Bachelor Thesis, 2015
38 Pages, Grade: 1,3
LIST OF TABLES AND FIGURES
LIST OF SYMBOLS AND ABBREVIATIONS
2 THE TEAM MODEL
3 THE INCENTIVE PROBLEM
3.1 Monetary Incentives
3.1.1 Pay Equality versus Relative Pay
3.1.2 Hawks and Doves
3.2 Non-Monetary Incentives
3.3 The Promotion-Incentive
3.3.1 Definition of Scope
3.3.2 Impact of Promotion-Incentives on Work Behavior
3.4 The Tournament Theory
3.4.1 The Elimination Tournament Model
3.4.2 Advantages of Promotion Tournaments
3.4.3 Disadvantages of Promotion Tournaments
4 EVALUATION OF PROMOTION-INCENTIVES FOR TEAMS
Table 1: Antecedents of Perceived Organizational Support
Table 2: Consequences of Perceived Organizational Support
Figure 1: Relation Between Output at Different Levels in the Hierarchy
illustration not visible in this excerpt
Examining the relationship between individuals and groups is, among others, one of the key issues in sociology that originates from the concept of reciprocity (Gouldner, 1960). Reciprocity, the tendency of people to return a favorable action after having received one (Gouldner, 1960), is a guiding principle that forms human actions. Su- rely, this principle is applicable to the employer-employee relationship in companies, as both wish to receive such favorable actions from one another. Companies require their employees to show high performance and excellent work behavior at all times and employees expect the company to compensate their effort and loyalty in return. Now, what does it take to deliver excellent work behavior nowadays? According to company profiles, characteristics like responsibility, communicational and analytical skills, capacity of teamwork and leadership abilities are demanded in many cases. Evidently, individuals are naturally equipped with these skills and abilities to diffe- rent extents, but it is also the company’s concern to influence employees in such a way that they are willing to deliver optimal work behavior. In order to do so, compa- nies must strive to create encouraging compensation plans, in economic contexts re- ferred to as incentives, so that performance is heightened and specially desired work characteristics can even be evoked. This arrangement is built on the central idea of reciprocity (Rhoades and Eisenberger, 2002).
For the purpose of this thesis the capacity of teamwork is of particular importance. Nowadays, companies in the entire consulting industry, for instance, implement the method of teamwork and thus expect their employees to deliver outstanding team performances. But can the company expect its employees to possess the ability to work in a team, or is it the company's duty to effectively incentivize its employees to do so? To answer this question, this thesis aims to reveal the optimal compensation scheme for teams to achieve high levels of team performance. Therefore, the impact of a specific incentive on team performance, the promotion-incentive, is being ex- amined in this thesis so as to evaluate its effectiveness and also derive general in- sights about incentive schemes for teams. Promotion-incentives nowadays are a pre- sently common addition to monetary compensation, as they exist in almost every company and are assumed to affect work behavior. Again, the consulting industry serves a good example. It has developed an entire promotion-incentive system from the junior fellow level to the director level that offers promising career prospects on top of their payments in order to keep their employees ambitious. Thus, for the rea- son that teamwork becomes a more and more frequently implemented work method and promotion-incentives may have an interesting impact on it, the contribution of the thesis at hand will be to grasp whether or not the method of teamwork and pro- motion-incentives are compatible.
This thesis is divided into six sections. In section 2, an economic team model is pre- sented that will constitute the reference team model for later observations. It deman- ds certain prerequisites in order to be rightfully called a team in economics. In the course of section 3, the incentive problem of companies is presented extensively with regard to the main subject. First, two opposing monetary incentive approaches are discussed by which inferences for later investigations are made. Non-monetary in- centives are then being introduced, whereupon their extent to what they can influ- ence work behavior is examined. For that purpose, empirical results are taken to connect psychological causes, later referred to as antecedents, and their consequen- ces at the workplace. Both monetary and non-monetary incentives build the theoreti- cal groundwork for a sufficient exposition of the promotion-incentive. The concept of a promotion as an incentive will be defined on the basis of primarily economic literature, whereupon its effects on general work behavior is explained. By reference to the definitional scope of promotion-incentives and its impact on work behavior, the so-called tournament model will be of particular importance. Thus, it will be pre- sented including all advantages and disadvantages that are of relevance completing the preliminary work for the investigation in the main subject of this thesis. Any con- siderations of incentives and influences on work behavior so far will be made on a more general and individually observed plain.
In the fourth section, it is the main purpose to find the impact of promotion-incenti- ves on team performance. All preceding considerations will then be applied to the economic team model from section 2 in order to finally determine whether or not the promotion-incentive fits a team in theory. Section 5 reveals limitations of this work and proposes interesting fields for future research. Finally, section 6 sums up the essence of this thesis.
