Leading by example in socially driven organizations: The effect of transparent leader compensation contracts on following

Leading by example is one of the most powerful methods to encourage individuals to work toward a common objective. Despite the importance of leadership, little is known about how the effectiveness of leading by example depends on institutional features, such as the transparency and design of leaders' compensation contracts. We conduct two experiments to study this interplay between leadership and contracting in organizations with social missions (i.e., socially driven organizations). We find that under non-transparent contracts, leader contributions to the social objective positively influence follower contributions, reflecting effective leading by example. More importantly, under transparent contracts, the positive effect of leader contributions on follower contributions is diminished by an increase in the intensity of variable compensation and/or the amount of fixed compensation in the leader's contract. Our study informs the debate on pay transparency and demonstrates that organizations need to carefully consider the effects of contract design on leadership effectiveness

Leading by example in socially driven organizations:The effect of transparent leader compensation contracts on following

Leading by example is one of the most powerful methods to encourage individuals to work toward a common objective. Despite the importance of leadership, little is known about how the effectiveness of leading by example depends on institutional features, such as the transparency and design of leaders' compensation contracts. We conduct two experiments to study this interplay between leadership and contracting in organizations with social missions (i.e., socially driven organizations). We find that under non-transparent contracts, leader contributions to the social objective positively influence follower contributions, reflecting effective leading by example. More importantly, under transparent contracts, the positive effect of leader contributions on follower contributions is diminished by an increase in the intensity of variable compensation and/or the amount of fixed compensation in the leader's contract. Our study informs the debate on pay transparency and demonstrates that organizations need to carefully consider the effects of contract design on leadership effectiveness

Ambiguous sticks and carrots: The effect of contract framing and payoff ambiguity on employee effort

Research suggests that employees work harder under penalty contracts than under economically equivalent bonus contracts. We build on this literature by examining how the motivational advantage of penalty contracts depends on a common aspect of real-world contracts: payoff ambiguity. With payoff ambiguity, employees provide effort without knowing how much pay they will receive for a given level of performance. According to our theory, this ambiguity opens the door for employee optimism, which has contrasting effects under each contract frame. Results from an experiment support this theory, with an increase in ambiguity leading to less employee effort with penalty contracts (as employees optimistically expect small penalties) and to more effort with bonus contracts (as employees optimistically expect large bonuses). We also find that these effects are stronger for more dispositionally optimistic employees. Overall, our results suggest that bonus contracts may be more motivating and penalty contracts less motivating than previously thought

Control in a Teamwork Environment – The Impact of Social Ties on the Effectiveness of Mutual Monitoring Contracts. The Accounting Review

ABSTRACT: This study examines control in a teamwork setting, experimentally investigating two financial incentive systems that have been proposed in the agency-theorybased analytic literature. Both systems rely on mutual monitoring-the ability of team members to observe each other's actions. However, the systems differ on whether team members report observations of their peers' efforts to management (vertical incentive system) or directly control the actions of each other (horizontal incentive system). Findings suggest that the effectiveness of these systems depends on the level of team identity. Specifically, a strong team identity leads to greater coordination. The result is that the effectiveness of a vertical incentive system is degraded by a strong team identity. On the other hand, a horizontal incentive system becomes more effective in the presence of a strong team identity. The results of this study suggest that when the team has achieved a high level of identity, the most effective way to use this information is likely horizontal in nature, delegating responsibility for control to selfmanaged teams, rather than extracting the information through reporting mechanisms. This study thus helps explain why firms have more readily embraced horizontal incentive systems than vertical incentive systems