Incentives in Firms: Compensation, Ethics and Behavior

Principal Investigators: Dirk Sliwka, Bernd Irlenbusch, Patrick Schmitz

In the first funding period we studied the design of bonus systems and performance evaluations on the basis of recent advances in behavioral economics.
Core topics were subjective evaluations, team incentives, and long-term incentives. Studying these issues, we identified different underlying behavioral mechanisms that affect the impact of formal incentive structures. In the next funding period, we want to focus on the analysis of the underlying behavioral mechanisms, a comparison of different evaluation processes and their implications for employee performance as well as for ethical behavior. In the subproject “Behavioral Design of Performance Evaluation Processes” we want to investigate the effect of different formats of performance evaluations. The focus is on the process and design of assessment mechanisms and on the associated behavioral consequences. We intend to approach this topic not only with respect to bonus structures that are tied to the evaluation but also regarding the person or group serving as the assessor. The interaction of performance evaluation and intrinsic motivation is another field we plan to explore.
In another subproject “Incentives and Ethical Behavior” we plan to investigate how incentives influence behavior from an ethical perspective. More specifically, we plan to explore the institutional conditions of compliance behavior. Key questions are: How can ethical behavior be enhanced by institutional settings? Under which circumstances do people blow the whistle? How is honesty and helping affected by incentive schemes? Is Corporate Responsibility an effective mechanism to increase effort? The third subproject “Long-term Incentives” continues with the work on incentive schemes that intend to align the agent’s actions with the principal’s long-term interests. We plan to analyze contractual frameworks that are highly relevant in organizations in reality and to study their behavioral consequences. One main focus will be on experiments that examine the performance effects of long- vs. short-term incentives or on the impact of wage changes in long-term relationships under real-effort conditions. Another topic is the role of termination threats as an alternative incentive in dynamic contracts. Furthermore, we plan to continue our work on the timing of wage changes and how it affects reciprocal behavior.