Editing Incentive (section)

=== Team-based incentives ===
Production is increasingly organized around teams in many large firms.<ref name=":4" /> Teamwork may enhance company productivity for firms that encounter multidimensional, complex problems. A firm may be able to solve a complex task which requires a high level of various different skills by assigning it to expert workers with complementary skills.<ref name=":4" /> Due to constantly advancing technologies, seldom does an individual employee have an [[absolute advantage]] across all skills that are required to solve the complicated problems that firms face, hence team collaboration is crucial and beneficial to ensure the success of a team.<ref name=":4" />

Individualized incentives are said to be dysfunctional in an interdependent working environment where individual performance is difficult to observe<ref>{{Cite book |last1=Franco-Santos |first1=Monica |title=Team-based incentives: Creating a Culture of Collaboration, Innovation, and Performance. The Compensation Handbook. |last2=Gomez-Mejia |first2=Luis R. |publisher=McGraw-Hill |year=2015 |edition=6th |pages=199–209 |chapter=Creating a culture of collaboration, innovation and performance through team-based incentives}}</ref> and so firms may opt for team-based incentives instead. Team-based incentive refers to the incentive system that rewards employees based on performance of the team.<ref>{{Cite book |last1=DeMatteo |first1=J. S. |title=Team-based rewards: Current empirical evidence and directions for future research. Research in organizational behavior |last2=Eby |first2=L. T. |last3=Sundstrom |first3=E. |publisher=Elsevier Science/JAI Press. |year=1998 |edition=B. M. Staw & L.L. Cummings |volume=20 |pages=141–183}}</ref> Team-based incentives are described as more beneficial to companies than individual-based incentives. By paying a straight piece rate to individual employees, they would have little to no motivation to help each other as the incentives they receive are irrespective of the result of others. On the other hand, paying team incentives based on team output can promote cohesiveness, trust, cooperation, and support within a team.<ref>{{Cite journal |last1=Beersma |first1=B. |last2=Hollenbeck |first2=J. R. |last3=Humphrey |first3=S. E. |last4=Moon |first4=H. |last5=Conlon |first5=D. E. |last6=Ilgen |first6=D. R. |date=2003 |title=Cooperation, Competition, and Team Performance: Towards a Contingency Approach |journal=Academy of Management Journal |volume=46 |issue=5 |pages=572–590 |doi=10.2139/ssrn.325401 |ssrn=325401 |issn=0001-4273}}</ref> Researchers found a positive relationship between team-based incentive and employees’ work efficacy, stability, and salary<ref>{{Cite journal |last=Kruse |first=Douglas |date=May 2022 |orig-year=December 2016 |title=Does employee ownership improve performance? |journal=IZA World of Labor |at=311 |doi=10.15185/izawol.311 |doi-access=free |issn=2054-9571|hdl=10419/148536 |hdl-access=free }}</ref> as well as company output.<ref>{{Cite journal |last1=Hamilton |first1=Barton H. |last2=Nickerson |first2=Jack A. |last3=Owan |first3=Hideo |date=June 2003 |title=Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation |journal=Journal of Political Economy |volume=111 |issue=3 |pages=465–497 |doi=10.1086/374182 |s2cid=11969481 |issn=0022-3808}}</ref>

Research shows that employees prefer individual-based incentives over team-based incentives due to a few reasons. Firstly, they believe that team-based incentives are prone to unfairness. Employees with more contributions may be discouraged from seeing employees that contributed less receiving the same level of incentive.<ref name=":11">{{Cite journal |last1=Gerhart |first1=Barry |last2=Rynes |first2=Sara L. |last3=Fulmer |first3=Ingrid Smithey |date=January 2009 |title=6 Pay and Performance: Individuals, Groups, and Executives |journal=Academy of Management Annals |volume=3 |issue=1 |pages=251–315 |doi=10.5465/19416520903047269 |issn=1941-6520}}</ref> Moreover, as a team expands and the effect of team incentives weakens, employees struggle to establish a clear link between effort given and incentives received.<ref name=":11" /> It is also inevitable that team incentives could induce the [[free-rider problem]] because an employee's motivation to maximize their individual output could be diminished.<ref>{{Cite journal |last=Holmstrom |first=Bengt |date=1982 |title=Moral Hazard in Teams |jstor=3003457 |journal=The Bell Journal of Economics |volume=13 |issue=2 |pages=325–328|doi=10.2307/3003457 }}</ref> Managers may need to offer a team incentive that is strong enough to ensure that each worker's individual payoff from exerting the level of effort that allows the company to maximize its profits is greater than their individual payoff from free riding on the efforts of other team members.<ref>{{Cite journal |author1=Alchian, A. |author2=Demsetz, H. |date=1972 |title=Production, Information Costs, and Economic Organization |jstor=1815199 |journal=The American Economic Review |volume=62 |issue=5 |pages=779–781}}</ref>
[[File:Team-based incentives game.png|thumb|360x360px|Payoffs of two employees assigned to a group project and faced with the choice of working hard or free riding.]]
Using [[Game theory]] to illustrate this, firms need to implement a team-based incentive that results in the value of ‘Y’ in Game 1 being greater than 100 and enforce a punishment for free-riding that makes the value of ‘X’ less than 40. This would ensure that both team members’ dominant strategy in Game 1 is to work hard and the [[Nash equilibrium]] is (Work Hard, Work Hard).

In contrast, some studies have shown that peer pressure and employees’ intrinsic incentive to perform well in a team environment may mitigate the free-rider problem associated with team-based incentives.<ref name=":8">{{Cite journal |author1=Frederiksen, A. |author2=Hansen, D. |author3=Manchester, C. |date=2022 |title=Does Group-Based Incentive Pay Lead To Higher Productivity? Evidence from a Complex and Interdependent Industrial Production Process |url=https://www.iza.org/publications/dp/14986/does-group-based-incentive-pay-lead-to-higher-productivity-evidence-from-a-complex-and-interdependent-industrial-production-process |journal=IZA Institute of Labor Economics |pages=2–4}}</ref><ref>{{Cite journal |author1=Kandel, E. |author2=Lazear, E. |date=1992 |title=Peer Pressure and Partnerships |jstor=2138688 |journal=Journal of Political Economy |volume=100 |issue=4 |pages=803–811|doi=10.1086/261840 |s2cid=16757647 }}</ref> Such case studies demonstrate that team incentives increase firm productivity in settings that involve complex, interdependent production where peer pressure and intrinsic incentives outweigh selfish preferences.<ref name=":8" /> Peer rating system can also be introduced for team members to rate each other's contribution to a task. Research findings show that imposing a penalty on free riders is useful in decreasing the tendency of free riding.<ref>{{Cite conference |last1=Hashim |first1=Matthew J. |last2=Bockstedt |first2=Jesse C. |date=5–8 January 2015 |title=Overcoming Free-Riding in Information Goods: Sanctions or Rewards? |book-title=2015 48th Hawaii International Conference on System Sciences |place=Kauai, HI, USA |publisher=IEEE |pages=4834–4843 |doi=10.1109/hicss.2015.574}}</ref>