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THE ACCOUNTING REVIEW

Vol. 88, No. 4
2013
pp. 1433–1457

American Accounting Association
DOI: 10.2308/accr-50436

Productivity-Target Difficulty, Target-Based
Pay, and Outside-the-Box Thinking
R. Alan Webb
University of Waterloo
Michael G. Williamson
The University of Texas at Austin
Yue (May) Zhang
Northeastern University
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.

We thank Jacob Birnberg, Jasmijn Bol, Larry Brown, Clara Chen, Harry Evans, Lynn Hannan, Steve Kachelmeier, Khim
Kelly, Justin Leiby, Theresa Libby, Jeremy Lill, Tim Mitchell, Andrew Newman, Derek Oler, Adam Presslee, Steve
Smith, Hun-Tong Tan, two anonymous reviewers, participants at the 2011 Management Accounting Section Research
Conference and the 2011 AAA Annual Meeting, and workshop participants at Georgia State University, Nanyang
Technological University, Texas Tech University, the University of Illinois, The University of Texas at Austin, and
University of Waterloo for providing helpful comments. We gratefully acknowledge funding from a McCombs School of
Business Research Excellence Grant and the Social Sciences and Humanities Research Council of Canada.
Editor’s note: Accepted by John Harry Evans III.

Submitted: May 2011
Accepted: February 2013
Published Online: February 2013

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Webb, Williamson, and Zhang

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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
1

An illustration of outside-the-box thinking leading to production efficiencies is the advent of manufacturing
cells, which involves ‘‘taking the production tools to the product’’ rather than the conventional ‘‘taking the
product to the production tools’’ (Chaneski 2005; Sofianopoulou 2006). Such production efficiencies minimize
the often costly and inefficient movement of raw materials and work-in-process. While we provide a
manufacturing example and use the term ‘‘production efficiencies,’’ our research question is relevant to any
setting in which the identification of task improvements is possible through outside-the-box thinking.

The Accounting Review
July 2013

or (2) a fixed wage irrespective of performance. However. Holding expected pay constant. First. suggesting that these control tools motivate greater productive effort. Locke and Latham 1990). We test our predictions using a laboratory experiment where participants receive boxes of letters (18 columns 3 7 rows) and. then the use of easy targets combined with fixed pay 2 Because theory and the related evidence are less clear about the combined effects of target difficulty and targetbased pay on productive effort (Bonner and Sprinkle 2002). Participants can search for the correct answer either by the conventional way of simply counting the number of times the search letter appears in the box as they were initially trained or by identifying embedded more efficient ways of determining the appropriate counts. Moreover. if identified. we do not posit an interaction prediction. we can make no directional prediction for overall productivity. As such. Second. we manipulate contract type by paying participants either (1) compensation contingent on meeting and beating their assigned productivity target. they suggest that in settings where employees boost productivity through both the discovery of production efficiencies and productive effort. 2000). On the other hand. in these environments. These production efficiencies include patterns within either the box itself or answers across boxes that. and (2) we have no theoretical basis for predicting which performance dimension will have the strongest impact on productivity because the relative impact is likely context specific. First. individuals with challenging targets and/or target-based pay exhibit higher productivity per production efficiency discovered. we manipulate target difficulty by assigning either (1) an easy productivity target that can be achieved through the conventional way of performing the task. We hold expected pay across these four conditions constant. The Accounting Review July 2013 . Finally. if the objective is to encourage employees to think outside-the-box. Rather. our results suggest that the ultimate effectiveness of these control tools hinges on the importance of promoting the discovery of production efficiencies relative to motivating productive effort. can significantly increase productivity. for each box. because (1) theory suggests that these control tools can have competing effects on the identification of production efficiencies and productive effort. no simple prescription exists regarding performance target difficulty and whether to base pay on meeting and beating these targets. or (2) a challenging productivity target that can only be achieved by identifying new production efficiencies. challenging targets and target-based pay can each independently enhance productivity by motivating productive effort as individuals work harder and more productively using either conventional task approaches or more efficient approaches once discovered. we expect that challenging targets and target-based pay will each motivate individuals to work harder and more productively using either conventional task approaches or more efficient task approaches when discovered relative to those with easy targets and fixed pay. we find that the competing effects of our control tools on the discovery of production efficiencies and productive effort result in similar levels of overall productivity across differing combinations of target difficulty and pay schemes. 2004). effort-sensitive task approaches. We manipulate two factors between-subjects at two levels each.2 Ultimately. prior research also shows that target-based pay can lead to higher effort and productivity than fixed pay (Bonner et al. Productivity is defined as the quantity of correct responses given. Target-Based Pay. We find that participants assigned both an easy productivity target and paid a fixed wage discovered a greater number of production efficiencies than those with either challenging targets or target-based pay.Productivity-Target Difficulty. record the number of times a ‘‘search letter’’ appears. Our results have important implications. prior research demonstrates that challenging targets can induce higher effort and productivity than easier targets (Bonner and Sprinkle 2002. In environments with known. and Outside-the-Box Thinking 1435 activities and ultimately inhibit their ability to discover production efficiencies (Beilock et al.

