Shielding the Workforce: Does Subordinate Contract Frame Induce Leniency in Superiors' Decisions?

Abstract

Research shows that penalty contracts can motivate more effort due to loss aversion. However, we do not have a clear understanding of how individuals are motivated by penalty contracts at different levels of target difficulty. Thus, we experimentally evaluate the effects of contract frame and target difficulty on subordinates’ effort provision and performance. We find that high targets result in a higher likelihood of and quicker giving up under penalty contracts, with no difference in performance when compared to bonus contracts. However, as low performers give up sooner under penalty contracts, performance is higher in later periods for subordinates working under a penalty contract rather than a bonus contract. When the target is relatively easy to achieve, the effect of contract frame on giving-up behavior is limited, and we find penalty contracts lead to lower performance than bonus contracts, in contrast to prior research findings. Our results add insight into how contract frame affects subordinates’ effort provision and performance and highlights that these effects can be dependent upon target difficulty.