Incentives in Firms: Compensation, Ethics and Behavior
Final Report Abstract
The design of incentives schemes is a crucial topic in the management of organizations. Incentive schemes can be understood in the narrow sense of monetary compensation and bonus payments, but also in the broader sense of other means to affect employee motivation that often interact with monetary incentives. From both perspectives, it is important to study how the design of incentives affect employees’ productivity. But very often incentive structures also affect employees’ ethical behavior. It was the key aim of P3 to gain new insights on these aspects and their interplay. In the project we have conducted both lab and field experiments to advance our understanding on the impact of incentive structures on behavior. For instance, we have conducted four large-scale field experiments in a retail chain that study the causal effect of different HR practices and their interaction with performance pay. Most importantly, while monetary incentives can increase performance, we find also evidence that call for some caution: Even within the same firm different circumstances can lead to very heterogenous effects of bonus schemes. In a further field experiment on an online platform we find that people with different intrinsic task motivations react very differently to changes in performance pay. Hence, for any well-designed compensation scheme it is crucial to understand the context and the characteristics of the workforce, the business model, and even very seemingly small details about local management practices. We evaluated the effectiveness of different incentive schemes, not just on employee performance, but also on the crucial topic of compliance and ethical behavior. We, for one, evaluated the effectiveness of several organizational provisions, which are currently controversially discussed in research, concerning their potential to foster ethical behavior - the “Four-Eyes-Principle” (4EP), whistle-blowing behavior, corporate social responsibility and information provision within teams. We additionally investigated the influence of asymmetric outside options on fairness and bargaining outcomes, since bargaining situations often form part of disruptive team work developments. With our work, we are able to point at the benefits as well as the limits of these organizational provisions to increase workers’ performance and compliance. We also concentrated on individual origins of ethical behavior, to gain general insights on how to construct incentives schemes to enhance moral decision making. An important focus here was to determine the factors influencing the psychological costs of lying in economic interactions with asymmetric information. A further project focus was to better understand the underlying driving forces of moral hypocrisy. Our results yield novel implications for incentive scheme modulation, on the proneness of situational settings to enhance individual honesty. We also have collected first laboratory evidence on a novel method of rewarding performance with leisure time. This domain is still not much in the focus of organizations and academic research and has the possibility to be an interesting alternative to monetary bonuses. We will explore this further in future projects.
Publications
- (2017). Social responsibility and incentives in the lab: Why do agents exert more effort when principals donate? Journal of Economic Behavior and Organization, 142, 482-493
Kajackaite, A., and D. Sliwka
(See online at https://doi.org/10.1016/j.jebo.2017.08.013) - (2017). The management of innovation: Experimental evidence. Games and Economic Behavior, 104, 706-725
Kusterer, D. J., and P. W. Schmitz
(See online at https://doi.org/10.1016/j.geb.2017.06.011) - (2017). Wage Increases and the Dynamics of Reciprocity. Journal of Labor Economics, 35(2), 299-344
Sliwka, D., and Werner, P.
(See online at https://doi.org/10.1086/689189) - (2018). Asymmetric outside options in ultimatum barganing: a systematic analysis. International Journal of Game Theory, 41(1), 301-329
Hennig-Schmidt, H., B. Irlenbusch, R. M. Rilke, and G. Walkowitz
(See online at https://doi.org/10.1007/s00182-017-0588-4) - (2018). Do two bribe less than one? – An experimental study on the four-eyes-principle. Applied Economics Letters
Bodenschatz, A., and B. Irlenbusch
(See online at https://doi.org/10.1080/13504851.2018.1456644) - (2018). Job Mission as a Substitute for Monetary Incentives: Benefits & Limits. Management Science
Cassar, L.
(See online at https://doi.org/10.1287/mnsc.2017.2903) - (2018). Lying Aversion and the Size of the Lie. American Economic Review, 108(2), 419-53
Gneezy, U., A. Kajackaite, and J. Sobel
(See online at https://doi.org/10.1257/aer.20161553) - (2018). More Dispersion, Higher Bonuses? - The Role of Differentiation in subjective Performance Evaluations. Journal of Labor Economics, 36(2), 511-549
Kampkötter, P., and D. Sliwka
(See online at https://doi.org/10.1086/694588)
