Plantwide Incentives for Plantwide Quality: Do They Work?

Abstract

This paper examines whether plantwide incentives for quality actually have incentive effects, a puzzle because high level incentives are common but potentially vulnerable to freeriding and other obstacles. We exploit a natural experiment embedded in a common but economically peculiar feature of self-funded incentives distributed under a gainsharing plan: the plant's variable costs create exogenous variation in the eligibility and magnitude of incentives. Although incentives are salient and potentially large, and despite sufficient statistical power to detect differences quality-related item returns within 1% (on an 8.5% overall rate), we find evidence that item returns stays the same in weeks there is an incentive for quality, and may actually rise when incentives are small. We interpret this as evidence that the strict incentive effects of such plantwide programs are ineffective or possibly counterproductive, at least by their intended mechanism. Rather, the effectiveness of gainsharing plans may rest on programs typically adopted simultaneously or through a sense of shared ownership that is imparted regardless of whether employees are eligible for incentives.

Keywords: Gainsharing, incentives, freeriding, compensation

JEL Classification: J33, M52