The Determinants of Incentive Intensity in Group-Based Rewards

Abstract

Higher-powered incentives have spread to a broader subset of employees within hierarchies, largely through group-based pay plans such as profit sharing, gainsharing, and team-based rewards. Yet, in most organizations, the incentive intensity of group rewards, like the incentive intensity of individual rewards, remains low. This paper explores the determinants of incentive intensity in group-based rewards. We draw upon agency theory for hypotheses and test these with a sample of 663 group-based pay plans. We find that incentive intensity is higher when groups are small, when plans need not measure quality, and when management participation is high. We also find that plans embedded in small firms and plans with longevity have higher incentive intensity.

JEL Classification: J31