Q: In sales terminology, an “average contract” is when an average of team members’ sales is used as a commission calculation for the entire sales force. Is this a motivating formula for managers when most employee teams include both weaker and stronger performers?
A: In my recent paper, “Increasing Team Performance by Sharing Success,” I study employees in the context of employee commissions and group-based commission plans—plans where the individual employee commissions are partially tied to the group’s output and outcome. In this paper, we ask whether the historically used “average contract” that takes the average of team members’ sales outcomes for a payoff calculation is optimal in motivating a sales force. (A side note: my interest in the area of sales and group incentive takes its root from leading a donor-sponsored Sobic Sales Workshop within the Wisconsin School of Business for the past few years. Curiosity naturally led to interesting questions, which this paper is a byproduct of!)
First, we show mathematically that the proposed maximum contract, where the team output is set by the largest individual output instead of the average output of team members, dominates the average contract in terms of effort provision when team members have varying levels of ability. The intuition behind this finding is this: even though setting the team output by the largest individual sales output demotivates the weaker team member, the boost in the stronger member’s motivation leads to increased effort that more than offsets the loss. The overall team effort is greater under the maximum contract compared to the average contract.
Next, we conducted two incentive-aligned laboratory experiments and two field experiments to validate our predictions of increased overall team effort, which confirmed our main theoretical predictions. We also found no difference in weaker team members’ efforts across contracts even though the theory predicts that the weaker team member will exert lower effort under the maximum contract than under the average contract, making the predicted benefit of the maximum contract conservative. We attribute this lack of demotivation to a behavioral bias borne from guilt aversion by the weaker member. Despite their lower ability, the weaker member may still feel guilty if their output is too far below that of the stronger member.
For managers, these findings have positive implications for firms: the maximum contract can significantly boost effort by the stronger team member without negatively affecting the productivity of the weaker team member. Thus our findings suggest that by understanding the psychological factors that impact the stakeholder decision process, managers can take advantage of these opportunities while enabling them to more accurately predict how the new strategies would work in the real world.
Q: How did you get interested in this area of research?
A: To those who know me, I am known for doing research in social influence processes, specifically in endorsement marketing—celebrity endorsements in the sports world, for example—and how behavioral biases can influence endorser behavior. Mainly, I try to understand how psychological factors could lead to systematic deviations from normative predictions based on the assumption that endorsers are rational decision makers.
However, in addition to the ever-expanding research in this space, I also have an emerging stream of research that looks at behavioral biases outside of endorsers where I seek to provide better explanations of why managers often make suboptimal choices and what firms can do moving forward. This most recent paper on team dynamics and team success stems from that avenue of research.
—Kevin Chung is an assistant professor in the Department of Marketing at the Wisconsin School of Business
Read the paper “Increasing Team Performance by Sharing Success” published in Journal of Marketing Research.