The effect of occupational level and public sector employment on the importance of extrinsic and intrinsic rewards

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Faculty of Business and Economics

MSc. Business Economics

Organisation Economics

The effect of occupational level and public sector employment on the importance of extrinsic and intrinsic rewards

Name: Vera Nijwening

Student number: 10002961

ECT: 15

Name supervisor: Eszter Czibor

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ABSTRACT

For many years research has focused on the overall difference in motivation between public and private sector employees, finding highly intrinsically and less extrinsically motivated employees in the (semi)public sector. Recent policy changes in the Netherlands, lowering the remuneration levels of top executives in the (semi)public sector, put this field of research in a new perspective. Using the LISS panel data and an experimental vignette survey in the Dutch semipublic sector, we test whether this motivational difference is driven by the hierarchical level of employment, assuming more similarities in motivation among executive positions. Contrary, we find an increasing difference between the (semi)public and private sector employees when moving up the hierarchy within an organization. Public sector employees are found to be less extrinsically and more intrinsically motivated at higher occupational levels than employees at lower

hierarchical positions. The opposite trend is observed in the private sector, where higher

hierarchical positions within an organization are held by employees giving a greater importance to monetary rewards.

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It is largely believed that individuals employed in the private and public sector differ from each other in the importance they attach to intrinsic and extrinsic motivation factors. This study introduces a different perspective by considering the idea that (semi)public sector executives might value monetary rewards in a similar way as private sector executives. Therefore, to attract and retain this group of employees, comparable remuneration schemes should be provided. In this study we test whether a difference in motivation exists between public and private sector employees and additionally address the effect of hierarchical level on the main differences in intrinsic and extrinsic motivation. Based on these results, we answer the main research question: Does the motivation difference between the (semi)public and private sector employees decrease when moving up the hierarchy within an organization?

For this study, two methods are used: an analysis of self-stated importance of various motivational drivers and a vignette survey to test for the interaction between intrinsic and

extrinsic motivation. The first method uses data from the LISS panel, which allow for testing the differences in motivational drivers between the public and private sector, as well as between different occupational levels. Second, the observations from the experimental vignette survey are used, completed by employees from the Dutch semipublic housing association sector.

Very little research has explored the differences in motivation among occupational levels. Similarly, the comparison of the hierarchical level effects between two sectors is not addressed in literature before. Current understanding of motivational drivers of public sector employees and thereby their remuneration schemes have been based on the overall assumption that monetary rewards are less important than the high societal impact of the job, irrespective of one’s occupational level. We contribute to this literature by studying the effect of the

occupational level on motivation and comparing the two different sectors. The results of this study therefore provide us information on the main motivational drivers of top executives, and the resemblances between the private and (semi)public sector which is an undiscovered field of research until now. Additionally, the experimental vignette setup used in this study provides a unique tool to test the interaction of different motivational drivers, not presented in this stain of academic research before.

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The topic is currently highly relevant since public sector executive remuneration has been a main topic of debate in recent years in the Netherlands, which resulted in the recently

introduced law ‘Wet Normering Topinkomens’ (WNT)1_{. The law decreases the compensation of} top executives in the public and semi-public sector in the Netherlands to a maximum of 130 percent of the minister’s income. Ever since the introduction of the law, questions were raised about the optimal level of remuneration in this sector and the increased competitiveness with the private sector. Proponents of a high remuneration level for public sector top executives base their arguments on the competition for qualified staff with the private sector. Reduction in public sector wages can affect the government’s ability to attract and retain qualified staff, with high ability employees leaving the public sector to pursue higher paid opportunities in the private sector (OECD, 2011). Opponents on the other hand base their arguments on the relative high level of intrinsic motivation of public sector employees, which decreases the need to provide high levels of extrinsic motivation as provided in the private sector. In this context extrinsic motivation results from engaging in an activity mainly to earn a reward whereas intrinsic motivation involves engaging in the activity because it is personally rewarding.2

The results from this study are therefore highly relevant in the current context since understanding the main motivational drivers allows us to predict the effects of a relative wage decrease in the public sector on the labor market, thereby illustrating the situation after the recently introduced WNT law. Furthermore, understanding the motives of their top executives allows organizations operating in the private and (semi)public sector to structure incentive schemes most efficiently based on the preference for either intrinsic or extrinsic rewards.

In contrast to the predicted convergence of main motivational drivers with increasing occupational level in both sectors, the findings from this study suggest the opposite. Although occupational level is indeed found to be positively related with extrinsic motivation in the private sector, the results from the LISS panel show a statistically significant negative effect for public sector employees. Additionally, the results obtained from the survey show a significant positive effect of occupational level on the importance of intrinsic rewards in the public sector. The conclusions drawn from the vignette questions support the previous two occupational level

1_{In English: law standardization of executives remuneration for the public and semipublic sector. The law is introduced in} January 2013 and is discussed in more detail in section 3.

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effects in the semipublic sector by finding an increased tradeoff of intrinsic rewards for monetary rewards by employees from lower occupational levels in comparison to top executives.

In what follows, section 2 discusses the general related literature. In section 3 theoretical support is presented for the hypothesized similarities in motivational drivers among top

executives in the public and the private sector. Section 4 discusses the design of the study. In this section the data and method used for the analyses are described. Section 5 reports the empirical findings from the data analyses. Section 6 provides a discussion of the limitations of this study. Last, in Section 7 the conclusions of this findings are presented. Tables and graphs entitled with a letter A, B or C are presented in the Appendix.

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2. Related literature

Prior to discussing the results from this study, this section provides a literature overview of three related fields of research. First, the differences and interaction between intrinsic and extrinsic motivation are discussed. Second, the differences between (semi)public and private sector employees are addressed. Last, the field of study is elaborated on which focusses on the differences in motivation among occupational levels.