1995). similar to our setting. The next section provides background and develops the hypotheses. testing these hypotheses. That is.g. 90) and can result in productivity-enhancing approaches to performing a task (Shalley 1991. by illustrating the competing effects of target difficulty and target-based pay on these two fundamental determinants of performance. Importantly. However. which involves embracing ‘‘new ways of conceptualizing old problems’’ (Magretta 2002. in the natural environment. many organizations reward outside-the-box thinking based on whether the innovations can be translated into measurable outcomes (Zingheim and Schuster 2007). and processing feedback about the tests’ results that may or may not lead to the successful discovery of a more efficient task approach (Shalley 1995). an ongoing challenge is motivating employees to move away from their relatively safe. Section IV presents the results. AND HYPOTHESES Background and Research Setting A common key to the success of today’s organizations is the ability and willingness of their employees to engage in outside-the-box thinking.3 Our research highlights the importance of breaking productivity down into these important determinants when examining the efficacy of incentive mechanisms such as productivity targets and target-based pay. and Section III describes the method used to test these hypotheses. our results provide a better understanding of why competing prescriptions have arisen in the practitioner literature and business press. Matthews 2004). conventional task approaches and engage in a riskier search for new. it is unclear whether such incentive mechanisms facilitate the discovery of new production efficiencies or simply motivate individuals to reveal already obvious production efficiencies that they otherwise have an incentive to withhold. a conventional approach to task performance is based on prior experience or instruction (e. in the natural environment. which. BACKGROUND. and Zhang 1436 may be more effective. Alternatively. 1995). prior research explores the efficacy of employee suggestion programs that directly reward individuals or groups for providing innovative ideas (Welbourne et al. while sensitive to productive effort. When allocating these scarce resources. imposes an effective upper limit on performance potential. THEORY. perhaps because management could use the information to set higher targets or make reductions to the labor force (Sprinkle and Williamson 2004). rewarding ideas can be challenging because the process involves a high degree of subjectivity. organizations seeking to motivate more productive effort may be better served by using challenging targets or target-based pay. it is difficult to isolate whether these gains are effort-based or caused by more efficient production techniques. and Section V provides a summary discussion of the results and conclusions. research often describes outside-the-box thinking as occurring in settings in which well-defined constraints exist with respect to the availability of resources or the amount of time available to identify solutions (Magretta 2002. generating hypotheses about potential efficiencies. Thus. By tying rewards to measurable outcomes. II. For the purposes of our study. Conversely. better ways to perform the task. and emphasizing the discovery of ideas rather than their development and implementation may not necessarily lead to productivity gains (Jain et al. 2010). Moreover. We also contribute to field-based research that explores ways to motivate and facilitate the discovery of production efficiencies.. For example. prior research suggests that incentive schemes such as gain-sharing plans can lead to more efficient production such as using less labor hours per unit produced (Welbourne et al. Williamson. The Accounting Review July 2013 . outside-the-box thinking often involves a number of cognitive processes that include monitoring the environment for potential production efficiencies. 3 Moreover.Webb. 1995). However. ‘‘the way we’ve always done things’’).

