Summary by Eileen Z. Taylor
Ph.D. Program in Accounting
University of South Florida, Spring 2004
Behavioral Issues Main Page | Control/Controllership
Main Page | Teamwork Main Page
This study uses an economic gaming task to experimentally evaluate the behavior of team members under two different incentive schemes that both require mutual monitoring. The psychological aspect of team identity is also manipulated. Findings indicate that a vertical incentive system is more effective under conditions of low team identity. Further, a horizontal incentive system is not only more effective in the presence of strong team identity, over time, it serves to increase and reinforce. The study provides an explanation for the preponderance of horizontal incentive systems seen in practice; it also warns of the negative aspects of implementing a vertical incentive system.
Theory Development
Teams: Organizations are quickly becoming aware of the benefits of team formation as a way to compete in today’s marketplace. Diverse teams bring varied viewpoints, as well as different knowledge together, so that multiple issues can be identified, and multiple problems solved.
Agency theory indicates that agents will shirk if not properly monitored by the principal. One way to monitor agents involves mutual monitoring - in effect, agents within a team setting monitor each other. There are two systems proposed to encourage adequate monitoring; vertical and horizontal.
Vertical monitoring involves providing a financial incentive for team members to honestly report the work effort of their peers on the team directly to the principal. Based on the work of Ma (1988), this scheme provides effort pay, as well as a reporting bonus/penalty. This system encourages honest reporting; for dishonest reporting also has a cost. It is the cost of “hiring an auditor” to verify the teammates report. The perfect Nash Equilibrium involves both agents working, and both truthfully reporting. However, on a individual basis, agents may still try to collude and “beat the system.”
Horizontal monitoring differs in that team members do not report to the principal. Instead, this incentive system relies on team members to self-monitor. By tying rewards to team output, team members will use peer pressure to ensure that members put forth effort and do not shirk. This aligns the team members’ goals with that of the principal, thus leading team members to self-police. This approach requires communication between members of the team; whereas, the vertical approach pits team members against one another.
Given that the two systems require opposing levels of communication; the author proposes that team identity will interact with the incentive system in relation to effort. Social identity theory is used as the basis for this proposition. In this theory, individuals identify themselves as group members. This leads to the belief that they can affect outcomes by working together as a group, rather than as individuals. Thus, they increase communication, which allows them to jointly decide the best course of action. In this case, effort by both agents will result in the highest level of effort; and thus, the highest financial reward.
Hypotheses
The primary hypothesis is the interaction between team identity and incentive system such that increases in team identity will lead to increased effort in horizontal systems and decreased effort in vertical systems. This hypothesis was SUPPORTED.
The second hypothesis is that team identity will have both a direct effect on effort, as well as an indirect effect on effort through its effect on communication. This hypothesis is FULLY SUPPORTED for the vertical incentive system, but NOT for the horizontal system.
The third hypothesis relates to the increase of team identity over time for the horizontal approach. This hypothesis is MARGINALLY SUPPORTED.
Method
Participants were randomly assigned to two person teams. Team identity was manipulated by giving different colored cards to members in the low identity group, and the same colored cards to those in the high identity group. Manipulation checks on team identity confirmed the adequacy of the manipulation.
Conclusion
This study investigates the effects of different financial incentives on team effort in the presence of high and low team identity. Findings indicate that horizontal incentive systems increase team communication, build team identity, and result in greater team effort. The practical implication is that, should an organization decide to use mutual monitoring with teams that have a high team identity, horizontal systems will be more effective. Further, it is also important for organizations to encourage team identity in order to increase the effectiveness of such horizontal systems.
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Notes:
Abrams, D. and M. A. Hogg. Eds. 1990. Social Identity Theory: Constructive and Critical Advances. Springer-Verlag New York, Inc.
Ma, C. 1988. Unique implementation of incentive contracts with many agents. Review of Economic Studies 55(4): 555-572.
"If there is a set of strategies with the property that no player can benefit by changing her strategy while the other players keep their strategies unchanged, then that set of strategies and the corresponding payoffs constitute the Nash Equilibrium."
"A Nash Equilibrium is a set of mixed strategies for finite, non-cooperative games between two or more players whereby no player can improve his or her payoff by changing their strategy. Each player's strategy is an 'optimal' response (cf. optimality) based on the anticipated rational strategy of the other player(s) in the game".
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