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Incentives
Monetary incentives are an important aspect of managerial economics as they can be used to achieve particular business outcomes. Monetary incentives allow for a particular behaviour to appear more attractive to employees and contractors. An example of this is when an agent receives a bonus for reaching a key performance indicator. Providing this incentive allows the business to reach particular goals that would not otherwise be achieved. Providing monetary incentives can also have to opposite effect, dissuading the agent from performing the incentivised behaviour. An example of this is when an agent is provided with a base salary independent of achieving a particular goal set by management. In this scenario there is no incentive for the agent to act in accordance with achieving the goal as they will receive their salary regardless.

Tournament theory is used to describe why different pay levels exist between different roles in the business hierarchy. The idea of tournament theory is that agents who put in effort to achieve promotions are rewarded with a higher, non-incremental, pay rate. The reward of a higher pay rate incentivises behaviour that leads to promotions. This behaviour is often lucrative and therefore ideal for the business. Tournaments can be very powerful at incentivising performance. Empirical research in economics and managements have shown that tournament-like incentive structure increases the individual performance or workers and managers in the workplace.