Performance Spillover in a Multitask Environment

• Published in: Contemporary accounting research 2012-06, Vol.29 (2), p.563-589
• Main Authors: HECHT, GARY, TAFKOV, IVO, TOWRY, KRISTY L.
• Format: Article
• Language: English
• Subjects: Contracts; Economic incentives; Economic performance; Economic research; Employees; Evidence; Incentives; Physiology; Studies; U.S.A; Variance analysis
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/j.1911-3846.2011.01114.x

Holmstrom and Milgrom (1991) suggest that use of partial incentive contracts -- contracts that provide performance-based pay for only a subset of tasks -- can lead to an undesirable shift of employees attention away from important tasks for which incentives are infeasible. While prior, intuitive research has not supported this assumption, this study provides a theoretical explanation for this misalignment in the literature. Specifically, extant theory and empirical results in neuroscience research suggest that incentives induce a physiological response that is associated with enhanced task performance. Following evidence that this physiological response is general, the potential exists for incentives provided on one task to positively influence performance of other, unrewarded tasks, thereby mitigating the negative influence of partial incentives. Via an experiment, we find evidence supporting our theory. Specifically, consistent with Holmstrom and Milgrom's assumption, we find greater disparity in effort and performance across multiple tasks under partial incentives than under flat wages. However, we also find that unrewarded task performance is greater under circumstances in which the effect of spillover is more likely (i.e.. when tasks are performed simultaneously, as opposed to sequentially). Our theory and results shed light on the misalignment between Holmstrom and Milgrom's assumption and related empirical findings and establish tasks' temporal relation as an important determinant of the effectiveness of partial incentives. [PUBLICATION ABSTRACT]