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The Effect Of Task Complexity On The Relation Between Team Based Incentives And Performance

2197 words - 9 pages

4. Contribution
In this part I will first discuss the main existing research on both team-based incentives and task complexity and continue to discuss how the current research question can provide a useful addition to the existing literature.

4.1 Team-based incentives
Concerning team production there is substantive evidence that free riding is a problem. Kandel and Lazear (1992) explain how the system works. They state that in the principal-agent framework it is hard to explain joint profit incentive contracts. The explanation here is that the agent bears the full cost of effort while receiving maximally a share of 1/N of the benefit, where N = the number of workers in the firm. However, according to Prendergast (1999) empirical studies show increases in production when introducing company-wide profit sharing schemes. A suggested explanation for the success of team incentives despite of the free riding problem is that it may induce peer pressure resulting in effective monitoring systems. Kandel and Lazear (1992) address the peer pressure solution. They deviate a bit from agency theory and include a focus on preferences to explain profit sharing as a solution to agency problems under conditions of peer pressure. They find that profit sharing is more effective when applied on people in similar circumstances, similar tasks and when the relevant group for profit sharing is the peer group. Furthermore, they find that mutual monitoring is only to be effective when profits are shard by a very small group.
In contrast to this agency based theory that predicts free riding with team-based incentives Babcock et al. (2011) find that when implementing a team based compensation system people value a marginal dollar earned by their team-mates about 2/3 to twice the amount they valued a dollar of their own. This contradicts the economic problem of free riding in teams, but may support peer pressure hypothesis. Even the people with the lowest marginal estimation still attach a considerable value to a dollar earned by their teammates.
Ost (1990) discusses the potential risks and rewards of team-based pay systems. According to Ost all systems that incorporate team-based incentive payment consist of a performance goal that can only be reached by engaging in teamwork and employees are rewarded for achieving this goal. Furthermore for a good system the employee must feel that the reward is linked to their contributions (sensitivity), it must be perceived as fair and the rewards offered must make it very clear what the good performance is that is expected from the employee.

Apart from the theoretical work in this field there also is quite a substantive body on empirical work considering team-based incentives. Prendergast (1999) finds that most of the studies on team compensations are concerned with profit sharing plans and in general they increase performance of the company. For example, Hamilton et al. (2003) find a 14% increase in productivity in a manufacturing...

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