the utility that many individuals derive from target attainment would likely motivate them to expend effort searching for production efficiencies as the only means of attaining challenging productivity targets (Hollenbeck and Klein 1987.. Identifying Production Efficiencies Productivity-Target Difficulty and the Identification of Production Efficiencies When determining the level of productivity-target difficulty most likely to encourage discoveries of production efficiencies. Second. (3) identifying and using production efficiencies will result in greater productivity gains than the conventional approach. task complexity.4 In sum. Huber 1985. once discovered. 1997. simply discovering the efficiencies will not necessarily lead to higher productivity. theory and the practitioner literature offer two potential strategies. Distraction theory in cognitive psychology proposes that stress induced by factors such as challenging targets or target-based pay can cause people to ‘‘choke under pressure. However. if discovered and successfully implemented. we create an environment where. Target-Based Pay. Klein 1991. in our setting. Locke and Latham 1990. Earley et al. Bonner and Sprinkle 2002).. psychology-based research suggests that the pressure experienced while attempting to attain challenging targets can have dysfunctional consequences on the effectiveness of outside-the-box thinking (Eysenck 1982. both identifying production efficiencies and working harder using either conventional or more efficient production approaches (i.5 Here. assuming effort is held constant. subject to resource constraints. Matthews 2004). Because this literature suggests that either challenging or easy targets may be more likely to encourage individuals to spend their scarce time thinking outside-the-box. and (4) constraints exist affecting the extent to which the identification of production efficiencies can successfully occur (e. the effectiveness of these efforts may differ across these target types. 1989). to enhance the study’s external validity. 1997). allow for greater productivity.6 While both challenging and easy targets could potentially encourage outside-the-box thinking.Productivity-Target Difficulty. Moreover.e. for the productivity gains to be realized. Within this environment. 2002. That is. The Accounting Review July 2013 . individuals must still apply effort in using them. set productivity targets that can be easily achieved using conventional approaches such that individuals have the flexibility or slack to engage in the risky search for production efficiencies (Sprinkle et al. Bailey and Bristow 2004. 2008). we discuss how varying productivity-target difficulty and the presence and absence of target-based pay can combine to influence the identification of production efficiencies and productive effort.’’ 4 5 6 As an example. First. the QWERTY keyboards now available on most cell phones can be thought of as a production efficiency that permits faster and more accurate typing of text messages compared to using alphanumeric keypads. In all. Lee et al. a challenging target is similar to traditional definitions of a stretch target that can only be attained by identifying production efficiencies (Thompson et al. (2) exerting more effort using conventional techniques will lead to productivity gains. users of phones with QWERTY keyboards still must exert effort in using the more efficient technology when typing their messages. we focus our theoretical development on targets of these two types. Importantly. and Outside-the-Box Thinking 1437 production efficiencies. 1997. we develop our hypotheses in the context of a setting that our literature review suggests should possess the following features: (1) individuals can choose the extent to which they will perform a task using a conventional approach versus attempting to identify production efficiencies. limited feedback) (Thompson et al. theory suggests that an intermediate productivity target that could be achieved by working very hard using conventional approaches would encourage individuals to direct disproportionate efforts to the less risky conventional task approach in order to ensure a high probability of target attainment (Sprinkle et al. 2008). production efficiencies are also sensitive to effort. Specifically.g. Importantly. set challenging productivity targets that can only be achieved through the identification of production efficiencies. productive effort) can increase productivity. limited time.

Working-memory-intensive tasks involve cognitive operations that impose inter-related demands on information storage and processing (Beilock et al. Specifically. Dienes and Berry 1997). challenging targets could hinder individuals’ ability to identify production efficiencies (Beilock et al. Williamson.7 If so.. leading to the discovery of more production efficiencies. do not place high demands on working memory and are less prone to the negative effects of pressure (Dienes and Berry 1997. Our target-based pay contract pays individuals for both meeting and exceeding their assigned target (e. Thus. We believe this provides a stronger test of our theory since all participants. 1987). For example. they choose simpler versions of a game or puzzle that increase their expectancy of success. can benefit more from identifying production efficiencies than from using the conventional approach to task performance. Amabile (1996) offers that performance-based pay in general motivates people to focus excessively on doing what they need to do to earn rewards. 2006). which in turn. To the extent that the pressure induced by challenging targets impairs these processes. where individuals learn complex systems such as grammar rules without necessarily intending to do so. Humphreys and Revelle 1984. individuals who are assigned an easy target and paid to meet or exceed it may disproportionately use the less risky conventional approach. As discussed in the next section. Shalley 1995. and Zhang particularly on tasks that place high demands on working memory (Beilock et al. then the lower pressure resulting from easy targets relative to challenging targets may actually help facilitate more effective outside-the-box thinking. For example. Fisher et al. As a result. (1982) report that participants receiving target-based pay focus narrowly on the attainment of the target in order to receive their reward. even those with easy targets. 2006). individuals often must utilize strategies that require significant working memory resources as they consciously use information in the task environment to develop hypotheses about specific efficiencies. Shapira (1976) and Pittman et al. it biases against our ability to find a detrimental effect of challenging targets on the discovery of production efficiencies. we created an experimental setting designed to encourage participants to engage in these processes. Distraction theory posits that pressure or anxiety reduces the attentional resources available in working memory. 2006. because prior research argues that more working-memory-intensive processes are often antecedents to successful attempts at outside-the-box thinking including monitoring.g. prior research suggests that the anxiety of trying to reach a challenging target impairs many of the same processes that can facilitate the discovery of production efficiencies. Beilock and Carr 2005. employees could have a stroke of brilliance in developing an outside-the-box solution but not necessarily be able to articulate the steps that led to this solution.. 2003). 2004. 598). they would spend less time attempting to identify production efficiencies than if paid a fixed wage. Markman et al. The Accounting Review July 2013 .8 That is.g. as a result. Markman et al. Moreover. and receive feedback regarding the accuracy of their reasoning (DeShon and Alexander 1996. hypothesizing about. That said. hinders cognitive performance (Markman et al. 2006). pay tied to attaining challenging targets would be unlikely to reduce the time 7 8 Research shows that tasks involving implicit learning processes. Similarly. 944). The extent to which target-based pay affects effort directed to the conventional task approach would likely depend on the difficulty of the assigned productivity target. an easy productivity target is attainable by using the conventional approach to the task. while those receiving fixed pay prefer more challenging versions. to the extent individuals utilize implicit learning processes in our setting. Since identifying production efficiencies provides the only means of reaching challenging targets in our setting.1438 Webb. Ziori and Dienes 2008. Target-Based Pay and the Identification of Production Efficiencies Target-based pay relative to fixed pay may also lead to dysfunctional effects with respect to the identification of production efficiencies (e. 2004. In particular. target-based pay may focus attention on conventional approaches at the expense of outsidethe-box thinking. test them. In our setting. Stadler 1997. 2004. Wood et al. to discover production efficiencies. which they likely find more intrinsically interesting. they direct their efforts toward less risky and more predictable task approaches. Maddox et al. Markman et al. and testing potential production efficiencies. 2004.

