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1 Journal of Management , Vol. 26, No. 3, : 176 (Lazear and Rosen, 1981) (Main Lazear, et al., ) (Lambert, 2001 Indjeijikian, 1999) (Taylor and Trogdon, 2002) (Fisher (jump) (Lazear, 1999) et al., 2003) Lazear and Rosen (1981) (Prend (tournament theory) Lazear(1989) 51 (08) juling@npic.edu.tw Lazear 2006

2 334 Journal of Management June Eriksson, 1999) / Milgrom and Roberts(1995) Baker et al.(1988) Wageman and Baker(1997) (Holmstrom and Milgrom, 1994 Wagemen and Baker, 1997) Indjeijikian, 1999) 82% (Merchant et al. 2003) Indjeijikian(1999) Ittner and Larcker(2002) (Lazear, 1999) Lazear and Rosen(1981) Prendergast(1999) Bonner et al.(2000) (Lazear, 1999) (between-job) Lazear and Rosen (1981) (within-job) (interclass) (within-class) Lazear and Rosen(1981) L Lazear(1989) (Gibbs, Bognanno,

3 2009 Ling-Chu Lee 335 Daft,1987) et al.(2006) Van der Vegt and Janssen (2003) (equitable) bernethy et al.(2004) (1) (IMPCT-THEM) (2) (IMPCT-YOU) (3) Milgrom and Roberts(1988) (SUPPLY)(4) (INDEP) (5) (CHNGE) Wageman(1995) (task inputs) Milgrom and Roberts (1992) (pooled) (Baron and Kreps, 1999) (sequential) (reciprocal) (Chenhall, 2003) 1 Macintosh and Daft, 1987 (Macintosh and Daft, 1987) (pooled) (sequential) (reciprocal) (Thompson, 1967 Macintosh and Daft, 1987 Hirst and Wageman(1995) Yetton, 1999 Chenhall, 2003 Gerdin, 2005 Siegel and Hambrick, 2005 Van Vijfeijken et al., 2006) 1 Hirst and Yetton ( (Macintosh and

4 336 Journal of Management June WH WL W H > W L Siegel and Hambrick (2005) y i = ei + δ h j + ε i (1) i = B j = B e i i e 0 h j j i h 0 ε i Main et al.(1993) 13,347 ε 0 σ 2 ( ) δ 1 0 δ < 0 δ = Lazear(1989) Wageman and Baker(1997) (1) y i = e i + ε i 0 < δ < 1 e h B e h δ Henderson and Fredrickson(2001) 2 e h y y ε (Rob and Zemsky 2002) Main et al.(1993) P i Wageman and Baker(1997) Henderson and Fredrickson (2001) P = prob( y > yb ) = prob( e + δhb + ε > eb + δh + ε B ) (2) = prob( e + δh e δh > ω) = G( e E(ω)=0 ε B ε i.i.d E(ω 2 ) = 2σ 2 Lazear and Rosen C ( e, h) = 0.5e h 2 (1981) Lazear(1989) Drago and Garvey(1998) C' > 0 C"> 0 B B 1 B Max EU = E[ PW H + (1 P ) WL C( e, h) ] (3) s.t. e 0 h 0 e, h B i + δh B B e B B i δh ) ω=ε B -ε ω~g(ω) G(ω) ω h B 1 Lazear Bull et and Rosen (1981) 2 al.(1987) δ δ

