The impact of formal incentives on teams: Micro-evidence from retail

Brahm, F, Feylessoufi, A and Singer, M (2022) The impact of formal incentives on teams: Micro-evidence from retail. Working Paper. London Business School Working Paper.

Abstract

While the impact of formal incentives on individuals is well understood, their impact on teams is less clear. A handful of field experiments document a small or null impact of incentives on teams. However, these studies do not contrast their results with the impact of incentives on individuals, and thus, cannot rule out the possibility that the null/small results on teams are due to incentives being ineffective on individuals to begin with (for example, due to organizational culture). In this paper we perform a full comparison: we estimate the impact of incentives both on individuals and on teams, within the same setting. Concurring with the extant literature, we observe that incentives generate approximately a 19% productivity increase on individuals; however, we find a null effect on teams. Exploiting the details of our setting, and guided by a formal model, we show this is not because incentives do not work in teams –on the contrary, they strongly boost productivity via effort complementarity– but because teams in our setting do not need them –teams without incentives display larger social incentives than teams with them (and this asymmetry is large enough so that teams without incentives catchup with those with incentives). The analysis also shows that, under plausible conditions, having only an estimate of the impact of incentives on teams, without having an estimate for individuals, one cannot say much about the presence and magnitude of the generic mechanisms underlying the impact of incentives on teams (i.e., freeriding, effort complementarity and social incentives).