2.1. Intrinsic and extrinsic motivation

As briefly mentioned before, motivation can be caused by both intrinsic and extrinsic factors. The former form of motivation, intrinsic motivation, results from engaging in an activity because the work itself is personally rewarding (Amabile et al., 1994). Intrinsic motivation can further be divided in action-orientated and output-orientated motivation (Francois and Vlassopoulos, 2008). Action-orientated intrinsic motivation is described by the authors as the ‘warm glow’ resulting from the act of engaging in the activity. The latter form of intrinsic motivation, output-orientated motivation, is experienced when the individual cares about the overall output of the activity instead of merely the action of engaging. The second motivation elaborated on is extrinsic motivation. Extrinsic motivation occurs when people are motivated to engage in an activity by external incentives, represented by either rewards or punishments (Amabile et al., 1994).

Understanding these main motivations of employees is of great importance to

organizations to efficiently attract and retain staff. In this context, Delfgaauw and Dur (2007) argue that given the level of effort, a worker who is more motivated for a job needs to be compensated less. Similarly, Eckel and Steinberg (1994) find that employees who are

intrinsically motivated because they identify themselves with the organizational goal, are willing to exert effort for a lower remuneration level. Following the model Besley and Ghatak (2005), Fehler and Kosfeld (2014) tested in a laboratory labor market experiment whether the provision of effort increases when subjects are allowed to choose the mission of their job. They found that a subgroup of participants chose to work for their preferred mission orientated job, even when it is costly to do so. Moreover, this group of employees exerted more effort than the other group of employees (Fehler and Kosfeld, 2014). In line with Delfgaauw and Dur (2007) they conclude that workers can be motivated by the missions of the organization and offering low salaries thereby works as a screening mechanism for motivated workers. They refer to the screening

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mechanism presented earlier by Delfgaauw and Dur (2007), in which they show that in the case of unobservable intrinsic motivation, offering a higher wage decreases the expected intrinsic motivation of the hired employee. The rationale behind this finding is the following. Highly intrinsic motivated employees are willing to accept a lower monetary compensation due to the high intrinsic benefits from working for the mission orientated company. However, as a result of the wage increase also less intrinsic motivated employees select themselves for the position. Consequently, the average level of intrinsic motivation will decrease with the level of salaries (Delfgaauw and Dur, 2007). A low remuneration level would therefore serve as a screening mechanism for the high intrinsically motivated employees.

2.2. Public versus private sector employees

Earlier research into the differences in personal characteristics, preferences and motivation between employees in the private and public sector yielded interesting results. The results often show significant differences between the preferences and work motivation of the two groups of employees. These differences are likely to be driven by self-selection into the sectors based on personal characteristics and preferences in combination with the organizational goals of (semi)public sector organizations, which will be discussed in the remainder of this subsection.

2.2.1. Motivation

Organizations in the public sector provide collective goods and therefore can be viewed as mission-orientated organizations (Besley and Ghatak, 2005). The public sector employees are therefore often referred to as motivated agents, who care about the mission of their organization and derive intrinsic benefits from working for these organizations (Besley and Ghatak, 2005). Earlier empirical studies support this view, showing that public sector employees are often found to place a higher value on intrinsic motivation factors, thereby consciously choosing work that has societal impact, achieves social justice or supports the public interest (Lewis, 2002; Houston, 2000; Crewson, 1997; Perry, 1996; Wittmer, 1991; Rainey, 1982). These intrinsic motivational factors are less often found for private sector employees. On the other hand, many studies find that private sector employees value extrinsic incentives more than public sector employees (French and Emerson, 2015; Buelens and Van den Broeck, 2007; Karl and Sutton, 1998). Although some studies showed limited differences between the motivation of non-profit, public and private sector personnel (Gabris and Simo, 1995), the key prediction of this literature is more

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intrinsically and less extrinsically motivated (semi)public sector employees. The combination of the low pay level for jobs with high intrinsic rewards in the public sector is therefore argued by Delfgaauw and Dur (2010) to result in self-selection of job candidates with high motivation. Based on this unique ethic of public sector employees in valuing intrinsic over extrinsic rewards, Crewson (1997) even cautioned against using private sector incentive schemes.

2.2.2. Personal characteristics

In addition to intrinsic motivation, the preference for working in the public sector is likely to be driven by personal characteristics. Since the (semi)public sector in Europe provides more job security than the market sector (OECD, 2011), one of the factors influencing the selection into the public sector is the level of risk aversion. The level of risk aversion determines the value placed on the job characteristic employment security. Earlier studies testing the difference in risk aversion between public and private sector employees however find mixed results. Using

workers’ stated preferences, job security is reported to be of greater importance to public servants than to private sector employees (Jurkiewicz, 1997; Crewson, 1997). Other studies however did not find a significant difference between the importance placed on job security by employees from the private or public sector (Karl and Sutton, 1998). Studies using survey questions indirectly measuring the risk preferences of employees present more consistent results. In their study, Bellante and Link (1981) use questions simulating daily decisions involving risk tradeoffs such as the choice for medical coverage and contents insurance. Analyzing these choices, the authors find that risk averse individuals have a higher probability of selecting themselves into the public sector. In line with this study, Roskowski and Grable (2009) find a lower financial risk tolerance for public sector employees. Pfeifer (2008) reports similar results using data from the German Socio-Economic Panel3, finding more risk averse individuals sorting into the public sector employment (Pfeifer, 2008). Last, Buurman et al. (2012) confirm this theory in their study by testing stated preferences using an experimental design in the Netherlands. Public sector employees are observed showing more risk averse behavior than private sector employees (Buurman et al., 2012). Based on these previous findings, we conclude that the motivation for working in the public sector is related to the amount of risk an employee

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is willing to accept. Job security is therefore still considered to be one of the primary strengths of attracting employees in the public sector (OECD, 2011).

2.2.3. Organizational structure

Another aspect influencing the decision for a particular sector is the structure of the organization, which greatly determines the work environment. Boyne (2002) reviews 34

empirical studies on differences between public agencies and private organizations and finds four main factors that distinguish the public sector from the private sector: complexity, vulnerability, instability and the absence of competitive pressures. First, the increased complexity of public sector firms arises from the fact that there are multiple stakeholders involved in the organization. Additionally, these firms are easily influenced by external events and reactive to the frequent changes in public policy (Boyne, 2002). For this reason the author claims that public managers and top executives face a shorter time horizon than their private sector counterparts. Last, and most importantly, public sector organizations experience limited competitiveness, which follow from the lack of competition in the markets in which the public organizations operate (Boyne, 2002). According to the author, this might be a main driver for the choice of public sector employment.