5 2009 Ling-Chu Lee 337 y = e + δ hb + ε C( e, h) ( WH WL ) (5) (10) h * δ P = < 0 e* = ( WH WL ) (4) ( W e H W L ) 2σ π P h* = ( WH WL ) (5) h Nash-Cournot e * = eb * h * = hb * 2 ( e * + δh*) (1 δ ) = > 0 (11) e * +δhb* = e * +δh * ( W H W L ) 2σ π P P (6) = ( + δ )*( W H W L ) e h ( δ = 0 ) 1 (11)0 > B 2σ π ( W ) H WL P i i B B B Nash- Cournot e * = eb * Lazear and Rosen(1981) h * = hb * (2) (betweenjob) (within-job) P G( e + δhb eb δh ) = = g(0) > 0 (7) e e ( ) P G( e + δhb eb δh ) = = δg(0) 0 (8) h h E(ω)=0 E(ω 2 )=2σ 2 g(ω) σ g(0) = e = (9) 2 2π 2σ 2σ π (7) (8) (9) (6) e 1 2 * + δ hb* = (1 δ )( WH WL ) (10) 2σ π W H WL ( WH WL ) ( W W ) L H Main et al.(1993) ( W ) H W (4) Eriksson(1999) L e * 1 = > 0 ( W H W L ) 2σ π

6 338 Journal of Management June (11) ( WH WL ) δ 1 2 ( e * + δh*) (1 δ ) = 0 δ ( W H W L ) 2σ π 1999 ISO QSR 2σ π ( ) (δ ) (1 δ ) δ = > 0 2σ π 2σ π 2σ π Wageman(1995)

7 2009 Ling-Chu Lee 339 ( ) 1 ( ) ( ) ( 1. ) 2. 3 Eriksson(1999) 36 Banker et al.(2000) NI_per_employee ( ) Milgrom and Roberts(1992) Prendergast(1999) Lazear( ) (Indjeijikian, 1999)

8 340 Journal of Management June (BONUS_CV) COM_GP = - (REV_CV) (#EMPLOYEE) (EXPERIENCE_M) (EDUCTION_M) 4 BONUS_CV ( ) = / (Leonard, 1990) (RE) (YER) M1 M2 M3 M1 M2 M3 M1 (BONUS_CV) M2 M3 (SERVICE*COM_GP SERVICE*BONUS_CV) M2 (SERVICE*COM_GP) M3 (SERVICE*BONUS_CV) NI _ per _ employeeit = ω+ α1com _ GPit + α2bonus_ CVit (1) + δ1rev _ CVi + δ2# EMPLOYEEit (SERVICE * COM_GP) + δ3experience_ Mit + δ4eduction_ Mit 5 93 (2) (SERVICE + φa REait + ψ yyeryit +ε it (M1) a= 1 y= 91 * BONUS_CV) NI _ per _ employeeit = ω+ α1com _ GPit + α2service* COM _ GPit SERVICE=1 + δ1rev _ CVi + δ2# EMPLOYEEit SERVICE=0 + δ3experience_ Mit + δ4eduction_ Mit φa REait + ψ yyeryit +ε it (M2) a= 1 y= 91 (COM_GP) NI _ per _ employeeit = ω+ α3bonus_ CVit + α4service* BONUS_ CVit + δ1rev _ CVi + δ2 # EMPLOYEEit 4 + δ 3EXPERIENCE_ Mit + δ4eduction_ Mit φa REait + ψ yyeryit +ε it (M3) a= 1 y= 91 : i = i

9 2009 Ling-Chu Lee 341 t = NI_per_employee it = i t / REV_CV i = i / COM_GP it = i t ( ) BONUS_CV it = i t / SERVICE it = SERVICE=1 t SERVICE=0 2 2 #EMPLOYEE it = i t EXPERIENCE_M it = i t $546,439 EDUCTION_M it = i t 3.4% REa = RE1-RE5 YERy = YER91-YER93 ε it = SERVICE*BONUS_CV 17.4% (t p<0.0001) (COM_GP) (M1) COM_GP α1 (BONUS_CV) M1 BONUS_CV 3 (1) COM_GP (SERVICE=1) (SERVICE=0) Lazear and Rosen(1981) Ehrenberg and M2 Bognanno(1990) (SERVICE) (COM_GP) BONUS_CV M3

