For years, economists have assumed that people only tell the truth at work if money pushes them to. But new research suggests that assumption might be wrong.
Researchers at the University of Technology Sydney in Australia have found that trust and honesty may actually work better than financial incentives in organizations. Their study, published in the Journal of Business Ethics, challenges a longtime idea in economics called the principal-agent model.
That model, which became popular in the 1980s, says that workers will lie or cut corners unless they are paid to be honest. It helped justify large bonus contracts for executives. But the researchers argue this ignores something important: many people genuinely care about being truthful.
"In many business situations, people are neither perfectly self-interested nor perfectly trustworthy," said Associate Professor Gordon Menzies, one of the study's authors. "Our model captures that more realistic middle ground."
Menzies teamed up with Professor Isa Hafalir at UTS to build a mathematical model showing what happens when honesty is factored in. They found that when people have a real commitment to telling the truth, simple fixed salaries can actually work better than complicated incentive-based pay.
There is a catch, though. The researchers also discovered that offering incentive contracts can backfire. When a boss offers extra pay for honesty, it sends a message: "I don't trust you." That signal can make people feel less inclined to be honest, which then leads to even more incentives being needed — a downward spiral.
"That can discourage honesty, reduce trustworthiness, and create a downward spiral where even more incentives are needed," Menzies said.
The researchers believe this might explain why many professions still use salaries instead of performance pay. Doctors, lawyers, and other professionals often work on fixed wages rather than commission. Their work depends on duties of loyalty, care, and truthfulness — things that are hard to measure with a paycheck.
"The persistence of salaried professional roles is not an accident," Menzies said. "It reflects the very economic value and economic efficiency of trust, judgment, and moral responsibility."
The study grew partly from Menzies' public lecture at Oxford University, where he looked at lessons from the Global Financial Crisis of 2008. He became interested in whether standard economic models reflect how people actually behave in organizations.
The findings may have wide reach. The researchers say they matter for debates about executive pay, professional standards, and trust in institutions. Instead of relying only on bonuses to keep people honest, organizations might do better by simply trusting their workers.