Level Up: The Effect of Contract Design on Strategy Development in a Skill Transfer Task Environment

• In Event: Managerial Accounting Incentives

Abstract

Diverting effort from current-period performance towards strategy development is important in tasks that are skill-sensitive, complex, and involve multiple periods. However, there is little research examining how differences in the forms of compensation contracts affect this focus on strategy development. We experimentally examine the effect of flat-wage, piece-rate, and relative performance contracts on strategy development with a skill-based, multi-period task where the task is either the same or different between periods. We find that performance-based incentives improve current period performance, but do not create a differential level of strategy development, when the task is identical between periods. When the task changes between periods, performance-based incentives lead to increased levels of strategy development. However, this strategy development is not effective at improving performance for individuals under a piece-rate contract in the novel task. This suggests that firms should consider the task horizon and job environment when designing their compensation contract.

Authors

• Jeremy Douthit, University of Arizona

• Todd A Thornock, Iowa State University