In the business world, it can be hard to identify the right way to incentivize teams, especially when different team members bring different skill sets, motivations, and levels of expertise to the table.
A new study by Jonathan Glover, the George O. May Professor of Financial Accounting in the Faculty of Business, and Baruch College Professor Eunhee Kim, used abstract modeling to study what works best in a variety of situations.
Their research reveals that cross-functional teams are easier to manage, with team members who cooperate more readily and are less inclined to shirk their duties. That’s not to say functional teams—those composed of people with similar skill sets—are always less preferable. In situations where shared expertise is essential, functional teams can be worth the additional effort it takes to manage them. In these cases, though, incentives should be carefully designed to make it less attractive for workers to underperform.
Different Teams, Different Incentives
To arrive at these conclusions, Glover and Kim used analytical models that simulate real-world interactions. Setting out, their goal was to identify incentives that encourage collaboration and discourage collusion—in this context, a behavior defined by workers secretly shirking their responsibilities by taking turns doing similar tasks.
In the real world, collusion plays out as an unspoken agreement between coworkers. Say a pair of auditors are assigned to carefully review financial records. Their manager assumes they are both contributing equally, but in reality, one does the heavy lifting on a given audit while the other does a cursory review. On the next audit, they swap roles.
The researchers found that collusion is a real threat in functional teams, where similar skill sets make it easy for workers to take turns shirking. But incentives can change that dynamic. “You could just give everybody higher-powered incentives, or you could look for other ways to offer incentives that aren’t so draconian,” Glover says.
One solution he and Kim propose: asymmetric contracts, in which the more productive worker on a functional team receives higher-powered incentives than the less productive worker. Both workers receive incentives to cooperate, but the more productive worker receives higher-powered incentives, making collusion much less appealing. The gap in productivity is what makes asymmetric pay effective: The more the stronger contributor stands to lose from a shirking arrangement, the less attractive collusion becomes for both parties.
Meanwhile, cross-functional teams have a very different dynamic. Since team members’ actions complement one another, opportunities for collusion are limited and cooperation is much easier to achieve. As a result, cross-functional teams are generally easier to manage and incentivize.
What the Research Means for Managers
These findings are based on a theoretical model, and Glover cautioned that empirical research should be conducted to test them among real teams. Still, the paper draws several conclusions that managers may find useful:
Cross-functional teams are easier to incentivize
When members of a team have skill sets that complement rather than replicate one another, the team is easier to manage. Its inherent structure discourages collusion, so managers don’t have to focus so intently on designing incentives to deter it.
Collusion is a significant risk among long-tenured functional teams
In functional teams, two factors create a particular risk of collusion: substitutability, or how easily team members can cover for one another, and tenure, or how long the team has been together. The longer a highly substitutable team has been together, the more likely it is that members have developed an unspoken shirking arrangement—and the harder it is to detect.
Functional teams can be optimized with the right incentives
When a team of specialists whose shared expertise can produce significant productivity gains, managers can justify the complexity of managing and incentivizing them. Compensating the strongest contributors with higher performance-based pay both rewards performance and structurally disrupts any advantages to be gained from collusion. But the size of the productivity gap matters: the greater the difference between the strongest and weakest contributors, the more valuable asymmetric pay becomes as a tool for discouraging collusion.
These findings align with Glover’s experience in the classroom, he says, where he has noticed that teams of students with different skill sets are often more successful than more homogeneous teams. “Sometimes, diverse teams might struggle at first to communicate across their disciplines,” he says. “But in the end, my impression is that they do a better job of working together.”
