Increasing Team Performance by Sharing Success

Abstract

When using group-based commission plans to motivate their sales force, should firms always compensate salespeople based on the average of team members’ sales outcomes? The theory suggests that when team members are heterogeneous in sales abilities, the proposed maximum contract (where the team output is set by the largest individual sales output) dominates the average contract (where the team output is determined by the average output of team members) in terms of overall team effort. This is because the stronger team member will exert higher effort under the maximum contract compared with the average contract, and this increase exceeds the decrease in the weaker team member’s effort. The authors validate the theoretical predictions by employing two laboratory experiments to provide a causal test of the theory and two randomized field experiments to deliver additional corroborating evidence. Overall, the experimental results are consistent and broadly confirm the theoretical predictions, pointing to the substantial gains from implementing the maximum contract when team members are heterogeneous in abilities. Interestingly, the weaker team members exert similar effort across the maximum and average contracts, although the theory predicts higher effort under the latter.