Watching or Not Watching? Supervision Technology and the Incentive Effects of Firing Threats

Abstract

A common rationale for the use of salary contracts is that they can produce substantial incentive effects when coupled with firing threats. However, enforcing firing threats may require close supervision of employees, thus possibly offsetting the very reasons salaries are commonly used, such as lowering monitoring costs and granting autonomy to workers. We design a series of experiments to study the effectiveness of firing threats when only limited information is available to supervisors.. We show that light and unobtrusive supervision can produce large incentive effects. Compared to salary contracts alone, firing threats based on observing organizational performance alone increase workers’ output by 70% whereas only observing how long an employee works doubles output. These findings show that salaries can produce large incentive effects even in the absence of intensive supervision. Finally, we show that salary contracts with firing threats perform at least as well as other popular incentive schemes (bonuses, individual and team incentives) that rely on a similar amount of information about workers.