2.2.4. Wage differential

The last difference addressed between the private and the (semi)public sector is the wage differential or wage gap between the private and public sector. A wage gap between the private and public sector is the result of comparable jobs in the two sectors with different monetary remuneration levels. A positive wage premium for the public sector indicates a higher wage in the public sector than in the private sector for a comparable job. A negative wage premium for the public sector vice versa indicates a lower wage in the public sector than the private sector for comparable jobs. Castro et al. (2013) find that public service employees in Europe earn on average more than comparable employees in the private sector. This wage premium is however found by the authors to be mostly driven by employees with lower levels of education and females. In the same study, a negative public wage premium instead is found for workers employed in high occupational levels and highly educated workers in the public sector. Pfeifer (2008) reports similar findings, indicating that highly qualified workers do not earn a wage premium in the public sector. Berkhout et al. (2011) evaluated the wage differential between

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public and private sector employees in the Netherlands. In contrast to many earlier studies in this field of research, this study uses a propensity score matching method to ensure a better

comparison between the jobs in the different sectors. With this method they find results

supporting earlier findings that lower educated employees earn a wage premium for working in the public sector. Higher educated workers in the Netherlands however earn on average less than employees in similar positions in the private sector (Berkhout et al., 2011). Direct comparison between public and private sector wages nevertheless does not take into account possible

endogenous choice behavior, in which employees select themselves into a sector of employment which motivates them the most and has the best wage prospects. Therefore, a direct comparison might lack accuracy since it does not control for a selection effect. Castro et al. (2013) do not find the wage differential being driven by selection. Bargain and Melly (2008) on the other hand find, after controlling for individual fixed effects, a much smaller negative wage premium. The authors conclude that there is an endogenous selection effect of high wage potential agents into the private sector (Bargain and Melly, 2008). In conclusion, although a wage gap is observed between the public and private sector accounting for the difference in monetary rewards, there are various non-monetary factors which influence the decision of working in a particular sector such as job security, the opportunity of advancement and work environment as discussed before.

2.3. Occupational level

Where the previous literature focused on the differences between the private and public sector employees, a different field of research considers the difference in motivation factors between occupational levels within a particular sector. Earlier studies examining the effect of

occupational level on motivation however presented somewhat mixed evidence.

Jurkiewicz and Massey (1997) explored the different aspects of motivation between supervisory and non-supervisory municipality employees. In their study, the employees are asked to rank fifteen work-related motivational factors based on their relative importance in job related situations. The results show that non-supervisors rank the extrinsic motivational factor ‘high salary’ higher than supervisors. Employees in a supervisory position however rank the intrinsic motivational driver ‘chance to benefit society’ higher, compared to non-supervisory employees. Based on these results, it could be argued that non-supervisors value extrinsic motivation factors more, whereas supervisors value intrinsic motivational factors slightly more.

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The use of supervisory versus non-supervisory employees in this study however does not well reflect a hierarchical level within an organization in which we are interested. Supervisory positions are characterized by the power and authority to give instructions and to be held responsible for the work and actions of other employees, and therefore present in all

organizational levels within a firm. Conclusions derived from this study hence do not allow to make any predictions with respect to the effect of hierarchical level.

Buelens and Van den Broeck (2007) did find hierarchical level to be the most important factor driving the differences in work motivation between employees in both sectors. They report a strong level effect even after including the variables gender, age, education and sector of employment. The authors found that being employed in a higher hierarchical position is positively related with both the level of reported intrinsic and extrinsic motivation. The interpretation of the results from this study are however slightly unclear. Fist, the hierarchical levels included in the regression are not specified in the paper, even though the definition used would significantly affect the interpretation of the results. A second limitation is the setup of the regression model, in which the occupational level and sector effect are included separately. With this regression model the authors assume similar hierarchical level effects in both the public and the private sector.

The third variation of the level effect is presented by French and Emerson (2015). In their study they tested the differences in the motivation between personnel employed in management and management positions in local government. Comparing 65 managers with 181 non-managers, the authors did not find significant differences: the intrinsic and extrinsic rewards are found to be evenly valuable to the two groups of employees (French and Emerson, 2015).

Last, a slightly different orientated study addressing the occupational level effect is presented by Moon (2000). Moon (2000) argues that the sector of employment and managerial level are the main elements driving organizational commitment. Organizational commitment is in this context measured by the level of organizational identification, willingness to do extra work and organizational loyalty (Moon, 2000). The author finds a significant difference in the organizational commitment between public and private sector managers. The former group experiences a lower organizational commitment than managers employed in the private sector. Moreover, a difference in organizational commitment between two levels of managers is

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observed in the private sector, where top managers show more organizational commitment than lower management (Moon, 2000). For the public sector this difference is not observed between top managers and middle managers in the level of organizational commitment (Moon, 2000). This finding suggests a smaller gap in perceived organizational commitment between

occupational levels within public organizations than in the private sector (Moon, 2000).

Concluding, earlier research on the effect of occupational sector on motivation finds overall consistent results, showing that public sector employees are more intrinsically and less extrinsically motivated than their private sector counterparts. Evidence of the effect of

occupational level on motivation on the other hand is somewhat mixed. The inconsistent findings in previous research are partly the result of different measures of occupational levels and

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3. Theory and hypotheses

In the following section we start by providing empirically driven motivation for the research of the interaction effect of occupational level and sector of employment. In the second part, theoretical predictions for this interaction are discussed based on four possible channels. Based on the discussion of these theories, the hypotheses tested in this study are formulated.

3.1. Changing incentives in Dutch (semi)public sector

Little research has focused on comparing the differences in motivation of hierarchical levels between different sectors. However, recently it became more interesting to explore these differences since changes in Dutch regulations forced public and semipublic organizations to decrease the remuneration levels of their top officials. As discussed briefly before, in January 2013 the WNT law came into force4. This legislation states that the compensation of top officials in the public and semipublic sector in the Netherlands cannot exceed the norm of 130 percent of the minister’s income, which translates to a gross income of 228.599 euro per year5.