In order to work with the term of a team in the remainder of this thesis, a clear limitation of the concept needs to be made. Marschak and Radner (1972) were the first to develop economic team models to examine decision making of its members under various conditions. Below and starting with the contribution of these authors, fundamental aspects of the theory of teams will be presented.
According to Marschak and Radner (1972: 123), a group of persons pursuing the same interests and promoting them with chosen actions are to be called a team. The team members’ interests can be defined as a preference hierarchy of possible outco- mes that are based on their chosen actions (Marschak and Radner, 1972: 123). These outcomes, henceforth referred to as payoffs, are selected by an organizing party in return to compensate the team’s work (Groves, 1973). In doing so, Marschak and Radner (1972: 124) claim that the actions are chosen individually and that of two gi- ven actions, the one that leads to a higher payoff will always be chosen. The perfor- mance of the team members, on the contrary, in many cases cannot be monitored in- dividually, but merely jointly (Groves, 1973). Hence, the team payoff is a joint con- sideration as well (Marschak and Radner, 1972: 124). Although all team members are expected to have the same payoff preferences and will similarly aim for the hig- hest one possible, Groves (1973) states that the incentive problem within a team is not negligible. This is because the team’s payoff influences the team members’ beha- vior (Groves, 1973). In organizations — where team structures are typically imple- mented — the organization’s leader chooses the team payoff in such a way that the team will serve the organization’s interests better (Groves, 1973). In the hypothetical case where every employee of the organization also follows the organization’s goals, Groves (1973) would regard the entire organization as a team model. He then infers that the team payoff function is consistent with that of the organization. However, Groves (1973) considers this assumption quite inaccurate and finds that the team payoff might more accurately be regarded as only the teams compensation received by the organizations leader. To illustrate the information above, a brief formal pre- sentation is provided. The further notation and formulations are based on Radner (1972) and are also used in Groves (1973). They will here be presented in a simpli- fied version.
Let ! denote all team members and let ! denote the team member’s chosen action, also referred to as strategy or action strategy of all ! , so that ! . The joint team payoff function, resulting from the team members’ joint strategy ! , is represented by ! . The team problem can then be denoted as:
illustration not visible in this excerpt
If the optimal individual strategy ! exists, the assumption by Marschak and Radner (1972: 124) that employees prefer the maximum joint payoff can be expressed by:
illustration not visible in this excerpt
It is then the team’s goal to select the joint strategy ! — that is the product of several ! — leading to the maximum expected value of ! , so that:
illustration not visible in this excerpt
In the following sections, all considerations refer to the team model described in this section.
Groves (1973: 617) defines the elements of an incentive problem to be an organization consisting of many members with different information and decision possibilities, and some clear organizational objective that may not be coincident with the members' individual objectives.
According to him, the organization’s leader is supposed to find the right incentive structure to make its members’ objectives virtually coincide with the organization’s objectives. In this section different incentive schemes are reviewed, regarding their possible influences on the behavior of organizational members and team members in particular.
All considerations of employees and teams in organizations will henceforth refer to contemporary companies. In this thesis, both terms are used synonymously. As to reward employees’ work, monetary incentives still occupy center stage among the field of employee compensation. Two alternative compensation approaches will now be presented and compared to each other.
Although the economic team model presented in section 2 assumes the team to ex- clusively have a joint payoff (Marschak and Radner, 1972: 124), not every organizat- ional leader follows this theoretical compensation scheme. In fact, there are various compensation schemes1 in use in organizations nowadays. Lazear (1989) has contras- ted two fundamentally different approaches, pay equality and relative pay. Pay equality describes a compensation scheme that pays groups of employees, or even entire hierarchical levels, completely equally (Lazear, 1989). In doing so, Laze- See Appendix for a brief overview on compensation schemes.