there is no clear theoretical basis for predicting whether the dysfunctional effects of combining an easy target with target-based pay will be more or less severe than those that arise by using challenging targets.10 As such. The Accounting Review July 2013 . Hypothesis 1 The preceding discussion of the dysfunctional consequences of challenging targets and targetbased pay in an environment where risky. Our notion of productive effort represents a standardized measure of productive output. hindering the identification of production efficiencies. the effectiveness of linking pay to meeting and beating challenging targets on promoting outside-the-box thinking may be limited. productive effort is distinct from the effort directed toward identifying production efficiencies.9 Second. such that target-based pay will lead to fewer discoveries of production efficiencies when targets are easy. Productivity-Target Difficulty. those paid a fixed wage will discover more production efficiencies than those with target-based pay. it may also be the case that challenging targets create a ceiling effect with respect to dysfunctional cognitive consequences predicted by distraction theory. However. working-memory-intensive processes facilitate the discovery of production efficiencies results in the following expectations. target-based pay may have limited room to further affect the discovery of production efficiencies. Target-Based Pay. That is. pay tied to target achievement. Target-Based Pay. and Outside-the-Box Thinking 1439 and effort spent searching for them. This assumption is consistent with prior management accounting research (Bonner and Sprinkle 2002). we make no formal predictions comparing these particular combinations of target difficulty and pay. we use two hypotheses to describe the form of the expected interaction: H1a: Individuals assigned easy targets and fixed wages will discover more production efficiencies than those assigned challenging targets. our first hypothesis predicts an ordinal interaction between target difficulty and target-based pay.Productivity-Target Difficulty. For the purpose of our study. individuals assigned an easy performance target and paid fixed wages will discover more production efficiencies than those pressured with a challenging target regardless of how they are paid. For clarity.. greater productive effort leads to higher productivity. As noted earlier. While total productivity (e. could put further pressure on or induce anxiety in individuals. the number of text messages) will naturally differ across the two task approaches (keyboard types). As a result. leaving little room to observe any incremental negative effects of target-based pay. Our earlier example of QWERTY versus alphanumeric keyboards on cell phones applies here. the effect of target-based pay will depend on productivity-target difficulty. our predictions assume that even when using more efficient task approaches. these control tools may also have a competing productivity-enhancing effect by motivating productive efforts. First. When targets are challenging. However. H1b: For individuals assigned easy targets. Productive effort is intended to capture the effort exerted by individuals in using either the QWERTY keyboard or the alphanumeric keyboard. it permits a meaningful comparison of the effort-inducing effects of targets and target-based pay across heterogeneous groups of 9 10 This prediction assumes that individuals will find the task of identifying production efficiencies intrinsically interesting/ motivating. controlling for the approach used to perform a task. similar to challenging targets. individuals will exert effort to discover efficiencies. even absent extrinsic rewards for doing so. productive effort refers to the intensity of effort deployed using either the conventional task approaches or more efficient approaches once discovered (Bonner and Sprinkle 2002). and Productive Efforts While challenging targets and target-based pay may harm productivity by hindering the discovery of production efficiencies.g. Finally. productive output captures the effort individuals exert in using their chosen approach. Accordingly. Thus. Instead.

