During the last decades, researchers in the area of personal economics have developed a bundle of possibilities to increase team performance. This paper wants to give an overview of the latest incentive schemes as well as concepts of peer pressure, norms and mutual monitoring. The findings of this paper are that a well-balanced integrated team incentive plan, which includes elements of rewards and of pressure is expected
to be the most promising. The ideas in this paper are applied to a basic economic model that allows a deeper understanding of the concepts. During the last 20 years, teamwork has become prevalent in many ¯rms. While 1987,
27% of the ¯rms supported self-managed teams, 1999 this number rose to 72% (Lazear
and Shaw (2007)). Together with the increment of usage, the research of teams as
a part of personal economics has increased. Many advantages of teams have been
identi¯ed as reasons for the augmented use of teams. But also the negative e®ects,
organization, coordination and free-riding have been further analyzed. Special attention
was given to the possibilities of increasing the team performance and mitigating the
negative e®ects. During the last decades, researchers and practitioners have developed
a huge array of incentive schemes and bonus plans. These incentives can be monetary,
non-monetary, they can be based on outcomes of the team and team members or on
acquainted team skills. In addition to the incentive schemes, concepts of peer-pressure,
mutual monitoring and punishments were further analyzed and improved. Today, an
integrated, well-balanced usage of the methods promises a considerable improvement
of team performance.
Table of Contents
1 Introduction
2 The benefits of teams
3 The free-riding effect in teams
4 Team performance through incentives
System I: Team gain sharing/profit sharing
System II: Team bonuses
System III: Team and team member skill incentive systems
System IV: Team member goal-based and merit incentive systems
5 Team performance through pressure, punishment and norms
Peer Pressure
Norms and culture
Mutual Monitoring
6 Numerical example
7 Team Size and Productivity
8 Conclusion
Objectives and Topics
This paper explores strategies to enhance team performance by addressing the "free-rider" problem. It analyzes the effectiveness of various incentive schemes combined with non-monetary elements like peer pressure, norms, and mutual monitoring to align individual efforts with organizational goals.
- Analysis of specialization and knowledge transfer as primary benefits of teamwork.
- Evaluation of four distinct team-based incentive systems.
- Theoretical modeling of peer pressure, guilt, and shame in team environments.
- Examination of the relationship between team size, productivity, and monitoring efficiency.
Excerpt from the book
3 The free-riding effect in teams
The free-riding problem in team production is one of the most investigated issues in literature of economics. It is based on the classical work of Alchian and Demsetz (1972), distinguishing partnerships and firms. They argue that the weakening of incentives in large firms will aggravate the free-riding effect. Holmström (1982) concludes that it is possible to overcome the free-riding problem with the enforcement of a bonus system that is able to implement efficient effort.
The main problem in teams is that the individual member bears the full personal costs of his efforts but shares the gains from those efforts with all team members (Baron and Kreps (1999)). Selfish behavior and a trade off between the own effort and the benefits lead to purposely underperformance of the worker. Instead, he will rely on the efforts of his co-workers in order to receive his share of profits. Unfortunately, if all workers think and act in that way, an efficient outcome will not be achieved.
Summary of Chapters
1 Introduction: Provides an overview of the prevalence of teamwork and the resulting challenges, specifically the free-rider effect, which this paper aims to address.
2 The benefits of teams: Discusses the foundational economic advantages of teams, focusing on specialization and knowledge transfer between team members.
3 The free-riding effect in teams: Examines the economic theory behind why team members may underperform and presents a mathematical model of the free-riding problem.
4 Team performance through incentives: Categorizes and evaluates four different systems of team-based financial incentives and their applicability to different organizational structures.
5 Team performance through pressure, punishment and norms: Explores non-monetary methods to increase performance, detailing the dynamics of peer pressure, social norms, and mutual monitoring.
6 Numerical example: Applies the theoretical models introduced in previous chapters to a concrete numerical scenario to demonstrate the impact of incentives and peer pressure.
7 Team Size and Productivity: Analyzes the negative correlation between large team sizes and the effectiveness of monitoring, and discusses strategies to mitigate this.
8 Conclusion: Synthesizes the findings, highlighting that a balanced combination of incentive schemes and peer pressure mechanisms is essential for optimal team performance.
Keywords
Team Performance, Personal Economics, Free-Riding Effect, Incentive Schemes, Profit Sharing, Peer Pressure, Mutual Monitoring, Social Norms, Team Size, Productivity, Guilt, Shame, Economic Modeling, Organizational Behavior, Cooperation
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines how organizations can increase team performance by mitigating the "free-rider" problem through a combination of incentive systems, peer pressure, and mutual monitoring.
Which incentive systems are discussed?
The work analyzes four main systems: team gain/profit sharing, team bonuses, team/team member skill incentive systems, and team member goal-based/merit incentive systems.
What is the core research goal?
The goal is to determine how to effectively align individual worker effort with team success to ensure that the benefits of teamwork outweigh the costs and inefficiencies inherent in group production.
What methodology does the author use?
The author uses a combination of literature review and basic economic modeling (algebraic representation) to analyze equilibrium efforts under different incentive and pressure structures.
What does the main body cover?
It covers the benefits of teams, the formal economic model of free-riding, evaluations of various incentive plans, the psychological and social aspects of pressure (guilt and shame), and the impact of team size on monitoring.
What are the key descriptive terms for this work?
Key terms include Personal Economics, Team Incentives, Mutual Monitoring, Peer Pressure, and Free-Riding Effect.
How does the concept of "guilt" differ from "shame" in the author's model?
Guilt acts as internal pressure where a worker feels bad for shirking regardless of observability, whereas shame is external pressure that requires specific identification of the shirking worker by others.
Why are large teams often less efficient according to the paper?
Large teams make it harder to observe individual efforts and increase the costs associated with monitoring and sanctioning, which leads to a decrease in the effectiveness of internal peer pressure.
- Quote paper
- Dipl. Ing. oec. Jan-Nicolas Garbe (Author), 2008, How to increase team performance?, Munich, GRIN Verlag, https://www.grin.com/document/90472
