Incentive Redesign and Collaboration in Organizations: Evidence from a Natural Experiment

Abstract

Research summary: Separating the individual from the social effects of incentives has been challenging because of the possibility of synergies in team production. We observe a unique natural experiment in a South Korean e‐commerce company in which a switch from pay‐for‐performance to fixed (but different) salaries took place in a staggered and effectively random manner across employees. In this case, social and individual effects perspectives make opposing predictions, enabling a critical test. We find evidence consistent with social effects of incentives, particularly as predicted by goal framing theory. The results have implications for the design of incentives to foster collaboration, organizational learning, and organizational performance. Managerial summary: Managers often neglect the deeper hypothesis behind pay‐for‐performance schemes—that people primarily care about how much they are individually paid. An opposing school of thought contends that incentives have social effects too—that individuals care about not only what they receive but also what their peers receive. It is difficult to say whether individual or social effects would be more salient in a context, without a proper experiment with randomization. We exploit a rare opportunity provided by a company that changed its incentive system in a random order, thus unintentionally creating a natural experiment. The results strongly validate the existence of social effects of incentives, but also make the general case for the opportunity to learn from experimenting with organization design in a systematic manner. Copyright © 2017 John Wiley & Sons, Ltd.

The effects of incentives, social norms, and employees' values on work performance

“…Burks et al (2009) show in an artificial field experiment with bicycle messengers that individual performance pay in fact reduces cooperation. Lee and Puranam (2017) confirm goal-framing theory with data from a natural experiment in South Korea. Their findings support the existence of social effects of rewards schemes on cooperative behaviour which are in line with goal-frame theory but contradict the alternatives of agency theory and equity theory.…”

A value-based model of job performance

“…Burks et al [ 30 ] show in an artificial field experiment with bicycle messengers that individual performance pay in fact reduces cooperation. Lee et al [ 31 ] confirm goal-framing theory with data from a natural experiment in South Korea. Their findings support the existence of social effects of rewards schemes on cooperative behaviour which are in line with goal-frame theory but contradict the alternatives of agency theory and equity theory.…”

Under a magnifying glass: On the use of experiments in strategy research

“…Dealing with these issues has become an important endeavor, to the extent that some scholars talk about the field undergoing an “identification revolution.” As researchers expose scientific apophenia (Goldfarb and King, 2016), we are witnessing renewed interest in the use of empirical designs in which there is an exogenous treatment, as in the case of quasi- (Flammer, 2015; Gubler et al, 2016; Obloj and Zenger, 2017) and natural experiments (Lee and Puranam, 2017; Nagaraj, 2018; Starr et al, 2018; Zhang, 2018). By randomizing the assignment to such an exogenous treatment, randomized experiments enable researchers to make causal inferences that are simply not feasible in observational studies (Baldassarri and Abascal, 2017; Falk and Heckman, 2009; LaLonde, 1986).…”