Don’t fear the meter: How longer time limits bias managers to prefer hiring with flat fee compensation

Abstract

Time limits and deadlines are pervasive in organizational settings. Managers work under time limits themselves and also manage time limits for others. While the motivational effect of time limits on individual and group performance has been studied, little is known about how time limits shape people’s consequential decisions that involve reasoning about others’ behavior. We investigate the effect of time limits on managers’ choice of compensation schemes for hiring temporary workers in games with financial consequences. We find a biased preference among managers for flat fees over time-metered fees, particularly under longer time limits, resulting in lost earnings for managers. The sub-optimal choices occur because managers over-estimate task completion time, which in turn is driven by both beliefs about workers’ behavior and about the perceived scope of the task. The bias is accordingly eliminated only when both workers’ incentives are decoupled from time limits and managers are provided with information about the scope of work. The robust effect of longer time limits on preference for flat fees, even when the time limits are irrelevant and non-informative, is observed regardless of whether task quality is fixed or variable, and persists among actual managers.