are the changes knowledge work requires in how we manage performance. This paper explores the differences between knowledge work and more traditional physical and managerial work, in the context of economic agency models, the most rigorous extant theoretical representations of how to manage performance. Assumptions derived from the characteristics of knowledge work are used to extend agency models. The conclusions about how to manage from this extended model are different from the conclusions of traditional agency models. Linking measured performance and compensation - a common recommendation that arises from interpretations of agency theories - is effective in knowledge work contexts only if knowledge workers are intrinsically motivated. We conclude that agency models and recommendations derived from them are relevant only to the extent that they employ modified assumptions consistent with the distinctive characteristics of knowledge work and knowledge workers.