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.
Keywords: incentives; outside-the-box thinking; productivity; targets.
I. INTRODUCTION
I n a rapidly changing and highly competitive business environment, many organizations look to
their employees to improve productivity. Employees can boost productivity through increased
efforts using conventional task approaches or by directing their efforts toward identifying and
using more efficient task approaches. Identifying production efficiencies often requires individuals
to think ‘‘outside-the-box,’’ which we define as trying to discover original and better ways to
accomplish a task (Shalley 1995). Indeed, many argue that achieving significant productivity
breakthroughs is critically dependent on the extent to which employees can effectively move
beyond traditional approaches to performing work activities in order to identify more efficient
approaches (Magretta 2002; Chen and Jones 2005).1 We examine the effects of productivity-target
difficulty and pay contingent on meeting and beating this target (hereafter, target-based pay) in an
environment where individual productivity can be increased through both efforts directed at a
conventional task approach and more efficient task approaches that can be identified through
outside-the-box thinking.
Minimal research has examined the influence of management control tools such as target
setting and target-based pay in these environments. More attention comes from the practitioner
literature and business press in the form of competing prescriptions. Some advocate the use of
challenging productivity targets that can only be achieved by discovering production efficiencies
(e.g., Kaplan and Norton 1996; Thompson et al. 1997; Chen and Jones 2005). Conversely, others
recommend using easily attainable targets that give individuals the flexibility or slack to search for
production efficiencies or improved task-related strategies (e.g., Wood et al. 1990). Moreover, these
articles provide different perspectives as to whether financial incentives tied to attaining targets
further motivate or inhibit productivity (Thompson et al. 1997; Chen and Jones 2005). Systematic
empirical research is needed to provide a better understanding of the basis for the conflicting views
that have emerged in the practitioner literature.
To contribute to a better understanding for why these conflicting views have emerged, we
develop and test theory suggesting that challenging targets and target-based pay can actually have
competing effects on two important underlying determinants of individual productivity relative to
easy targets and fixed pay. On the one hand, challenging targets and target-based pay may
negatively affect productivity by hindering the discovery of production efficiencies. Theory
suggests that performance-contingent pay can focus individuals’ efforts excessively on
conventional approaches to task performance rather than engaging in the relatively riskier activity
of searching for production efficiencies, particularly when performance targets are easy to attain
(Amabile 1996). While challenging targets may motivate effort to search for production
efficiencies, distraction theory from cognitive psychology suggests that individuals faced with
the pressure of attaining tough targets may not be successful, because the resulting stress reduces
working memory (Eysenck 1982; Beilock et al. 2004; Beilock and Carr 2005; Markman et al.
2006). Discovering production efficiencies often requires strategies that require intensive usage of
working memory such as monitoring the environment for potential efficiencies, generating and
testing hypotheses about them, and processing feedback about the tests’ success (Dienes and Berry
1997; Maddox et al. 2004; Shalley 1995; Ziori and Dienes 2008). Thus, by inducing anxiety that
consumes working memory, challenging targets can hinder individuals’ ability to perform these