In settings where a single straightforward conventional approach exists for performing a task. prior research demonstrates that individuals continue to maintain effort even in situations where it is unlikely that the target will be attained (Bonner and Sprinkle 2002). theory and empirical evidence suggests that both challenging targets and target-based pay can lead to higher productivity than easy targets and fixed wages (Locke and Latham 1990. Bonner and Sprinkle 2002. Lee et al. While prior research illustrates that challenging targets and target-based pay can independently boost productivity in these environments. stated in the alternative form. 1997). individuals with either a challenging target or target-based pay will have higher productive effort. which in turn positively impacts performance until individuals reach the limits of their ability (Hollenbeck and Klein 1987. challenging targets and target-based pay will lead to higher productivity per production efficiency discovered than easy targets and fixed pay. more effort generally leads to higher productivity (Locke and Latham 1990.g. Thus. The Accounting Review July 2013 . Accordingly. That is. (2000) report that target-based incentive schemes are significantly more likely to lead to performance gains than fixed pay. We base this section’s hypotheses on theory and evidence from studies that examine settings where all individuals use similar and relatively straightforward ‘‘conventional’’ task approaches and performance is sensitive to effort. considerable evidence supports a key prediction of goal theory that there will be a positive association between target difficulty and effort. H2b: Individuals with target-based pay will have higher productivity per production efficiency identified than individuals with fixed pay. Indeed. very challenging targets lead to worse performance when coupled with a bonus for target attainment (e.1440 Webb. In other words. these individuals will not only be more productive when using conventional task approaches to solve problems. Bonner et al. Given management’s general interest in motivating employees to be as productive as possible. Bonner and Sprinkle 2002). controlling for the increase in productivity resulting from discoveries of production efficiencies. We believe that theory related to the productive effort-inducing effects of target difficulty and target-based pay from single-task-approach settings will generalize to a setting where both conventional and more efficient task approaches can be employed. there is some evidence indicating negative interactive effects of target difficulty and target-based pay such that compared to easier targets. In fact. and Zhang individuals who differ with respect to their willingness or ability to identify production efficiencies. The above arguments suggest that. Based on an analysis of 131 experiments. Here. but they will also be more productive in using more efficient approaches if discovered. Locke and Latham 2002). Williamson. Bonner and Sprinkle 2002). Locke and Latham 1990.. while challenging targets and target-based pay may hinder the discovery of production efficiencies. we make no predictions about the joint effects of these control tools. where no opportunities exist to identify significant production efficiencies. prior research shows that target-based pay also increases productivity by enhancing productive effort and task persistence. are as follows: H2a: Individuals with challenging productivity targets will have higher productivity per production efficiency identified than individuals with easy targets. 2002. Bonner and Sprinkle 2002). regardless of their ability to identify and employ production efficiencies. These predictions. First. these control tools could still lead individuals to more productively utilize them once discovered. the joint effects of these control tools are unclear (Bonner and Sprinkle 2002). Prior research suggests that assigning individuals challenging productivity targets or using target-based pay will lead to higher productive effort regardless of their selected task approach(es). Second. relative to a fixed wage. we believe productive effort is an important construct to examine (Simons 2000.

they worked through a five-minute preliminary period. but simultaneously lead to greater productivity per production efficiency identified.10 for each correct response provided during the preliminary period. i. they were randomly assigned to a separate computer terminal. the number of correct answers they had recorded. Target-Based Pay. and the compensation they had earned. participants removed a packet with 20 pages stapled together. each page contained six boxes with seven rows and 18 columns of letters. We locked the spreadsheet following an incorrect response so that it would not be advantageous for participants to randomly guess answers. The program immediately checked the response. the wrong answer was removed from the spreadsheet. they did not have to go in order. with 27 to 39 participants per session. Target-Based Pay. The program also provided a summary of their performance and compensation at the end of the period. participants read additional instructions about the three tenminute production periods they would complete next. The Accounting Review July 2013 . a message box appeared informing the participant of the wrong response. Participants recorded answers in the appropriate cell in the six columns (numbered box 1 through 6) by 20 rows (numbered page 1 through 20) spreadsheet at their computer.e. rather than a directional prediction we pose the following research question: RQ: Will the difficulty of the assigned productivity target and target-based pay affect overall productivity in a setting where conventional approaches and more efficient approaches. Preliminary Period To familiarize participants with aspects of our task. and the next answer could not be entered into the spreadsheet for five seconds. and Productivity Collectively. Production Periods After the preliminary period. participants could record an answer for any box at any time. can be used to perform a task? III. if discovered.11 Otherwise. From a letter-sized envelope. The computer spreadsheet informed participants of the time remaining. As participants arrived. These students participated in one of three 60-minute experimental sessions. Our theory development above leads us to expect that these control tools may hinder the discovery of production efficiencies. or go on to another box. Because theory does not provide a clear basis for predicting which effect will dominate in affecting overall productivity or whether the effects will be offsetting. the preceding hypotheses indicate that we expect challenging targets and targetbased pay to have competing effects on two important productivity determinants.’’ The participants’ task was to count the number of times the search letter appeared in each box. The task was similar to that of the 11 After the five-second delay. METHOD Participants We recruited 98 undergraduate student volunteers from business classes at The University of Texas at Austin. read a set of computerized instructions. As shown in Figure 1. and Outside-the-Box Thinking 1441 Productivity-Target Difficulty. Participants received $0. and worked individually on a task as discussed in greater detail below. participants could either record another answer for the same box following an incorrect response. Each box had a single search letter identified at the top right-hand side of the box.Productivity-Target Difficulty. Figure 1 contains a screen shot of one page from our task in which the search letter in the top box is ‘‘E.. If incorrect.

and Zhang 1442 FIGURE 1 Task Example The Accounting Review July 2013 .Webb. Williamson.

