Professional Documents
Culture Documents
Incentives
Kevin Hinde
Aims
Most
productive activity is carried out by
teams. However,
There must be potential synergies for working as a
team.
Team members must either have or be able to acquire
at low cost (to the organisation) the relevant specific
knowledge for making good decisions.
The organisation must be able to control the free-rider
problems of teams at a relatively low cost.
A solution for teams
What factors determine optimal team size?
– Depends upon a mixture of
Agency issues. The ability to control the free rider problem.
Knowledge of the team. More team members = more
knowledge.
Productivity. An additional member can be more productive
but eventually diminishing returns sets in.
The optimal team size can vary between 2 and 25
according to research by Katzenbach J R and
Smith D K (1993) The Wisdom of Teams, Harvard
Business School.
Some Interesting Team payments
Forcing Contracts.
– These specify that the workers meet a certain
target that is easy to monitor. If the target is not
met then the employer pays the workers
nothing. This will increase the effort levels.
However, it crucially depends on the extent to
which trust exists between the principal and the
agents.
Some Interesting Team payments
Efficiency Wages.
– Here employees motivate workers by paying above the opportunity
(reservation) wage and have inspectors monitor job performance
at random intervals. If shirking occurs, then the employee is fired
on the spot. Clearly, monitoring costs the firm so employees must
balance the costs of getting caught shirking on the job with the
potential gains from a higher wage.
Revenue/Profit Sharing.
Here revenue or profit is shared equally. Sadly, this gives rise to a
classic prisoner’s dilemma – all will defect in the absence of
incentives to cooperate.
Hierarchies and the assignment of
decision rights
Benefits of specialised task assignment
Exploiting comparative advantage.
Lower cross-training expenses.
Relative ease of motivating workers to perform a narrower set of
tasks.
Costs of specialised task Assignment
Lost complementarities from performing few functions.
Functional myopia.
Reduced flexibility.
Incentive issues (blame can be easily apportioned)