Productivity-Target Difficulty, Performance-Based Pay and Outside-the-Box Thinking

Abstract:     
In an environment where individual productivity can be increased through efforts directed at a conventional task approach and more efficient task approaches that can be identified through unconventional thinking, we examine the effects of productivity-target difficulty and pay contingent on meeting and beating this target. We argue that while challenging targets and performance-based pay may hinder the discovery of production efficiencies, they can motivate high productive effort (i.e., motivate individuals to work harder and more productively using either the conventional task approach or more efficient task approaches when discovered). Results of a laboratory experiment support our predictions. Individuals both assigned an easy productivity target and paid a fixed wage identify a greater number of production efficiencies than those with either challenging targets or performance-based pay. However, individuals with challenging targets and/or performance-based pay have higher productivity per production efficiency discovered suggesting these control tools better motivate productive effort. Collectively, our results suggest that the ultimate effectiveness of these control tools will likely hinge on the importance of promoting the discovery of production efficiencies relative to motivating productive effort. In doing so, our results provide a better understanding of conflicting prescriptions from the practitioner literature and business press.

Number of Pages in PDF File: 39

Keywords: Stretch Targets, Outside-the-Box-Thinking, Performance-Contingent Incentives

JEL Classification: M46

working papers series