1 for page one. if discovered. with successful attempts at outside-the-box thinking (Baron 2006). the same shortcuts were used on each new page of boxes.Productivity-Target Difficulty. we examine participants’ responses to box one. once discovered. these shortcuts were also present during the preliminary period. as will be reported in the next section. the ‘‘conventional approach. For all other cells. where per Figure 2. box one initially entered a wrong answer consistent with them testing whether the answer followed the sequence. and processing feedback about the tests’ success (Shalley 1995. patterns across boxes within a single page. participants correctly answered several quiz questions to ensure they understood their instructions and completed a short questionnaire. First. After observing the answers. they could identify shortcuts. 2. 0. Specifically. the answers repeated 1. employees would have more experience with their work activities and would likely be sensitive to the possibility that more efficient task approaches exist and could be identified if they were to devote time and resources to discovering them. First. we informed them that while counting is a reliable way to complete the task. can result in substantive improvements to productivity. we anticipated that our participants would generate and test that 4 was the answer to page 4. participants provided wrong answers 20 percent of the time. Before starting the production periods. We conducted several pilot tests to develop shortcuts that were detectable. Thus. 2004. 3 across pages. testing these hypotheses. Target-Based Pay. Second. Moreover.’’13As further described in the instructions. the instructions now informed participants that there were two ways to identify answers for each box. rather than the correct answer of 1. That said. p . To provide evidence that our task requires working-memory-intensive hypotheses generation and testing processes. Dienes and Berry 1997. and/or patterns within a single box which will help identify the answer. 2 for page two. Third. and 3 for page three. On the other hand. 87 percent of participants providing an answer for page four. So. Maddox et al. a shortcut could be used repeatedly throughout the production periods. Participants discovered all six shortcuts at least once and. which in our task represent the ‘‘production efficiencies. Figure 2 describes each shortcut we used for this study. These relative error rates suggest that participants engaged in hypotheses generation and testing. which would potentially significantly improve productivity. shortcuts will initially take time to discover but will allow the determination of correct answers much faster. However. After completing 12 13 14 15 Given participants’ lack of experience with the task and the relatively short time they spent in the experiment. they involve a unique approach to performing the task that is very distinct from the conventional approach of simply counting letters that. both pattern recognition and outside-the-box thinking often involve monitoring the environment for potential production efficiencies or patterns. While we did not inform participants until the production periods.’’12 As stated in the instructions. attempting to identify patterns often requires similar cognitive processes required to identify production efficiencies more generally. participants faced the choice of allocating their effort between the low-risk strategy of simply counting letters and the riskier strategy of searching for shortcuts.01). and they were placed in the same location. The Accounting Review July 2013 . on average participants across all conditions found about 50 percent of the available shortcuts.14 We believe our shortcuts represent a valid operationalization of outside-the-box thinking for a number of reasons. for example. they likely would not have searched for production efficiencies had we not informed them of their existence. the same shortcuts were used in each production period. in the natural task setting. ‘‘Shortcuts include patterns in a particular box across the pages. they could simply count the number of times each search letter appeared in its corresponding box of letters. and Outside-the-Box Thinking 1443 preliminary period. it takes more time than using the shortcuts once they have been discovered. While our software program only records whether participants provide a correct or incorrect answer for each cell and not their specific answers. but not so obvious that the task would be easy to perform. then that same shortcut applied to the first box on each subsequent page. if participants identified the shortcut for the first box on the first page of materials.’’ Second. generating hypotheses about potential efficiencies or patterns. which is inherent to shortcut discovery in our setting. prior research associates pattern recognition. which is significantly lower (v2 ¼ 247.15 We instructed participants that they were free to choose either strategy for determining correct answers for each period. Ziori and Dienes 2008).83. Furthermore.

