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

1714 words - 7 pages

1. Introduction

In this study I want to look at the effect of task complexity on the relationship between team-based incentives and performance. I will thus try to find whether task complexity is a moderating variable in the relation between incentives and performance and specifically try to find whether this effect differs for individual incentives and team incentives.

When looking at incentive contracts in management accounting literature, usually theories from the field of economics and psychology are combined. In some circumstances these theories can lead to quite opposing predictions of the effect of incentives on performance. In general incentive contracts are a decision influencing control tool used to make sure that people’s and the organizations goals are aligned. There are different theories about the effect of incentives on performance. In general, considering the working environment the prediction and empirical finding is that incentives increase performance or ‘you get what you pay for’. Although what you pay for is not always what the company, organization or society actually wants as is explained by Kerr (1975). In this paper I will not focus on these anomalies, but merely on the well-established relation between incentives and performance. Prendergast (1999) sees incentives as ‘the essence of economics’ . There is quite a lot of evidence suggesting that that there is a strong relation between pay-for performance and productivity. This is in line with predictions based on agency theory. Agency theory (Jensen and Meckling (1976), Jensen (1983), Gibbons (1996)) predicts that to make sure the employee exerts effort this needs to be made the rational choice. For it to be rational to exert effort incentives are necessary as the employee also faces a cost of effort. If no incentives are provided the employee (the agent) will do the minimum not to get fired. When there are information asymmetries and perfect monitoring is impossible financial incentives will be necessary to align the interests of the agent and the firm.
However, empirical evidence in this field is mixed. For example Lazear (2000) empirically finds in a manufacturing environment that pay for performance increases productivity with 44%. On the other hand Bonner et al. (2000) find that only in about 50 percent of the experiments they examined, financial performance led to improvements in productivity. This thus means that the relationship between incentives and performance may be dependent on the situational circumstances and they do not work in every environment. Specifically in their review of experiments Bonner et al. (2000) find that when the complexity of the task increases (relative to the skill of the participants), the likelihood of observing a positive effect of incentives on performance decrease. Bailey and Fessler (2011) also find that monetary incentives are more effective when the task is less complex. On the other hand in a review of empirical studies on...

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