The SEO economic research institute evaluated the effect of the new legislation for the Dutch housing association sector, which is one of the semipublic sectors in the Netherlands. Based on the remuneration levels in 2011, they showed that the introduction of the WNT for all directors would negatively affect the remuneration of 99.4 percent of the 346 directors of housing associations in the Netherlands (Gerritsen and Van der Werff, 2013)6. Confirming the remuneration levels to the WNT norms would result in an average decrease of 40.6 percent of the gross income (Gerritsen and Van der Werff, 2013). This significant wage decrease for top executives does not solely apply to the housing association sector, but affects executives in all public and semipublic sector organizations.

Earlier in 2006, a survey was conducted by the Dutch Ministry of the Interior and Kingdom Relation on work mobility in the Netherlands. The findings from the report suggest that the overall demand for employees increases in the following years as a result of the ageing

4_{The WNT proposal (bill EK 32.600 A) was adopted by the House in 2011 and by the Senate in November 2012}

5_{In 2015 the adjustment of the WNT norm forces the executives’ compensation to confirm an even lower norm of 100 percent of} the minister’s income, translating to a gross income of 178.000 euros. Additional bonuses and variable payments are not allowed. The norm of 130 percent of the minister’s income applies to top executives appointed after the first of January 2013. Labor contracts dating from before January 2013 are covered by a transitory for four years.

6_{The average income of the research group was 168.408 euros per year. The average deviation of the appropriate maximum} gross remuneration level in 2011 is 68.324 euros.

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Dutch workforce. They furthermore, state that employers in the public sector will primarily have to compete with the private sector for the high educated workforce (BZK, 2006). This concern is supported by more recent research conducted by the CPB (2011). In their report they argue that regardless of the unique intrinsic rewards offered by public sector employers, the deteriorated wage level for highly educated employees affects the attractiveness of the (semi)public sector for this group of employees (CPB, 2011). This belief is held also by the Dutch association of

executive directors of housing associations (NVBW), who state that the sector is experiencing difficulty obtaining qualified directors as a result of the lower remuneration level and their worsened competitive position relative to the market (E. Angenent, personal communication, June 3, 2015). An underlying assumption of this reasoning is that public sector top executives might show similar preferences with respect to high extrinsic rewards as their private sector counterparts.

Consequently, the recently deteriorated wage position of public sector top executives and the expected increased competition for the highly educated workforce make research on the differences in motivation between occupational levels within the public sector and compared to the private sector extremely relevant. Although the overall findings on motivational differences between public and private sector servants show on average a higher intrinsic motivation for the former group of employees, this difference might possibly be driven mainly by lower

occupational level employees. The position of the (semi)public sector as employer is

consequently likely to be affected when the increased negative wage premium for executives in the (semi)public sector causes an outflow to the private sector. In this study we therefore explore whether motivational drivers at executive level in both sectors are similar, thereby enabling us to answer the main research question: Does the motivation difference between the (semi)public and private sector employees decrease when moving up the hierarchy within an organization?

To answer this question, we first test the main motivational drivers of employees in both sectors, thereby trying to support findings from previous studies on the importance of intrinsic and extrinsic incentives. The first hypothesis follows from the importance of intrinsic rewards for public sector employees (French and Emerson, 2015; Buelens and Van den Broeck, 2007; Lewis, 2002; Houston, 2000; Crewson, 1997; Perry, 1996).

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Hypothesis 1: (Semi)public sector employees are more motivated by intrinsic rewards than private sector employees.

The second hypothesis follows from earlier research on the relative lower importance of extrinsic rewards for (semi)public sector employees (French and Emerson, 2015; Buelens and Van den Broeck, 2007; Karl and Sutton, 1998).

Hypothesis 2: (Semi)public sector employees are less motivated by extrinsic rewards than private sector employees.

The remainder of this section identifies the different channels through which the observed motivation difference between the public and private sector employees may change with

occupational level, resulting in more alignment of motivational drivers at top executive positions.

3.2. Crowding out of intrinsic motivation

The first channel discussed through which similarities result in motivation among public and private sector executives, is the crowding out of intrinsic motivation by the provision of high extrinsic incentives. This subsections discusses general crowding-out mechanisms, as well as mechanisms more specific for the (semi)public sector.

The level of intrinsic and extrinsic motivation are not considered to be two independent factors, instead, the two types of motivation interact. In line with this belief, there is extensive evidence suggesting that the provision of monetary incentives for socially desirable activities reduces the non-monetary motivation to perform these tasks. This is the result of the two effects working in the opposite direction and thereby crowd out the socially desirable behavior (Gneezy et al., 2011). This effect is referred to as the ‘crowding-out effect’, and explains why monetary rewards might reduce overall effort (Benabou and Tirole, 2003; Gneezy and Rustichini, 2000; Frey, 1997). One of the earliest studies on the crowding-out effect was an experimental research by Deci (1971). He found that paying subjects for interesting activities such as solving puzzles, decreases their willingness to engage in the activity after the removal of these extrinsic

incentives. Gneezy and Rustichini (2000) report similar results of decreased motivation of children when they are provided small monetary incentives for collecting money for charity. When the monetary incentives are increased further however, they do find an overall increase in motivation. This is described by the authors as “pay enough or don’t pay at all”.

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One explanation of the crowding-out theory of intrinsic motivation is given by Janssen and Mendys (2004). In their paper they give an interpretation to the theory of Titmuss (1972), who argued that compensating people for blood donations would demoralizes them and therefore result in a reduction or even elimination of the donations. Janssen and Mendys (2004) developed a theoretical model which allows them to study the impact of monetary incentives on the

intrinsic motivation for blood donations. In the model, the intrinsic motivation derived from this socially desirable activity depends on two factors. First, the likelihood of being recognized as a person driven by altruism. Second, the number of altruistic people following the norm and engaging in the activity. The authors state that when people are compensated for donating blood, it will induce not only altruistic people, but also non-altruistic people to donate blood.

Consequently, they argue that the proportion of altruists donating blood will decrease and thereby also the utility derived from blood donation by altruistic people. Crowding-out is therefore described by Janssen and Mendys (2004) as the decrease of the social reward to zero. After the social norm has been crowded out, rebuilding the norm by removing the monetary incentives is argued to take a very long time (Janssen and Mendys, 2004).

