Task-Specific Experience, Tacit Knowledge, and Compensation Contracts

Abstract

This study experimentally examines whether task-specific experience acquired by managers influences their reliance on performance-based contracts to motivate employees in a setting in which the employee’s task can spark intrinsic motivation. Building on experiential learning theory, we predict that managers who acquire task-specific experience via doing the employee task will develop tacit knowledge regarding the cognitive stimulation and intrinsic motivation that the task generates. These managers will then prefer a fixed-wage contract, which relies on intrinsic motivation, over a performance-based contract to motivate their employees. Our results support these predictions. Compared with managers who only learn about the employee task from a description of the task, managers who perform the employee’s task are less likely to choose the performance-based contract. Results further validate our theory by showing that the difference in contract selection is driven by the manager’s perception of cognitive stimulation and intrinsic motivation of the task. Additional experiments further replicate and validate the main results. Our study enriches our understanding of the role of task-specific experience and tacit knowledge for compensation contract design.

Keywords: Tacit knowledge, task experience, task challenge, intrinsic motivation, compensation contract

JEL Classification: C91, D83, M40