Awards are a Special Kind of Signal

Abstract

Awards appear in various forms, ranging from the title "Employee of the Month" to prizes, decorations, and other honors. This contribution develops a theory designed to analyze the widely-observed phenomenon of award giving. We use signaling theory as a basis for our discussion. The perspectives of the giver, and of (potential) recipients, of awards are studied in a principal-agent framework. The analysis highlights conditions under which signaling failures are likely to arise and compares awards with monetary compensation. The paper informs management practice by presenting a systematic appraisal of the signaling functions of awards. It proposes under which conditions awards tend to raise performance, and when monetary compensation proves to be superior.

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