Another main aspect driving the crowding-out effect is the signaling of information. Benabou and Tirole (2003) present a theoretical model in which the principal (employer) is better informed than the agent (employee). In this context, the monetary reward chosen by the principal depends on different factors, including the attractiveness and difficulty of the job, the principal’s view on the intrinsic motivation of the agent and the expected ability of the agent (Benabou and Tirole, 2003). In their study they show that a high reward is therefore associated by the agent with a less attractive task, which in turn reduces the intrinsic motivation. Gneezy et al. (2011) argue that agents update their beliefs after observing the monetary reward provided for a particular job. Therefore they state that even when the extrinsic incentives are removed or decreased, the motivation to perform the task is reduced permanently. A different feature of the signaling effect driving the crowding-out of intrinsic motivation, particularly applicable to executive positions in the (semi)public sector, is discussed by Delfgaauw and Dur (2007). Delfgaauw and Dur (2007) argue that providing a higher wage may change the public’s perception of how noble the job is, which in turn may reduce workers’ intrinsic motivation to perform the job. As a result, the motivation of agent applying for the job decreases with salary. The authors state that this image is difficult to recover.

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Besides the noble image of the public sector job being affected by the high wages offered, the image may also be affected by the more general perception of the occupation by society. In previous years, the Dutch housing association sector has received increased media attention due to excessive risk taking and the lack of focus on their main societal responsibility, the provision of social housing. The negative image of executives in this semipublic sector is possibly affecting the average intrinsic motivation of workers applying for these job positions in a negative way.

Conculding, the provision of eccessive monetary at top executive positions which crowds out the initial high level of intrinsic motivation in the public sector, in combination with the signaling mechanism is likely to result in a relative increase in extrinsically motivated public sector executives. Based on this prediction, the third hypothesis follows.

Hypothesis 3: There is a positive, and more stronger, occupational level effect on

extrinsic motivation for (semi)public sector employees than for private sector employees. 3.3. Unstable preferences

The second channel discussed through which similarities occur in motivational factors among public and private sector executives, is the instability of personal preferences. Earlier studies found dissimilarities in the average importance of intrinsic motivation between the public and the private sector. However, unstable personal preferences could explain a change in motivational drivers of public sector employees with hierarchical level.

In an earlier study, Harter (1981) studied classroom behavior using a self-report scale measuring children’s extrinsic and intrinsic motivation. He found that motivational orientation is situation specific and therefore alterable. In contrast to this view of motivational orientation as state specific, some others studies argue that motivation could be seen as a stable trait over time. Using a sample of both students and adults, Amabile et al. (1994) showed stable intrinsic and extrinsic motivational orientations, even during large transitions from a school to work environment for the students.

Another field of research in line with previous studies focused on the specific effect of tenure on the level of motivation. These earlier studies are of particular interest since executives often experience a long tenure within a particular sector or organization. Information on tenure

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of public sector employees shows that most public sector executives, 65 percent, have worked within the public sector for more than 20 years (COCOPS, 2013). A strong negative effect of tenure on the level of intrinsic motivation would consequently explain a lower observed level of intrinsic motivation at top executive level in the public sector.

The relation between the level of intrinsic motivation and tenure in the public sector is tested by Van Maanen (1975). By evaluating the reported motivation of policemen he finds a decrease in motivation after the first year of employment. Moynihan and Pandey (2007) report similar findings of a negative tenure effect, which is driven by public servants questioning the effectiveness of the public organization and their perceived limited impact on the social

objective. Using data from a longitudinal study among Flemish teachers, Cooman et al. (2009) correspondingly report a decline in intrinsic motivation among public sector employees with tenure. In line with these empirical researches, Buurman et al. (2012) tested the tenure effect in a laboratory setting by using a survey including both Dutch public and private sector employees. The participants were given the option to receive a reward in the form of a gift certificate, a lottery ticket, or donating the reward to charity. They found a strong negative effect of tenure on the probability of donations to charity among public sector employees. Employees in this study that recently started working in the public sector are found to be more likely to donate their reward to charity than their counterparts in the private sector, whereas after some years, this difference decrease to a point that the situation even converses. The tenure effect for public servants stays significant after including public-sector age effects, while this effect is not observed for the private sector employees (Buurman et al, 2012). A possible explanation of the decreased willingness to donate to charity by public servants provided by the authors is that these employees are already serving the public interest in their occupation. When the effect is driven by this believe, the outcomes do not reflect pure intrinsic motivation in the work environment. Due to a lack of additional data however, this argument cannot be verified by the authors.

Concluding, this channel predicts a decreasing gap in motivation between the two sectors with occupational level due to the negative effect of tenure on the level of intrinsic motivation in the public sector. Since tenure is often related to top positions within an organization, this would predict decreased levels of intrinsic and relative increased levels of extrinsic motivation with occupational level in the public sector. Based on this theory the fourth hypothesis is formulated.

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Hypothesis 4: There is a negative, and more stronger, occupational level effect on intrinsic motivation for (semi)public sector employees than for private sector employees. 3.4. Current recruitment pool executive level positions

Another possible explanation for similarities in the motivational drives among executives in the public and private sector could be that currently both sectors are recruiting their directors from the same employee pool, thereby explaining similarities in motivational drivers. Since a high labor mobility of executives between the sectors would provide evidence for this view, the mobility between the private and (semi)public sector in the Dutch labor market is evaluated.

There are two forms of labor mobility: internal mobility and external mobility. The former form of mobility refers to the labor mobility within a sector, whereas the latter form refers to labor mobility between sectors. In 2006, the BZK conducted a mobility research in the Netherlands. The Dutch labor market is found to experience relatively low external mobility, in contrast to a relatively high internal mobility (BZK, 2006). A possible explanation put forward is the conscious choice for the public sector, which motivates employees to change jobs within the sector, but does result in external mobility. In the report the BZK states that of the total inflowing workforce in the (semi)public sector, 22 percent was previously employed in the private sector. Of the total outflow of employees, 11 percent left for a job in this sector. The group of external mobile employees consists of relatively younger, higher educated, and relatively more female employees who experienced a relative shorter tenure at their previous employer (CPB, 2011; BZK, 2006).

