For decades, economic theory has often treated people as if they will do the right thing in organizations only when incentives, such as performance pay, force them to. But does this miss the fact that many people also care about honesty?
A new paper in the Journal of Business Ethics, co-authored by University of Technology Sydney (UTS) researchers Associate Professor Gordon Menzies and Professor Isa Hafalir, challenges one of economics' most influential ideas about incentives, arguing that trust and professional integrity may be more efficient than performance-based pay.
By revisiting the classic principal-agent model, the authors show that when people have a genuine commitment to honesty, fixed salaries can outperform incentive contracts, and excessive reliance on incentives may even erode trust over time.
"This research is especially timely for debates about performance pay, executive incentives, professional standards, compliance culture, and trust in institutions," said Professor Menzies.
This research grew out of Menzies' public lecture at Oxford, which focused on the lessons of the Global Financial Crisis, particularly the way economics can sometimes be used inappropriately to make moral decisions. He became interested in what standard economic analysis assumes about truth-telling and whether those assumptions reflect how people always behave in organizations.
The principal-agent model, which has helped justify large bonus contracts since the 1980s, effectively assumes that agents will not tell the truth unless they are incentivized to do so. Menzies teamed up with Professor Isa Hafalir at UTS to model this formally, and the ethical implications were explored by Tom Simpson, a professor of moral philosophy at Oxford.
"In many business situations, people are neither perfectly self-interested nor perfectly trustworthy. Our model captures that more realistic middle ground," said Professor Menzies.
"A key implication is that offering an incentive contract can itself send a signal of distrust. That can discourage honesty, reduce trustworthiness, and create a downward spiral where even more incentives are needed."
Menzies said that could be why salaries remain common in professional roles such as medicine, law, and other advisory fields.
"Doctors, lawyers, and other professionals are not just service providers responding to price signals. Their work depends on duties of loyalty, care, and truthfulness," he said.
"The persistence of salaried professional roles is not an accident. It reflects the very economic value and economic efficiency of trust, judgment, and moral responsibility."
Publication details
Gordon Menzies et al, The Efficiency of Moral Character: Modelling Principal–Agent Relations and Caring Agents Within the Fiduciary, Journal of Business Ethics (2026). DOI: 10.1007/s10551-026-06380-y
Who's behind this story?
MA in English, copy editor since 2021 with experience in higher education and health content. Dedicated to trustworthy science news. Full profile →
Master's in physics with research experience. Long-time science news enthusiast. Plays key role in Science X's editorial success. Full profile →
Citation: Honesty may be more efficient than incentives in organizations, new research finds (2026, July 9) retrieved 13 July 2026 from https://phys.org/news/2026-07-honesty-efficient-incentives.html
This document is subject to copyright. Apart from any fair dealing for the purpose of private study or research, no part may be reproduced without the written permission. The content is provided for information purposes only.