Can a Code of Ethics Reduce Sabotage and Increase Productivity Under Tournament-Based Compensation? An Experimental Study

Abstract

Managers have often used tournament incentive programs because of their ability to attract top talent and motivate employees to give their best effort (Grote 2005; McGregor 2006; Ng and Lublin 2010). However, because a tournament incentive structure explicitly evokes competition, prior economic literature has shown that the harmful effects of sabotage observed during a tournament can completely negate any benefits they have (Carpenter et al. 2010). Remedies suggested to reduce sabotage involve reducing the economic incentives that contribute to both beneficial and harmful behavior (Chen 2003). In the accounting literature to date, no remedy for the harmful effects of a tournament incentive has been investigated because the ability to sabotage has been restricted by way of tight experimental control. I utilize an experiment in which participants perform a real effort task which allows them to sabotage each other and receive relative performance feedback in real-time. I first predict that sabotage during a tournament will be higher than fixed pay because of the higher incentive to sabotage during a tournament. I then predict that by employing a code of ethics, I can activate the social norm of promise keeping which discourages those in a tournament from engaging in sabotage, while still giving their best effort. In the majority of cases, this allows the company to reap the previously observed benefits of a tournament incentive, while minimizing the previously observed costs that normally accompany a tournament incentive. However, I unexpectedly discover that a code of ethics can be a double-edged sword; In so much that, if violations persist despite certifications to follow the code, participants may become more discouraged and their behavior more detrimentally effects productivity than if those same violations occurred without a code. The implication of employing a code of ethics under these two incentive systems on overall productivity is explored.

Keywords: sabotage, incentives, tournament, code of ethics, social norm activation

JEL Classification: M41, M52