Webb. Williamson. Average compensation totaled around $18 for the 60-minute session. First. Independent and Measured Variables We manipulated two aspects of participants’ performance evaluation and reward system design at two levels. each between-subjects. participants received cash compensation for the preliminary period and the three production periods. we manipulated the level of productivity-target difficulty. and Zhang 1444 FIGURE 2 Task Shortcuts the three ten-minute production periods. We assigned half of our participants to an easy productivity target of 10 correct responses The Accounting Review July 2013 . participants completed a short post-experimental questionnaire. Finally.

we ran a pilot study and set our pay parameters such that $7. The Accounting Review July 2013 . see Locke and Latham 1990. and the coded number of shortcuts discovered is highly correlated with the total number of correct responses for the three production periods (r ¼ 0.g.10 for every correct response for exceeding their assigned productivity target. the coder only gave credit when the description provided by the participant unambiguously corresponded to the actual shortcuts embedded in the instrument. we had an independent coder. Target-Based Pay.10 3 average pilot performance per production period). In addition. Specifically. The other half of our participants received a target-based contract (Fisher et al.4) percent of our participants ultimately reached their assigned target of 10 (90). p . these participants received a fixed wage of $2. Ziori and Dienes 2008).10 piece-rate if their performance exceeded their assigned productivity target. by controlling for productivity caused by discoveries of shortcuts. we manipulated participants’ pay contract type. easy target condition will 16 17 18 Consistent with definitions in the literature. RESULTS Test of Hypothesis 1 Our first hypothesis predicts an ordinal interaction such that participants in the fixed wage.. and a piece rate of $0. we asked them to describe the shortcuts found and the period in which they were discovered.17 Dependent Variables To determine the number of shortcuts discovered by participants. we consider an easy target as one achievable almost 100 percent of the time and a challenging productivity target as one achievable approximately 25 percent of the time (e.16 Second. To validate the self-reports. To ensure equivalent compensation magnitudes across our fixed wage and target-based contract conditions. Prior research indicates that the ability to verbalize rules discovered and followed is associated more with working-memory-intensive cognitive processes rather than less cognitively taxing implicit learning (DeShon and Alexander 1996. we believe that the construct validity of our shortcuts discovered measure is acceptable.18 As a result. Half of our participants received a fixed-wage contract that paid them $7 per production period irrespective of their performance. the coder determined that a participant who indicated that she had discovered the shortcut for box one—and consecutively entered the correct response for that box several times before providing a response for another box on any page—had discovered that shortcut. 100 (22.Productivity-Target Difficulty. Where the pattern of responses did not clearly indicate whether a self-reported shortcut had been discovered. For example. easy productivity target condition will identify more production efficiencies than those in the challenging target conditions (H1a). participants in the fixed wage. We assigned the other half of our participants to a challenging productivity target of 90 correct responses per production period. In essence. As discussed below. the fixed wage compensation. 0.001). a bonus of $0.10 3 the assigned productivity target as a bonus for reaching this target.77. 2003). ¼ $2 þ ($0. this measure captures productivity resulting from productive efforts. In our study. and Outside-the-Box Thinking 1445 per production period. review the pattern of responses electronically collected for each participant to determine if it corresponded with the self-reported shortcuts discovered. Merchant and Van der Stede 2007). This approach resulted in a high correlation between the coded and self-reported number of shortcuts (r ¼ 0. blind to the study’s hypotheses. 0. we interpret the high correspondence between the selfreported and coded measures of shortcuts as supporting our expectation that identifying patterns that lead to production efficiencies involves more working-memory-intensive processes than implicit learning. IV. Accordingly. p .94. participants received a $0.001). We used the number of correct responses each period as our measure of overall productivity and divided that amount by the total number of shortcuts discovered to determine productivity per production efficiency.

