The implementation of team incentives

Team production is one of the defining characteristics of a firm. In any company consisting of more than one person, teams of workers have to coordinate their efforts to some extent in order to achieve the company's goals. The company must thus align ince ntives so that each team member finds it optimal to work for the team's interest. In other words: each member must be rewarded, not so much for his or her own performance, but more importantly, for the team's performance. However, team incentives are susc eptibility to free-riding. An additional unit of output contributes only a small amount to each individual's compensation, especially in large teams. It is therefore tempting for each worker to free ride on the peers' work. Peer monitoring and social pres sure can, however, to some extent mitigate the free-rider problem. In this research project, we investigate the conditions for providing team incentives when workers possess indispensable human capital. In human capital-intensive firms the allocation of ownership rights is unclear. According to the standard view of ownership, it is the owner of an asset who has residual control right over the asset; that is the right to decide all usages of the asset in any way not inconsistent with a prior contract, cu stom or law. If the asset involved in the worker's production is his own mind and knowledge, then he also is to decide all non-contractual usages. This residual control right makes it costly for the firm to provide team incentives, because a team member w ho is not paid "a fair share" of his value added can threaten to walk away with ideas, clients, techniques etcetera. In this research project we investigate the following conjecture: Incomplete contracts and indispensable human capital leads to less wor ker-cooperation and more individual performance pay at the expense of team incentives.