Although the highly educated group of employees is relatively more mobile, the average mobility between the two sectors is extremely low. Based on this relatively low mobility

between the sectors it can be concluded that the channel of similar recruitment pools is not the supporting the prediction of finding similarities in the motivation profiles of top executives. On the other hand, it would neither serve as an argument against this prediction, since the merely lack of mobility does not exclude similarities in the observed motivational drivers.

3.5. Self-selection into top executive positions

The last channel discussed through which similarities in motivational factors at executive levels can arise is the self-selection of people into top executive positions. Previous research has

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focused primarily on the selection into one of the two sectors. However, after being employed in a particular sector, (unobserved) personal characteristics or ability can influence the probability of being employed in a high occupation level. There might be characteristics that affect both the probability of being employed at a high occupational level as well as the level of motivation. Therefore, when these unobserved abilities drive the self-selection of employees into higher occupational levels in both the private and the public sector and are additionally related to the level of motivation, this could explain resemblances in the motivational drivers of top executive employees.

The findings by Koudstaal et al. (2014) in combination with the results of the COCOPS research suggest similarities among top management levels in both sectors in the level of risk aversion. Koudstaat et al. (2014) find differences between managers and employees employed at lower occupational levels in their self-assessed risk attitudes as well as in the survey-based measure of risk preferences. Managers are considered to be less risk averse than employees with similar background characteristics (Koudstaal et al., 2014). The research of COCOPS (2013) shows, in contrast to the widely held belief of highly risk averse public servants, that the majority of the top executives (65 percent) similar to private sector top executives, likes to take risks. Moreover, they report that 80 percent of the public sector top executives value the trait ‘being successful’ as very important (COCOPS, 2013). Being employed in a top executive position is therefore related with a lower risk aversion, regardless of the sector of employment. These studies however did not directly compare top executives from the public and private sector. Therefore we cannot derive any conclusions based on the combination of these findings. Moreover, if present at all, resemblances in risk preferences do not indicate similarities among motivational drivers since earlier research lacks evidence relating the level of risk aversion to the importance of other work related factors.

In contrary, the self-selection into top executive positions in the two sectors would more likely suggest differences in motivation drivers at executive positions than similarities based on the different advancement opportunities within the sectors. In the public sector, seniority is observed to be a more important determinant of advancement than the performance of an employee (OECD, 2001). Consequently, when selecting oneself for a job, employees anticipate this fixed career path which is little influenced by performance (OECD, 2001). This might result

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in employees selecting themselves into the private sector when preferring wage to depend more on performance. The same reasoning applies to highly educated employees who aspire a position at executive level in the near future. These employees will likely select themselves into private sector jobs. The difference in advancement between the sectors hence reflects differences in personal characteristics of executives in the two sectors, which in turn are likely to be related to the perceived importance of extrinsic motivational drivers such as career opportunities and monetary rewards.

Concluding, the channel of unobserved personal characteristics driving the self-selection into executive positions is therefore not likely to support the hypothesis of similarities in

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4. Data and Method

In the following section the data and method are described which are used to test these hypotheses. The two sources of the data used in the analyses are the LISS panel data set and vignette survey administered to semipublic sector servants.

4.1. Longitudinal Internet Studies for the Social sciences (LISS) panel data

For the first data analysis, the LISS panel data are used. The LISS panel consists of 5000 Dutch households, comprising 8000 individuals. The sample represents a true probability sample of Dutch households, drawn from the population register by Statistics Netherlands7. For this particular study8, 9219 number of household members were selected, aged 16 years and older. From this selection, 5524 household members completed the survey. Since only the respondents currently employed in paid work are of interest, the sample used for the analysis consists of 1449 respondents, of which 981 are employed in the private sector and 468 are employed in the public sector. The survey is designed as single wave study dating from October 2009. It contains

information about the labor market, profession, work satisfaction, work hours and employment history of the respondents. Data from an additional study9 is consulted for control variables, which includes all relevant background information of the respondents. This survey is completed by every household member when joining the LISS panel and is updated every month.

To determine the relative importance of both intrinsic and extrinsic motivation for (semi)public and private sector employees at different occupational levels, we used questions from the survey indicating the importance of these factors. The importance of intrinsic factors in work related environment is measured in this study unit by asking the respondents to indicate the level of importance of the following work characteristics: ‘work with which you can help other people’, ‘work that is useful to society’, ‘interesting work’ and ‘independent work’. The

importance of extrinsic motivation is measured by asking respondents to indicate the importance of ‘a good income’, ‘a permanent contract’ and ‘good career opportunities’. For these questions the respondents indicated the perceived level of importance using a 5-point Likert-type scale ranging from ‘not at all important’ to ‘very important’. Additionally, the respondents answered

7_{www.lissdata.nl}

8_{Study unit: LISS panel. Topic: Employment, labor and retirement. Study: WageIndicator. Project number: 38} 9_{Study unit: LISS panel. Topic: Background variables. Study: Householdbox. Project number: 1. Wave: October 2009}

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questions about their perceived job security and preferences for performance dependent payment. The dataset allowed to control for factors correlated to the importance of intrinsic and extrinsic rewards, including gender, age, tenure and education. OLS regressions and two sample t-tests are completed to test the effect of sector and occupational level on employee preferences for

extrinsic and intrinsic motivation.

4.2. Survey housing association sector

In addition to the previous analysis, a research survey was administered to semipublic sector employees from Dutch housing associations. The results from this survey allow us to further explore the importance of intrinsic and extrinsic rewards, the differences between occupational levels but most importantly, the tradeoff between the former two rewards for employees of Dutch housing associations. Dutch housing associations operate in the semipublic sector, which is characterized by organizations with a strong public interest and the receipt of public funding. The latter feature does not apply to the Dutch housing association anymore, since in 1995 the housing associations obtained financial autonomy (Conijn, 2005). Nevertheless, Dutch housing associations still operate within the public framework and have the organizational goal of providing social housing and could therefore be seen as a social enterprises (Conijn, 2005). In the Netherlands, there are circa 380 housing associations in operation, which vary in size from 5.000 to more than 50.000 housing units (Rijksoverheid, 2011). The housing associations employ circa 26.200 people in the Netherlands (CFV, 2014).