10 342 Journal of Management June 2 t a,b t REVENUE( ) 173, ,695 48, , *** (160,370) (115,229) (19,869) (78,286) NI( ) 9,686 11,173 8,493 2, *** (5,068) (5,742) (4,086) (4,893) NI_per_employee 546, , , , *** (228,188) (302,317) (104,186) (216,106) REV_CV *** (0.086) (0.079) (0.085) (0.082) COM_GP *** (0.286) (0.269) (0.265) (0.267) BONUS_CV *** (0.203) (0.169) (0.111) (0.140) SERVICE (0.497) #EMPLOYEE (6.0) (4.325) (7.033) (5.981) EXPERIENCE_M *** (2.1) (1.550) (1.710) (1.641) EDUCTION_M (0.4) (0.304) (0.468) (0.403) a. b c. *** ** 0.01 * (3) (SERVICE*BONUS_CV) (p<0.001) 3 (2) (3) (2) 5 (BONUS_CV) ( (3) p<0.01) (COM_GP) (BONUS_CV) (SERVICE=1) (SERVICE=0) 3 (2) (SERVICE*COM_GP) (p<0.001) 5 SERVICE*COM_GP SERVICE*BONUS_CV SERVICE*COM_GP SERVICE*BONUS_CV VIF Eriksson (1999) (fairness) (Hill et al., 2000, 190)

11 2009 Ling-Chu Lee 343 Lazear(1989) Eriksson (1999) Wageman and Baker(1997) Young(2001) 3 (1) (2) (3) VIF VIF VIF Intercept *** *** *** 0.00 REV_CV (-) ** *** *** 1.21 COM_GP H1 (+) 0.626*** *** 1.76 SERVICE*COM_GP H3 (-) *** 1.43 BONUS_CV H2 (+) 0.365* ** 1.58 SERVICE*BONUS_CV H4 (-) *** 1.47 #EMPLOYEE * EXPERIENCE_M 0.046* EDUCTION_M * R *** *** F value djusted R DW a. *** ** 0.01 * 0.05 b. REV_CV= / COM_GP= BONUS_CV= / SERVICE = SERVICE*COM_GP SERVICE*BONUS_CV #EMPLOYEE = EXPERIENCE_M = EDUCTION_M = c. d. Durbin-Watson Test Durbin-Watson d e. VIF(variance inflation factor) (SERVICE) (SERVICE*COM_GP ) VIF (SERVIC ) (SERVICE*BONUS_CV ) VIF Greene( ) VIF 5 (robustness) ( ) ( ) 4 (1) (1) (COM_HL) (2) ( (2) )

12 344 Journal of Management June (p<0.01) 4 (3) (6) ( ) (3) (5) SERVICE*COM_GP (p<0.05) SERVICE*COM_HL ( ) 4 (4) (6) ( ) (HIGHTURN=0) (HIGHTURN=1) (COM_GP COM_HM) ( ) (p<0.001) ( ) SERVICE*COM_GP SERVICE*COM_HL ( ) 4 (3) (5) (COM_GP COM_HL) (HIGHTURN=1) (COM_GP COM_HL) 4 (1) (2) (3) (4) (5) (6) Intercept *** *** *** *** *** *** REV_CV (-) * *** ** *** ** ** COM_GP H1 (+) *** SERVICE* COM_GP H3 (-) * *** COM_HL H1 (+) 0.243** 0.249*** *** SERVICE* COM_HL H3 (-) ** * #EMPLOYEE EXPERIENCE_M EDUCTION_M * R * * * *** *** F value djusted R DW a. *** ** 0.01 * 0.05 b. COM_HL= 3 c. (3) (5) HIGHTURN=1 ( ) HIGHTURN=0 ( ) d. e. VIF(variance inflation factor)vif 5

13 2009 Ling-Chu Lee 345 (ResBONUS_CV) 0.378(p=0.018) 5 (2) (ResBONUS_CV) (SERVICE) (ResBONUS_CV) (ResBONUS_CV*SERVICE) (1) (p<0.001) 5 (1) (2) =309 =599 VIF VIF Intercept *** *** 0.00 REV_CV ** *** 1.27 COM_GP H1 (+) 0.628*** 1.75 ResBONUS_CV H2 (+) 0.378* SERVICE*ResBONUS_CV H4 (-) *** 1.74 #EMPLOYEE * EXPERIENCE_M 0.043* EDUCTION_M R *** F value djusted R a. *** ** 0.01 * 0.05 b. ResBONUS_CV= SERVICE*ResBONUS_CV 3 c. d. Durbin-Watson Test Durbin-Watson d Prendergast(1999) (Lazear, 1991 Lazear, 1999 Wier et al., 2002) Kunz and Pfaff (2002)

