Teams, Leaders, and Performance Measures

Abstract

This paper studies the effect of leadership on the ability to promote cooperation in teams through the performance measurement system. Performance measurement of teams can promote cooperation by rewarding team success, or can emphasize and reward individual success, by promoting competition via relative performance evaluation. In order to highlight the tradeoff between individual and group incentives, I consider the impact of leadership, where one agent with private productivity information acts as a leader and partially signals his information via his action to the agent who is an uninformed follower. With symmetric, privately informed agents, promoting cooperation with group incentives is more costly than promoting competition with individual incentives. The team is more likely to be successful than individuals and agents rewarded based on the team output earn more informational rents than agents rewarded for individual performance. With one informed agent, group incentives that promote cooperation can be preferred for both agents but only with signaling between the leader and follower. With no signaling, group incentives are too costly for the informed agent, but may be preferred for the uninformed agent. Uninformed agents earn fewer rents, but are productively inefficient; with signaling, the follower’s productive efficiency improves, lowering the cost. Also, because of the effect of the follower’s action on the leader’s incentives, the leader’s incentives are decreased, resulting in a lower payment. The results suggest that leadership can not only improve productive efficiencies via information sharing, but can reduce information rents, allowing for the use of cooperative performance measures.

Keywords: performance measurement, incentives, teams, leaders

JEL Classification: M41, D82, M54, L29