4.2.1. Sample and Implementation

The online survey used for this study is programmed using the survey software Qualtrics.

Employees were invited to participate in this survey by a personal email sent from the account of KPMG, management consulting department housing associations, on the May 4, 2015 (Appendix C2).10 The invitations were sent to 120 executive directors (top officials) and 100 employees employed at lower occupational levels. For the completion of this survey no incentives were offered. One week after the invitation, a reminder was sent to the non-responders. After two weeks the survey closed. By this time 112 surveys were completed and usable for the study,

10_{The group of people invited to participate in the survey consists of business and personal relations of colleagues from KPMG,} management consulting department housing associations.

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which is an overall response rate of 51 percent11. The respondents represent employees from various occupational levels within the organization.

4.2.2. Method

One of the first introductions of the vignette method in social sciences is by an explanatory study of Nosanchuk (1972),who tried to measure family status in an experimental way. Vignettes are hypothetical situations, which are presented to the subjects. The vignette method has been primarily used to study people’s attitudes, perceptions and beliefs (Finch, 1987). In social sciences, the vignette technique is preferred over traditional survey methods since the latter is argued to provide less reliable and biased self-reports as a result of the direct and technical questions. Instead, the vignette technique provides respondents with hypothetical situations which closely resemble real-life situations (Frey and Neckermann, 2013). Particularly, presenting a set of factors allows subjects to evaluate the complete situation rather than

indicating their preference for isolated factors (Frey and Neckermann, 2013). In this study, the vignettes presented are hypothetical job descriptions. By responding to the different vignettes, the participants reveal their preferences for the situations12. Each job description consist of two factors that determine the situation.

Table 1 Factors and their values included in the vignette survey

Factor Factor

values Descriptions in vignettes

Wage Low Current wage

Medium Current wage +5%

High Current wage +15%

Impact on society

Low A research institute that conducts research to develop new products for the

commercial personal care industry

Medium A research institute that conducts research to develop medical equipment which is sold to hospitals

High A research institute that conducts research to develop new drugs for a chronic illness

11_{The response rate of the group of executive directors and employees from lower occupational levels were 58% and 43%} respectively, resulting in an overall response rate of 51% (in completed surveys). 31 surveys were started and not-completed. 12_{Additional information on the methodology is given by Hensher et al. (1999) and McFadden (2001).}

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The two factors included in the vignettes are wage and impact on society (Table 1), which are proxies for extrinsic and intrinsic rewards respectively. Each factor consists of three different values, which are randomly selected for each situation. By including both factors this method it enables us to measure the tradeoff made by participants between extrinsic and intrinsic rewards.

Factor 1, Wage. The factor wage is included serving as a proxy for extrinsic rewards, thereby resembling the wage differential between public and private sector jobs. The most recent study evaluating the wage differential between the private and public sector in the Netherlands is by Berkhout et al. (2006). The authors found that public sector employees with a higher

education or university degree earn 12 percent less than for comparable positions in the market sector. For employees with lower levels of education on the other hand, a wage premium of around 10 percent is earned for public sector employees (Berkhout et al., 2006). Based on these findings and thereby simulating opportunities in the private sector for top executives, the following values of the factor wage are constructed: current wage, current wage plus 5 percent and current wage plus 15 percent (Table 1). Negative wage differences are not included as values since this would likely bias the results by loss aversion, which represents the greater disutility from a loss in income than the utility derived from a gain of the same magnitude in income (Kahneman and Tversky, 1979).

Factor 2, Impact on society. The other factor included in the vignettes is the level of societal impact, which serves a proxy for intrinsic reward. Societal impact is reported as motivational factor driving the choice for the public sector (Crewson, 1997 and Perry, 1996). The different values are deduced from the description of the organizational goal of the company presented in the vignette. The organizations described in the vignettes are similar in the overall organizational structure but differ in the level of positive societal impact. A pilot study

confirmed the ranking (low, medium and high) as proposed by the setup of the vignette experiment (Table 1).

Earlier vignette studies mostly used a setup in which respondents are presented with one vignette at the time (Frey and Neckermann, 2013; Falk and Kosfeld, 2006). In contrast, the method used in this study is more similar to the method used by Eriksson and Kristensen (2011), in which the respondents are presented series of two vignettes at the time. The respondents are asked to indicate which of the two job description appeals to them the most. The two vignettes

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presented at the same time are selected in a way that the set of values from one vignette does not strictly dominate the other. Additionally, the vignettes combination in which both ‘high’ and ‘medium’ societal impact are included are excluded from the survey, since this is of less interest for the analysis of the results. The choice between these two situations would resemble a choice between two public sector organizations with different level of social impact, whereas we are more interested in a choice between a public and private sector job. Hence, from the nine possible combinations of the factor levels, 6 combinations of vignettes were created and used in the survey (Appendix C1). An example of a survey question is presented below.

Job A Job B

This research institution that conducts research to develop medical equipment which is sold to hospitals.

(Factor 2: impact on society; Level: medium) The wage that is offered is the same as your current

wage. (Factor 1: wage; Level: low)

This research institution that conducts research to develop new products for the commercial personal care

industry. (Factor 2: impact on society; Level: low) The wage that is offered is 5% more than your current

wage. (Factor 1: wage; Level: medium)

4.2.3. Study design

First, the respondents were asked to provide some background information, such as the year of

birth, completed level of education, tenure, and current occupational level within the

organization. The occupational level is indicated by the subjects by self-selecting into one of the presented occupational groups, ranging from low hierarchical positions (Level 1), to the highest hierarchical position of executive director (Level 4)13_{. To increase the number of observations,} each respondent is presented multiple vignette combinations. Therefore, in the next part each participant was sequentially offered a random selection of five out of the six vignette

combinations. Since an increase in the length of the survey was expected to decrease the number of respondents, subjects were not presented all the six possible combinations. After the vignette choices, the respondents were presented with a control question in which they were asked to indicate the level of interest for each of the three organizational descriptions used for the factor ‘impact on society’. This question is introduced to ensure that respondents made the decisions between the different organization descriptions based on the level of societal impact and not merely on the level of interest for the organization. Last, the subjects are asked to indicate the

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level of importance of societal impact of work, good income and career opportunities

respectively. This question is not introduced until the end of the survey to prevent biased answers in the vignette questions as a result of respondents’ focus on the motivation factors.