14 346 Journal of Management June (noncontingent) ( ) Prendergast (2002) ( ) ( ) Lazear and Rosen (1981) Lazear(1989) (Milgrom and bernethy, M.., J. Bouwens and L.Van Lent, Roberts, 1995 Young, 2001) Determinants of Control System Design in Divisionalized Firms, The ccounting Review, 79(3), Bachrach, D. G., B. C. Powell and E. Bendoly, Organizational Citzenship Behavior and Performance Evaluations: Exploring the Impact of Task Interdependence, Journal of pplied Psychology, 91(1), (Daft, 1997) ( Baker, G. P., M. C. Jensen and K. J. Murphy, ) ( Compensation and Incentives: Practice vs. Theory, ) The Journal of Finance, XLII(3), Banker, R. D., G. Potter and D. Srinivasan, n Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures, The ccounting Review, 25(1), Banker, R. D., S. Lee, G. Potter and D. Srinivasan, n Empirical nalysis of Continuing Improvements Following the Implementation of a Performance-based Compensation Plan, Journal ( Banker et al., 2001 Lazear, 2000) of ccounting and Economics, 30, Baron, J. N. and D. M. Kreps, Strategic Human 176 Resource, Printed in the United States of merica: John Wiley and Sons, Inc. Lazear (1986) Bognanno, M. L., Corporate Tournaments, Journal

15 2009 Ling-Chu Lee 347 of Labor Economics, 19(2), Bonner, S. E., R. Hastie, G. B. Sprinkle and S.M.Young, Review of the Effects of Financial Incentives on Performance in Laboratory Tasks: Implications for Management ccounting, Journal of Management ccounting Research, 12, Bull, C.,. Schotter and K. Weigelt, Tournaments and Piece Rates: n Experimental Study, Journal of Political Economy, 95(1), Chenhall, R. H., Management Control Systems Design within its Organizational Context: Findings from Contingency-Based Research and Directions for the Future, ccounting Organizations and Society, 28, Daft, R. L., Organization Theory and Design, 6th ed, South-Western College Publishing. Drago, R. and G.T. Garvey., Incentives for Helping on the Job: Theory and Evidence, Journal of Labor Economics, 16(January), Drake,. R., S. F. Haka and S. P. Ravenscroft, Cost System and Incentive Structure Effects on Innovation, Efficiency and Profitability in Teams, The ccounting Review, 74(3), Ehrenberg, R.G. and M. L. Bognanno, Do Tournaments Have Incentive Effects?, Journal of Political Economy, 98(6), Eriksson, T., Executive Compensation and Tournament Theory: Empirical Test on Danish Data, Journal of Labor Economics, 17(2), Fisher, J. G., L.. Maines, S.. Peffer. and G. B. Sprinkle., n Experimental Investigation of Objective and Subjective Performance Evaluation, 2003 merican ccounting ssociation nnual Meeting. Gerdin, J., The Impact of Departmental Interdependences and Management ccounting System use on Subunit Performance, European ccounting Review, 14(2), Gibbs, M., Incentive Compensation in a Corporate Hierarchy, Journal of ccounting and Economics, 19, Greene, William H., Econometric nalysis, Prentice Hall Internation Editions. Henderson,. D. and J. W. Fredrickson, Top Management Team Coordination Needs and the CEO Pay Gap: Competitive Test of Economic and Behavioral View, cademy of Management Journal, 44(1), Hill, R. C., W. E. Griffithsl and G. G. Judge, Undergraduate Econometrics, John Wiley & Son, Inc. Hirst, M. K. and P. W. Yetton, The Effects of Budget Goals and Task Interdependence on the Level of and Variance in Performance: Research Note, ccounting, Organizations and Society, 24, Holmstrom, B and P. Milgrom, The Firm as an Incentive System, merican Economic Review, 84(4), Indjejikian, R. J., Performance Evaluation and Compensation Research: n gency Perspective, ccounting Horizons, 13(2), Ittner, C. D. and D. F. Larcker, Determinants of Performance Measure Choices in Worker Incentive Plans, Journal of Labor Economics, 20(2), Kunz,. H. and D. Pfaff, gency Theory, Performance Evaluation, and the Hypothetical Construct of Intrinsic Motivation, ccounting, Organizations and Society, 27, Lambert, R.., Contracting Theory and ccounting, Journal of ccounting and Economics, 32, Lazear, E. P. and S. Rosen, Rank-order Tournaments as Optimum Labor Contracts, Journal of Political Economy, 89(5), Lazear, E. P., Salaries and Piece Rates, The Journal of Business, 59(3), Lazear, E. P., Pay Equality and Industrial Politics, Journal of Political Economy, 97(June), Lazear, E. P., Labor Economics and the Psychology of Organizations, Journal of Economics Perspectives, 5(Spring), Lazear, E. P., Personnel Economics: Past Lessons

