The Importance of Task Complexity When Rewarding Nonfinancial Performance

Abstract

ABSTRACT In this study, I investigate whether the effectiveness of rewarding performance of nonfinancial measures varies across levels of task complexity. I use a multi-period experiment where participants are assigned a highly or moderately complex task and an incentive contract where only financial measures or both financial and nonfinancial measures are rewarded. I find that in a moderately complex task, individuals perform better when only the financial measures are rewarded in the incentive contract. However, in a highly complex task, individuals perform better when both financial and nonfinancial measures are rewarded. Collectively, the results identify task complexity as an important task characteristic that impacts the effectiveness of incentives on nonfinancial measures of performance.