The Effects of Ex Ante versus Ex Post Discretionary Contracts on Worker Performance, Trust, and Reciprocity

Abstract

Managers can set explicit, binding targets to reward workers before observing their performance (ex ante contract), or decide whether to reward workers after observing their performance (ex post contract). We experimentally examine the effects of the two types of contracts on workers’ behaviors in the common setting where information asymmetry prevents managers from directly observing workers’ effort and ability. Our results indicate that workers’ performance, trust, and positive reciprocity toward their managers are lower under an ex ante contract than an ex post contract because managers often set ineffective ex ante targets that do not match workers’ ability. However, providing managers with up-to-date, peer performance benchmark information offsets the negative effects of an ex ante contract by increasing workers’ perceived fairness of the target-setting process, despite no change in the target levels. Our results highlight how uncertainty in incentive contracts and benchmarking can motivate workers and build trust within organizations.

Keywords: Incentive contracting, managerial discretion, trust, reciprocity, fairness