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5. Results

5.1. LISS data

5.1.1. Demographic variables

Table A1 summarizes the information on the respondents included in the LISS panel survey. About 68% of the selected respondents are employed in the private sector, the remainder is employed in the public sector. The data show that the total group of respondents consists of 61% males and 39% females. The public sector employee sample contained significantly more

woman (50%) than the private sector sample (33%). Additionally, the average age of the

respondents was 43, with a slightly older public servant sample (mean of 45.9) compared to their public sector counterparts (mean of 42.2). In both the public and the private sector, the majority of the respondents are employed in level 1 and 2 of the occupational hierarchical ladder, which represent the lowest two levels of the hierarchy of the total 3 levels.14 This is consistent with a conventional pyramid organizational structure. The majority of all respondents (58%) are

educated at the level of intermediate and higher vocational education (MBO/HBO)15. Comparing the levels of education between the two sectors however shows that the public servants are on average higher educated with 57% educated at the highest two levels, whereas these levels accounts for only 32% of the respondents in the private sector.16

By comparing the means between the two sectors with two sided t-tests, the following results are obtained. It is found that the public sector employs significantly more woman and people with a higher education than the private sector (both p = 0.000). Consistent with the findings of COCOPS (2013) the public servants experience a longer tenure than the public sector employees. The average tenure of the former group is 13.4 years, which is significantly higher than the average tenure of 9.9 of the public servant (p = 0.000). The public sector furthermore employs an average older workforce than the private sector of 45.9 versus 42.2 years old respectively (p = 0.000). These observed characteristics are in line with characteristics of the

14_{Originally, the dataset classified the respondents in 11 different occupational levels. These 11 occupational levels are} subsequently merged into three levels, which better represents a hierarchy within an organization (Table A2).

15_{The level of education is measured on a 1-6 scale, based on the Dutch school system with 6 indicating the highest level of} education (from low to high: Primary school, VMBO, HAVO/VWO, MBO, HBO, WO).

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public servant population found by the CPB (2011), reporting that government sector employees are more often female, older, experience a longer tenure and higher educated (CPB, 2011).

5.1.2. Summary statistics of motivation factors

Table A3 and A4 report the self-stated importance of five characteristics of paid work. The characteristics ‘a good income’, ‘good career opportunities’ and ‘a permanent contract’ are proxies for extrinsic motivation whereas ‘work with which you can help other people’ and ‘work that is useful to society’ are proxies for intrinsic motivation. In general both groups of employees value the extrinsic rewards more than the intrinsic rewards, as shown in both tables by a higher score for the first two and fifth motivational driver. When comparing the two sectors however, public sector employees show a higher score for the intrinsic factors by valuing the work characteristics ‘useful to society’ and ‘helpful to others’ more than the private sector employees (row 2 and 3). Private sector employees on the other hand value the extrinsic reward of a ‘good income’ more than their public counterparts, as presented in the first row of the tables. The characteristic of having a ‘permanent contract’, presented in the last row of the tables is given the same importance by the two groups of employees. Table A5 summarizes the means of the indicated importance of intrinsic and extrinsic motivation for the different occupational levels per sector.

By using the two sample t-test we test the differences between the two sectors in the self-stated importance of motivational drivers. We assumed that public sector employees are more intrinsically motivated than their private sector counterparts (Hypothesis 1). Our findings on intrinsic motivation largely confirmed this assumption by showing that public sector employees value ‘useful to society’ and ‘helpful to others’, more than private sector servants (both p = 0.000). Women show similar preferences by indicating a higher level of importance for the intrinsic motivation of ‘useful to society’ (p = 0.004). For the other motivational drivers, there is no significant difference found between the two sectors or between male and female employees. Hypothesis 2, in which we assumed less extrinsically motivated public servants, is also

confirmed. The t-test confirms that the difference in importance of the extrinsic motivation ‘good income’ between public and private sector employees is highly significant (p = 0.000), thereby stating that private sector employees value extrinsic rewards more than public servants. We moreover find that males value this extrinsic reward more than females (p = 0.000).

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Second, the differences in means of the self-stated importance of motivational factors are tested between the occupational levels. For the total sample of public and private sector

employees, the employees of the various levels did not show significant differences in their motivational drivers. When testing the subsample of private sector employees we however find the following results. Employees employed in the lowest occupational level (Level 1)

significantly value ‘good income’ less than higher level employees (p=0.002). This finding partly supports the expected positive hierarchical level effect on extrinsic motivation for private sector employees (Hypothesis 3). For the intrinsic motivation factor ‘useful to society’ there is no significant difference between the different levels in the private sector. In contrast to the

predicted negative effect of occupational level on the value of intrinsic rewards, the results show a stable importance of the latter motivation in the private sector. Concluding, for the private sector employees we observe an increased importance of extrinsic rewards with occupational level and stable importance of intrinsic rewards, which is illustrated by Graph 1 and Graph 2.

Graph 1 Level of extrinsic motivation 'Good income' by occupational level (from low to high)

Graph 2 Level of intrinsic motivation ‘Useful to society’ by occupational level (from low to high) 4.05 4.10 4.15 4.20 4.25 4.30 4.35 4.40 4.45 4.50 4.55

Level 1 Level 2 Level 3

S core , L ike rt s ca le (1-5) Occupational level Private sector Public sector

Linear (Private sector) Linear (Public sector)

3.00 3.20 3.40 3.60 3.80 4.00 4.20

Level 1 Level 2 Level 3

S core , L ike rt s ca le (1-5) Occupational level Private sector Public sector

Linear (Private sector) Linear (Public sector)

The effect of occupational level and public sector employment on the importance of extrinsic and intrinsic rewards

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