A Review of the Effects of Financial Incentives on Performance in Laboratory Tasks: Implications for Management Accounting

Abstract

Management accounting information plays an important role in motivating individuals to improve performance (cf., Atkinson, Banker, Kaplan, and Young 1997). This role tends to be operationalized by linking compensation to performance, typically through the provision of financial incentives. Theoretically, financial incentives motivate people to exert additional effort, which in turn should improve task performance. However, a large body of empirical evidence indicates that financial incentives frequently do not lead to increased performance (e.g., Young and Lewis 1995; Jenkins et al. 1998). Consequently, it is important to examine variables that may interact with financial incentives in affecting task performance. This paper presents an extensive review of laboratory studies on financial incentives and examines the relations between type of task and type of incentive scheme, respectively, and task performance. We posit that performance in tasks of varying types (which we view as a surrogate for the gap between task complexity and skill) is differentially sensitive to the increases in effort induced by financial incentives and that not all incentive schemes elicit the same level of effort. Our review reveals that incentives improve performance in only about one half of the experiments. Further, as tasks become more cognitively complex, and thus as the average subject's skill level decreases, it is less likely that incentives improve performance. Finally, quota schemes have the highest likelihood of evincing positive incentive effects, followed by piece-rate schemes, tournament schemes, and fixed-rate schemes. Overall, our findings suggest that the type of task being performed and the type of incentive scheme being employed affect the efficacy of financial incentives and therefore may influence the design of management accounting and control systems.