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

39 Pages Posted: 10 Aug 2010 Last revised: 25 Jan 2013

Alan Webb

University of Waterloo - School of Accounting and Finance

Michael G. Williamson

University of Illinois at Urbana-Champaign - Department of Accountancy

Yue May Zhang

Northeastern University - Accounting Group

Date Written: August 10, 2010

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.

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

JEL Classification: M46

Suggested Citation

Webb, Alan and Williamson, Michael G. and Zhang, Yue May, Productivity-Target Difficulty, Performance-Based Pay and Outside-the-Box Thinking (August 10, 2010). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-02; AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1656394 or http://dx.doi.org/10.2139/ssrn.1656394

Alan Webb

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Michael G. Williamson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Yue May Zhang

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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