Productivity-Target Difficulty, Target-Based
Pay, and Outside-the-Box Thinking
ABSTRACT: In an environment where individual productivity can be increased through
efforts directed at a conventional task approach and more efficient task approaches that
can be identified by thinking outside-the-box, we examine the effects of productivitytarget
difficulty and pay contingent on meeting and beating this target (i.e., target-based
pay). We argue that while challenging targets and target-based pay can hinder the
discovery of production efficiencies, they can motivate high productive effort whereby
individuals work harder and more productively using either the conventional task
approach or more efficient task approaches when discovered. Results of a laboratory
experiment support our predictions. Individuals assigned an easy productivity target and
paid a fixed wage identify a greater number of production efficiencies than those with
either challenging targets or target-based pay. However, individuals with challenging
targets and/or target-based pay have higher productivity per production efficiency
discovered, suggesting these control tools better motivate productive effort. Collectively,
our results suggest that the ultimate effectiveness of these control tools will likely hinge
on the importance of promoting the discovery of production efficiencies relative to
motivating productive effort. In doing so, our results provide a better understanding of
conflicting prescriptions from the practitioner literature and business press
V. CONCLUSIONS
In an environment where individual productivity can be increased through efforts directed at
either a conventional task approach or more efficient task approaches that can be identified through
outside-the-box thinking, we use an experiment to examine the effects of productivity-target
difficulty and target-based pay. Our results suggest that challenging targets and target-based pay
have competing effects on two important productivity determinants. On the one hand, both
challenging targets and target-based pay hurt productivity by hindering the discovery of production
efficiencies. Participants assigned to an easy target and paid a fixed wage identified the most
production efficiencies. On the other hand, challenging targets and target-based pay both enhance
productive effort by motivating participants to be more productive per production efficiency
identified.
These results suggest that in settings where conventional approaches and more efficient
approaches that can be identified through outside-the-box thinking exist, the choice of reward
system depends on the value of promoting the discovery of production efficiencies relative to
motivating productive effort. Holding expected pay constant, our results indicate that if the
discovery of production efficiencies is a key objective for management, then the use of easy targets
with fixed pay may yield better outcomes.31 More generally, by illustrating the differing effects of
target difficulty and target-based pay on these two fundamental determinants of productivity, our
results provide a better understanding of why there are conflicting prescriptions in the practitioner
literature and the business press. That is, because our results suggest that different combinations of
target difficulty and pay schemes can lead to similar levels of productivity, it is not surprising that
there is not an unequivocal view in practice regarding the most effective approach to reward system
design.
Our results also have interesting implications for the burgeoning management accounting
literature examining the impact of target-based contract design on risk-taking. While prior research
demonstrates that these contracts can be designed to promote greater risk-taking, these studies
typically operationalize risk-taking as a choice among distributions with varying means and
variances, and evaluate whether individuals choose the option that provides the greatest expected
value to an assumed employer (e.g., Ruchala 1999; Sprinkle et al. 2008). While representing
successful risk-taking in this fashion may be descriptive of some environments, our results suggest
that this representation would be less descriptive of a setting where the outcome of risky decisions
is not a simple function of individuals’ willingness to take risks. In particular, challenging
productivity targets encouraged our participants to engage in the risky endeavor of searching for
production efficiencies, but the pressure induced by these targets hindered their success.
Limitations of our study provide opportunities for future research. First, we examine an
environment in which participants identify production efficiencies under short-term time pressure.
While time pressure is descriptive of many environments, other settings provide opportunities to
ruminate about potential efficiencies over a longer period of time. Future research can examine
whether and when our results extend beyond environments with short-term time pressure. Second,
not all of our participants may have perceived pay tied to target achievement as directly rewarding
them for discovering production efficiencies. Instead, some may have interpreted the assigned
targets as the productivity level they could attain simply by counting letters. This factor may have
led some participants who were assigned the challenging target to underestimate the importance of
looking for shortcuts. Thus, the effects of more closely linking compensation to discovering
production efficiencies would be useful to explore in future research. Third, since we informed
participants that production efficiencies existed, the key uncertainty faced by our participants was
whether they would be able to find the shortcuts, as opposed to whether they existed or their
production-enhancing benefits. While we believe that employees in the natural environment would
be sensitive to the possibility that more efficient ways exist to carry out their tasks, future research
can examine whether our findings generalize to an environment with greater uncertainty
surrounding the existence of production efficiencies.