Optimal Incentives in Problem Solving Teams

Abstract

Workers in problem solving teams- these are short term teams that are set up to generate ideas for improving a production process or a product- are often rewarded through group incentive pay. This is even though group incentives give workers an incentive to free ride. In our paper, we show how problem solving creates implicit incentives to reduce free riding, which in turn lowers the cost of using group incentive pay. In fact, when an employer has initial bargaining power and implicit incentives are strong, group incentive pay yields higher profits than monitoring workers, even when monitoring is costless.