Tournament Winner Proportion and its Effect on Effort— “More Bang for the Buck”

• In Event: Worker Motivation and Effort

Abstract

Management accountants are usually involved in the design of compensation contracts. Accountants not only have to trade off one compensation scheme against another, but they also need to consider the various parameters that ultimately determine the effectiveness of a specific pay scheme. This study focuses on the design of tournaments, because tournaments are widespread in practice and the design issues that management accountants face are more complex compared to other pay schemes. One important parameter is the proportion of tournament winners, that is, the percentage of contestants receiving a higher bonus. Therefore, this study investigates whether and how the proportion of winners (low, medium, or high) affects employee effort. We use a real-effort experiment that allows social comparison to evolve, and we manipulate the proportion of winners while holding the total bonus pool constant. Our results indicate that a firm can increase effort by increasing the proportion of winners, i.e., at no cost. Using a causal model, we generate evidence for our theory that this effect is driven by social comparison involvement and winning concerns, which both depend on the proportion of tournament winners. In addition, we find that in repeated tournaments, the change in effort is more negative the lower the proportion of winners. This interaction effect is driven by differing behavior of winners and losers of a previous tournament.

Authors

• Arnt Woehrmann, Universitat Muenster

• Thorsten Knauer, University of Bayreuth

• Friedrich Sommer, Universitat Muenster