Firm-Wide Incentives and Mutual Monitoring at Continental Airlines

Abstract

In February 1995 Continental Airlines introduced an incentive scheme that promised monthly bonuses to all 35,000 hourly employees if the company achieved a firm-wide performance goal. Conventional wisdom suggests that free riding will render such schemes ineffective. We study the impact of the Continental scheme by comparing the change in performance at airports where workers were eligible for the scheme and airports where they were not. A combination of cross-sectional and time-series data enables us to control for both airport differences and intervening industry or firm changes. The results offer support for claims that the incentive scheme raised employee performance despite the apparent threat of free riding. To explain why the scheme may have been effective we argue that, despite its size, Continental is able to exploit some of the benefits enjoyed by small firms. In particular, the organization of employees into autonomous work groups enables it to induce mutual monitoring among employees within each work group. Moreover, interdependencies between airports magnify the impact of each work group's performance on overall firm performance, so that firm level measures are sufficient to motivate each group to choose high effort.

JEL Classification: J53, L93