16 348 Journal of Management June and Future Directions Presidential ddress to the Society of Labor Economists, Journal of Labor Economics, 17(2), Lazear, E. P., Performance Pay and Productivity, The merican Economic Review, 90(5), Leonard, J. S., Executive Pay and Firm Performance, Industrial and Labor Relations Review, 43(Special Issue), Macintosh, N. B. and R. L. Daft, Management Control Systems and Departmental Interdependencies: n Empirical Study, ccounting Organizations and Society, 12(1), Main, B. G. M., C.. O Reilly and J. Wade, Top Executive Pay: Tournament or Teamwork?, Journal of Labor Economics, 11(4), Merchant, K.., W.. Van der Stede and L. Zheng, Disciplinary Constraints on the dvancement of Knowledge The Case of Organizational Incentive Systems, ccounting, Organizations and Society, 28, Milgrom, P. and J. Roberts, n Economic pproach to Influence ctivities in Organizations, merican Journal of Sociology, 94, Milgrom, P. and J. Roberts, Economics, Organization and Management, Prentice Hall International Editions. Milgrom, P. and J. Roberts, Complementarities and Fit Strategy, Structure, and Organizational Change in Manufacturing, Journal of ccounting and Economics, 19(March/May), Prendergast, C., The Provision of Incentives in Firms, Journal of Economic Literature, 37(1), Prendergast, C., The Tenuous Trade-off between Risk and Incentive, Journal of Political Economy, 110(October), Rob, R. and P. Zemsky, Social Capital, Corporate Culture, and Incentive Intensity, RND Journal of Economics, 33(2), Siegel, P.. and D. C. Hambrick, Pay Disparities within Top Management Groups: Evidence of Harmful Effects on Performance of High- Technology Firms, Organization Science, 16(3), Taylor, B.. and J. G. Trogdon, Losing to Win: Tournament Incentives in the National Basketball ssociation, Journal of Labor Economics, 20(1), Thompson, J D., Organizations in ction, New York: McGraw-Hill. Van der Vegt, G. S. and O. Janssen, Joint Impact of Interdependence and Group Diversity on Innovation, Journal of Management, 29, Van Vijfeijken, H.,. Dleingeld, H. Van Tuijl, J.. lgera and H. Thierry, Interdependence and Fit in Team Performance Management, Personnel Review, 35(1), Wageman, R., Interdependence and Group Effectiveness, dministrative Science Quarterly, 40(1), Wageman, R. and G. Baker, Incentives and Cooperation: the Joint Effects of Task and Reward Interdependence on Group Performance, Journal of Organizational Behavior, 18, Wier, B., D. N. Stone and J. E. Hunton, Promotion and Performance Evaluation of Managerial ccountings, Journal of Management ccounting Research, 14, Young, C. S., Effects of dopting Nonfinancial Performance Measures and Job Redesign on Employee Performance: Field Empirical Investigation, Taiwan ccounting Review, 2(1), 1-32.