ar (1989) does not distinguish between fixed pay equality that is independent on the group's performance and variable pay equality that is dependent on the group’s per- formance. In either case, most relevantly, the pay within the group or team is equal. Accordingly, pay equality shows a similarity to the team model’s payoff explicated in section 2. Lazear (1989) claims that pay equality has beneficial effects on the work morale of employees whose work is dependent on each other, such as of team mem- bers. Since the payoff rests upon the collective result, the incentive to work coopera- tively is supported (Lazear, 1989). On the downside, Lazear (1989) argues that pay equality can lead to less effort, as payment is not based on any performance relation. In relative payment schemes, on the contrary, employee’s payments differ on the ba- sis of their relative performance and enhance employees’ work effort substantially, since payment then relies on both one’s own and others’ performances (Lazear, 1989). By the same token, he claims that relative pay equally enhances competition and rivalry and is hence counterproductive in case cooperation is necessary for suc- cess, such as in teams. Furthermore, Lazear (1989) puts emphasis on the aspect of sabotage. In a workplace setting, the term sabotage describes any harmful activities by employees that reduce the output of others. He states that sabotage is — apart from increasing his own work effort — another way to raise one’s payoff under rela- tive payment schemes. The problem of sabotage, according to Lazear (1989), beco- mes more important as the wage spread increases, which will be an important issue in section 3.3.2. In addition to the sabotage problem, there is the problem of monito- ring (Groves, 1973). In the reference team model Groves (1973) claims that indivi- dual work cannot always be monitored adequately as to determine individual pay- ments. Although Lazear (1989) considers sabotage to be a very strong argument against relative pay, he indicates that there is no universally right compensation scheme. This is, as he differentiates between two personality types in companies, the so-called hawks and doves. For this thesis, a precise confrontation of the value of co- operation by pay equality and the value of increased effort by relative payment is ap- propriate. Thus, a brief detour to the idea of hawks and doves is presented hereinaf- ter.
Lazear (1989) applies the device of metaphors to differentiate between more compe- titive and less competitive personalities within companies. More specifically, they are distinguished by their dissimilar costs of output production and sabotage. In this thesis, it is distinctly not intended to distinguish employees into these two types, but the allegation of Lazear (1989) is merely utilized to later derive general arguments about work behavior. In the following, relative performance measurement is assu- med.
According to Lazear (1989), different costs of sabotage will consequently result in different practice frequencies of such. Subsequently, a comparison of both types will be presented. As stated by Lazear (1989), hawks do have a higher tendency than do- ves to sabotage other’s work, since they face lower costs in doing so. He claims that general effort2 of employees can either be invested in the production of output or in sabotage. Now, when hawks theoretically invest more effort in sabotage rather than in output production, doves will, as they invest relatively more effort in output pro- duction, thus yield a higher output level (Lazear, 1989). Doves are markedly less li- kely to sabotage, but still are generally capable in doing so, which is why Lazear (1989) infers the following aspect for compensations in companies. Although there is no universally right compensation scheme, pay equality reduces rivalry and sabotage in most cases. Moreover, the disadvantage of sabotage outweighs the increased out- put production, so that he generally proposes leaders to pay their employees equally in order to ensure a harmonic and collectively productive workplace. In his work, Lazear (1989) extends the idea of hawks and doves in companies and finds detailed solutions about compensation schemes under various conditions. For this thesis, the division of general effort in productive performance and detrimental sabotage activi- ties is an interesting aspect. Lazear’s (1989) inference that dovish employees will yield a higher output level than hawkish ones and thus are the more desirable type of employees for companies, will be revisited in section 4. So far, this section has pro- vided a basic understanding of the influence of monetary incentive schemes on work Lazear uses the term “generalized effort” as the sum of effort and sabotage; see p. 573. Henceforth, this definition applies. behavior. Later, the specific incentive of promotions will be introduced, which will then serve as the starting point for the subsequent observations. Yet, the influence of non-monetary incentives on employee’s work behavior is presented first as to complete the theoretical groundwork.
Money is not the only tool for organizational leaders to affect their employees’ work behavior. Non-monetary incentives can affect performance and work ethics of em- ployees as well (Rhoades and Eisenberger, 2002). In this section the influence of non-monetary and intangible incentives will be reviewed based on the meta-analysis of Rhoades and Eisenberger (2002). In their work they have aggregated more than 70 studies on the subject. Non-monetary and intangible incentives, henceforth referred to as non-monetary incentives, are e.g. power, reputation and honor (Jensen and Murphy, 1990). In the review of Rhoades and Eisenberger (2002) they examine how several kinds of employees’ appreciation by organizations contribute to their perfor- mance. Appreciation by the organization can, according to Rhoades and Eisenberger (2002: 698), be best expressed by “ fairness, supervisor support, and organizational rewards and favorable job conditions ”. In psychology, these categories altogether belong to what is called Perceived Organizational Support (POS) (Rhoades and Ei- senberger, 2002). In fact, organizational rewards do include payment. In this section, however, the focus is on other aspects, such as fair treatment, support, and promoti- ons. In the following, it will be proven how non-monetary incentives may increase the performance of employees. Thereby, an overview of some non-monetary incenti- ves and their influence on POS is exhibited in table 1. The notation and information therein are taken from Rhoades and Eisenberger (2002).
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