For decades, economic theory has often assumed that people in organisations will only act in the desired way when motivated by incentives such as performance-based pay. However, new research challenges this long-standing view, suggesting that honesty, trust and professional integrity may sometimes be more efficient than financial rewards.

A paper published in the Journal of Business Ethics, co-authored by University of Technology Sydney (UTS) researchers Associate Professor Gordon Menzies and Professor Isa Hafalir, revisits one of economics’ most influential theories about workplace incentives. By re-examining the classic principal–agent model, the researchers found that when employees have a genuine commitment to honesty, fixed salaries can outperform incentive-based contracts. Excessive reliance on financial incentives may also weaken trust over time, with implications for debates surrounding performance pay, executive compensation, professional standards and organisational culture.

The research emerged from a public lecture Menzies delivered at Oxford on lessons from the Global Financial Crisis and the ways economic reasoning can sometimes be inappropriately applied to moral decisions. This led him to question the assumptions standard economic models make about truth-telling and whether they accurately reflect how people behave in organisations. The principal–agent model, which has helped support the use of large bonus contracts since the 1980s, effectively assumes that individuals may not act honestly unless incentives encourage them to do so.

Working with Hafalir, Menzies developed a formal model that accounts for a more complex view of human behaviour. At the same time, Professor Tom Simpson, a moral philosophy scholar at Oxford, explored the ethical implications. “In many business situations, people are neither perfectly self-interested nor perfectly trustworthy. Our model captures that more realistic middle ground,” Menzies said. The findings suggest that organisations may need to recognise honesty as an economically valuable behaviour rather than assuming employees respond primarily to financial rewards.

The researchers also found that incentive contracts can unintentionally communicate distrust. When an organisation introduces performance-based rewards to ensure particular behaviour, employees may interpret the move as a sign that management does not trust them to act honestly. “That can discourage honesty, reduce trustworthiness and create a downward spiral where even more incentives are needed,” Menzies said. This cycle could ultimately make organisations increasingly dependent on costly incentive systems while weakening the trust those systems were intended to replace.

The findings may help explain why fixed salaries remain common in professions such as medicine, law and other advisory fields, where judgement, responsibility and ethical duties are central to the work. “Doctors, lawyers and other professionals are not just service providers responding to price signals. Their work depends on duties of loyalty, care and truthfulness,” Menzies said. According to the researchers, the continued use of salaried professional roles reflects the economic value of trust and moral responsibility. The study suggests that, in some organisations, cultivating honesty and professional integrity may be not only an ethical priority but also a more efficient economic strategy than relying heavily on incentives.

More information: Gordon Menzies et al, The Efficiency of Moral Character: Modelling Principal–Agent Relations and Caring Agents Within the Fiduciary, Journal of Business Ethics. DOI: 10.1007/s10551-026-06380-y

Journal information: Journal of Business Ethics Provided by University of Technology Sydney