17 2009 Ling-Chu Lee 349 Contemporary ccounting Research Ling-Chu Lee is ssociate Professor of Department of Business dministration, National Pingtung Institute of Commerce and teaches Financial ccounting, Cost ccounting and Management ccounting. She completed her Ph. D. degree at Department of ccounting, National Chengchi University, Taiwan. Her research areas include performance evaluation and compensation. Her research paper has been published at Contemporary ccounting Research.

18 350 Journal of Management June The Effects of Tournament-based Incentives under Different Levels of Task Interdependence on Organization Performance: Field Empirical Evidence Paper No Ling-Chu Lee National Pingtung Institute of Commerce Received October 23, 2006 First Revised pril 10, 2007 ccepted pril 25, 2007 Founded upon tournament theory, this article examines the impact of tournament-based incentives on organization performance under different levels of task interdependence. Tournament theory considers a group of employees competing for a fixed set of prizes defined by the pay dispersion between the winner and the loser. The employees exert efforts to increase the likelihood of winning a better prize and their efforts are increasing in the size of the prize. Task interdependence can vary from the lowest form of interdependence (such as an independent task) to the highest form of interdependence (such as a reciprocal task). Tournament-based compensation plans work well if employees perform tasks independently. However, a problem with tournaments is that since employees are compensated based on how well they do relative to their competitors, they are unlikely to help their competitors even though their tasks are highly interdependent, or the uncooperative behaviors among employees may even hurt organization performance. Balancing the tension between the cooperation of task interdependence and the competition of tournament-based compensation is a challenge for the design of tasks and reward system. lthough some empirical evidence reports that tournament-based incentives work on the CEO or the top management team, few studies focus on non-management employees. Moreover, prior studies ignore the impacts of the fit between incentive schemes and task interdependence on performance. In this paper I use an analytical model based on tournament theory to explore two questions: Does the wider pay dispersion between the winner and the loser in a tournament increase organization performance? re there differential effects on performance from tournament-based incentives under different levels of interdependent tasks? The predictions of the model suggest that wider pay dispersion between the winner and the loser in a tournament enhances organization performance under an independent task. However, two contradictory effects of greater pay dispersion make the performance change become blurred if employees work interdependently. On the one hand, greater pay dispersion will motivate employees to work harder in order to win higher pay. On the other hand, greater pay dispersion will prompt employees to not help their competitive colleagues and eventually hurt the organization performance. Therefore, the positive impact of greater pay dispersion under a high level of task interdependence on performance is less than that under an independent task. I further provide empirical analyses of tournament-based compensation, using personnel data of middle-level managers and employees and the performance data of 176 branches from a major car corporation. The findings support that wider pay dispersion among employees under independent tasks is positively related to performance. I find that the effects of wider pay dispersion between the winner and the loser on performance under interdependent tasks are less than that under independent tasks. Thus, the empirical results demonstrate that the effectiveness of tournament-based incentives is influenced by their interactive effect with the level of task interdependence. The results imply that a company can improve organization performance when compensation schemes take into account the fit between different levels of task interdependence and tournament-based incentives.

19 2009 Ling-Chu Lee 351 Key Words: Task Interdependence, Incentives, Tournament Theory, Performance.. Ling-Chu Lee is ssociate Professor in the Department of Business dministration, National Pingtung Institute of Commerce, 51, Min Sheng E. Road, Pingtung, Taiwan, Tel.: ext. 6149, The author would like to thank two anonymous reviewers for their helpful comments. The author also gratefully appreciates the comments made by nne Wu, Chin Shyh Ou, Shu Yeh, Shih-Tsun Chiu, Chia-Ling Lee, Jia Wen Liang, and Ching-His Yang and the discussions with Chung-Huey Huang and seminar participants at the 2006 ccounting Theory and Practice Conference in Soochow University. The author is especially grateful to the research company for providing the excellent interview opportunities and research data.

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