A Review of the Effects of Financial Incentives on Performance in Laboratory Tasks: Implications for Management Accounting

Abstract

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.

Quantification and Persuasion in Managerial Judgment

“…The overall result is that quantification increases proposal persuasiveness when the preparer's incentives are consistent with the firm's, but not when they are inconsistent. Thus, while prior work in accounting has focused on the direct effects of incentives on individuals' behaviors (e.g., Bonner et al 2000, Sprinkle 2000, Bonner and Sprinkle 2002, our study identifies indirect effects of incentives on the judgments and decisions of those evaluating the work of individuals with incentives. Together, the model and empirical results provide evidence to challenge the conventional wisdom that quantification always increases proposal persuasiveness.…”

The Effects of Performance Incentives and Creativity Training on Creative Problem-Solving Performance

“…Further, this study contributes to theories on incentives because creative problem-solving tasks are complex and incentives often fail to increase performance on complex tasks (Amabile, 1996;Bonner et al, 2000). Bonner and Sprinkle (2002) suggest that the dearth of positive effects noted in empirical research does not mean that incentives do not matter, rather, incentivized employees also need sufficient skill to solve complex problems.…”

“…However, incentives can fail as often as succeed to increase employee performance on more complex tasks (Bonner, Hastie, Sprinkle, & Young, 2000). In particular, prior research shows that, in tasks that require creativity, individuals paid fixed wages perform at least as well as those who receive performance incentives (Kachelmeier, Reichert, & Williamson, 2008;Webb, Williamson, & Zhang, 2013).…”

“…However, in view of the limited available research, insight problems are useful because performance on insight problems can be objectively measured and a viable training method has already been developed. Measurement precision is useful in an experimental setting because participants are shielded from outcome uncertainty which could cause them to discount the incentives and exert less effort (Sprinkle 2008). seen as an effective way of increasing employee effort and performance for many tasks (Bonner et al, 2000). Therefore, I expect individuals receiving piece-rate pay to exert effort for longer than those receiving fixed wages.…”

The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

“…Incentive effects of linear contracts have also been analyzed in various empirical studies. Many of these investigations reveal a positive correlation between monetary rewards and effort (see, e.g., Bailey, Brown, and Cocco 1998;Lazear 2000;Sprinkle 2000), whereas others do not find any positive effects (Bonner, Hastie, Sprinkle, and Young 2000;Jenkins, Mitra, Gupta, and Shaw 1998). A positive relationship between rewards and effort is also reported in experimental analyses of contractual relationships (e.g., Riedl 1993, 1998), though the evidence suggests that its degree is quite sensitive to the institutional setting (e.g., Van der Heijden, Nelissen, Potters, and Verbon 2001;Charness, Frechette, and Kagel 2004).…”