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Organizational economics

Incentives boost team performance

München, 05/29/2018

When teams are offered financial rewards for problem-solving, they coordinate their efforts and perform better than groups that lack such an incentive.

Team members were given an hour to work out how to exit a closed space based on clues and logical inferences provided in a detailed scenario. (photo: Exit the room)

A new field study shows that the prospect of a bonus for working groups has a positive impact on their performance. The results suggest that the monetary incentive prompts a change in the organization of task allocation within the group. The study was carried out by a team of researchers around Florian Englmaier, who heads the Institute of Organizational Economics at LMU.

“Although economists have very diverse views as to the effects of monetary incentives in the workplace, empirical studies of the issue have generally focused on the performance of routine and repetitive tasks,” says Englmaier. However, an increasingly large fraction of today’s workforce is confronted with more complex assignments – which economists refer to as ‘non-routine analytical tasks’, which require a coordinated approach involving teams with diverse talents. To assess the effect of financial incentives in such a context, Englmaier and his LMU colleagues Stefan Grimm and Simeon Schudy, together with David Schindler (Tilburg University) have collaborated with the company Exit the Room.

The firm Exit the Room designs problems that require groups to pool their logical and combinatorial skills in order to arrive at a solution. Team members are given an hour to work out how to exit a closed space based on clues and logical inferences provided in a detailed scenario. “The teams have to collect information about their environment, and then recombine the information in a non-obvious way in order to arrive at the desired goal. The game incorporates an array of features that are characteristic of the kinds of problems with which more and more modern businesses are now being faced,” says Stefan Grimm. In the study, some of the teams were promised a bonus of 50 euros if they managed to crack the puzzle in 45 minutes (rather than the allotted 60), while the others served as the control group.

The notion of offering a common incentive for team work reflects recent developments in the business world. “Companies have begun to question the practice of offering individual performance-related bonuses. Since much work is now done in groups, and success often depends on the team as a whole, it has become more difficult to assess the relative contribution of each team member,” David Schindler adds.

The field study analyzed the performance of just under 1000 teams and a total of approximately 4000 participants. The result was clearcut: the prospect of a financial bonus also boosts the effectiveness of teamwork. The promise of a bonus more than doubled the probability that the problem would be solved within 45 minutes.

Organization is the key to success

In order to pin down the reason for this effect, a subset of teams was subsequently asked to complete a questionnaire. An analysis of the responses revealed that the successful teams were generally better organized than their rivals. The more effective teams were more likely to note that one of their members had coordinated and directed the search for a solution. “This suggests that the prospect of a reward leads to the emergence of a hierarchy, which is accepted by all team members,” says Simeon Schudy.

This in turn points to the fact that one of the most significant challenges in the modern workplace is to ensure that small groups are effectively coordinated, in spite of their typically flat hierarchies. “Organization appears to be especially important in contexts in which teams are engaged in complex tasks that require the assembly and recombination of information. Our results indicate that monetary incentives can help to promote the establishment of this kind of leadership structure,” says Florian Englmaier.

One surprising and particularly interesting outcome of the study was that the prospect of a bonus enhanced the level of performance even among teams who had chosen the problem themselves. “Some researchers had suggested beforehand that the bonus would have no effect on teams who had voluntarily chosen to participate in the game. Such teams should be highly motivated from the outset, and therefore determined to put in a good performance without any further incentive,” as Schudy explains.

The significance of motivation

But there does indeed seem to be a positive correlation between the challenge posed by the problem itself and the effectiveness of incentives. The high level of motivation displayed by teams that had themselves selected the problem to be solved can be gauged from the fact that they rarely availed of outside help. “They were intent on solving the problem on their own,” says Englmaier. This was not the case for the control group, which was made up of students to whom the tasks were assigned. They were certainly interested in finding the solution as quickly as possible, as they frequently asked for tips, especially when there was a bonus to be won.

However, Englmaier doubts that the money alone explains why the teams did better overall than those who did not have a bonus to look forward to. “We didn’t actually test this, but other studies suggest that a large bonus can have the opposite effect. This may be because the very fact that more is at stake leads to more conflict within the teams, or because members become so preoccupied by the prospect of winning a large bonus that they fail to focus on solving the problem at hand. Then there is the question of how much scope for improvements in organizational structures is actually available in this context.” Nevertheless, the study demonstrates the importance of the element of financial reward represented by the offer of bonus. Just setting a reference point by remarking at the outset of the game that finding the solution within 45 minutes would qualify as an unusually impressive piece of teamwork had no effect on performance levels, while the offer of a bonus for successful completion of the task in under an hour clearly boosted performance.

Whether or not team bonuses have a similar effect in the case of repetitive and longer-term tasks is one of the many questions that the study’s authors intend to pursue in the near future. (CESifo Working Paper No. 6903)