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Management accounting information plays an important role in motivating individuals to improve performance (cf., Atkinson, Banker, Kaplan, and Young 1997). This role tends to be operationalized by linking compensation to performance, typically through the provision of financial incentives. Theoretically, financial incentives motivate people to exert additional effort, which in turn should improve task performance. However, a large body of empirical evidence indicates that financial incentives frequently do not lead to increased performance (e.g., Young and Lewis 1995; Jenkins et al. 1998). Consequently, it is important to examine variables that may interact with financial incentives in affecting task performance. This paper presents an extensive review of laboratory studies on financial incentives and examines the relations between type of task and type of incentive scheme, respectively, and task performance. We posit that performance in tasks of varying types (which we view as a surrogate for the gap between task complexity and skill) is differentially sensitive to the increases in effort induced by financial incentives and that not all incentive schemes elicit the same level of effort. Our review reveals that incentives improve performance in only about one half of the experiments. Further, as tasks become more cognitively complex, and thus as the average subject's skill level decreases, it is less likely that incentives improve performance. Finally, quota schemes have the highest likelihood of evincing positive incentive effects, followed by piece-rate schemes, tournament schemes, and fixed-rate schemes. Overall, our findings suggest that the type of task being performed and the type of incentive scheme being employed affect the efficacy of financial incentives and therefore may influence the design of management accounting and control systems.

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This paper reports the results of an experiment that examines how incentive-based compensation contracts compare to flat-wage compensation contracts in motivating individual learning and performance. I use a multiperiod cognitive task where the accounting system generates information (feedback) that has both a contracting role and a belief-revision role. The results suggest that incentives enhance performance and the rate of improvement in performance by increasing both: (1) the amount of time participants devoted to the task, and (2) participants' analysis and use of information. Further, I find evidence that incentives improve performance only after considerable feedback and experience, which may help explain why many prior one-shot decision-making experiments show no incentive effects. Collectively, the results suggest that incentives induce individuals to work longer and smarter, thereby increasing the likelihood that they will develop and use the innovative strategies frequently required to perform well in complex judgment tasks and learning situations.