t ¼ 2. and 3.01).01).74.20 In Panel D of Table 1. and 3. and three by experimental condition (based on self-reported measures) are as follows: 1. and 2. 0. Panel B shows the average number of Shortcuts discovered. As indicated by these results. Consistent with our predictions. participants scoring above the median on this measure did not identify more shortcuts than those scoring below the median (2. Overall. 0. for participants assigned a challenging target. 2. Table 2.01) interaction. we measured participants’ intrinsic interest in the task using a task attractiveness measure similar to Fessler (2003). The Accounting Review July 2013 .01). and Zhang identify a greater number of production efficiencies than those paid to meet and beat an easy target (H1b). Productivity Target difficulty and Contract type as the independent variables. two. Results from a repeated measures ANCOVA (not tabulated) show that none of the two-way or three-way interactions involving Period and either Productivity Target or Contract are significant (all two-tailed p-values . p ¼ 0. In a pre-experiment questionnaire. Time spent searching for shortcuts is significantly correlated with the number of shortcuts actually found (r ¼ 0.7 shortcuts compared to 3.21 On average. p ¼ 0. Reported results are based on one-tailed tests unless otherwise noted. p . 0. participants in the easy target/fixed wage condition identified significantly more production efficiencies than participants in the challenging target conditions (t ¼ 2.7 in easy/fixed. by experimental condition.0 in challenging/fixed. untabulated results also show that participants with an easy target and fixed wage discovered more shortcuts than the other three conditions combined (t ¼ 2.9 shortcuts.19 As reported in Panel C.5 versus 3. p . 0.36. Thus.22. The contrast results in Panel D also show that participants assigned an easy target and fixed wage discovered significantly more shortcuts than their counterparts with an easy target and target-based pay.0.91. As discussed earlier. we expect participants in the easy target/fixed wage condition to discover shortcuts to the extent that they are intrinsically motivated to do so. we use a gender indicator (male ¼ 0.5. t ¼ 0. In the easy target/fixed wage condition.50). We converted this to ‘‘time’’ by multiplying their self-reported percentages by the ten minutes available each production period.4. The number of shortcuts identified in periods one. 0. female ¼ 1) as a covariate to control for this possibility and include it in the reported results. those paid under a target-based contract discovered the same number of shortcuts as those paid under a fixed wage contract.17).07. These results suggest that the detrimental effects of target-based pay and challenging targets offset the potential benefits of intrinsic motivation for outside-the-box thinking.01) qualified by a significant Contract 3 Productivity Target (F ¼ 5.4 easy/target-based. p . and Panel B reports the results of an 19 20 21 22 23 Prior research suggests that the success of solving puzzles such as those embedded within our experimental task differs across gender (Amabile 1996). we first examine the amount of time spent looking for shortcuts in each condition. 2. p . we report the results of the contrast tests used to evaluate H1a and H1b. and Gender as the covariate.40. 0.0 challenging/target-based.01). We asked participants to self-report the percentage of time spent each period searching for shortcuts.7 versus 2.3. and 6 discovered more frequently than the others. who on average found only 2.2 shortcuts.9. Panel A reports descriptive statistics for the average amount of Time searching for shortcuts for the three production periods for each condition. and 3. Thus. which we believe supports the construct validity of the self-reported measure of time allocation. relative to the combination of an easy target and fixed wage. 2.1.15. p ¼ 0.17.41. Across the other three conditions. 2. 0.0 in the two challenging target conditions. participants with an easy target and a fixed wage discovered about 3.23 To evaluate whether participants’ behavior is consistent with the reasoning underlying our first hypothesis. Panel A of Table 1 provides descriptive statistics for the number of times each production efficiency (shortcut) was discovered and shows that all shortcuts were discovered at least once. 0. Moreover.02). Panel C of Table 1 provides the results of an ANCOVA with the total number of Shortcuts as the dependent variable.1446 Webb.7. Williamson. both challenging targets and target-based pay created dysfunctional consequences with respect to participants’ discovery of shortcuts.9. p ¼ 0.4 shortcuts (t ¼ 3. 3. with shortcuts 1. we observe a significant main effect for Contract (F ¼ 5. participants scoring above the median on this measure identified more shortcuts than those scoring below the median (4. these results support H1a and H1b.

0 25.2 1 2 3 4 5 6 Panel B: Means (Standard Deviations) for Shortcuts Discovereda (n ¼ 98) Fixed Wage Contract Target-Based Contract Average Easy Target Challenging Target Average 3. Contract: 0 ¼ fixed wage.002 Easy Target/Fixed Wage versus Challenging Target Conditions Easy Target/Fixed Wage versus Easy Target/Target-Based Contract a Total number of shortcuts discovered across the three production periods.1 1. 1 ¼ target-based.0 (1. Target-Based Pay.02 12.4 (1.89 0.93 0.7 (1.17 0.3) 3.5) 2.7 (1.0 (1.01 5.5) n ¼ 25 3. b The Accounting Review July 2013 . d Gender: 0 ¼ male.0 (1.4) n ¼ 24 2. and Outside-the-Box Thinking 1447 TABLE 1 The Effect of Productivity Target and Contract on Number of Shortcuts Discovered Panel A: Number (Percentage) of Participants Discovering Each Shortcut Participants Who Discovered Shortcut Number % 85 75 52 1 25 60 86. as signified by bold.07 3.5) Panel C: Analysis of Variance Factor df CONTRACTb PRODUCTIVITY TARGETc CONTRACT 3 PRODUCTIVITY TARGET GENDERd Error 1 1 1 1 93 Sum of Squares F p-valuee 10.0 (1.02 0.7) 3.5 53.15 0. e Reported p-values are two-tailed unless testing a one-tailed prediction.91 1. c Productivity Target: 0 ¼ easy target (10). 1 ¼ challenging target (90).09 0.45 2.2) n ¼ 24 3.01 0.30 5.4 (1.5 61.30 Panel D: Planned Contrasts H1a H1b t-statistic p-value 2.6) n ¼ 25 3. 1 ¼ female.Productivity-Target Difficulty.7 76.01 0.

Reported p-values are two-tailed unless testing a one-tailed prediction. participants assigned to challenging targets would quickly learn that they could not reach the target without identifying shortcuts.6) 4. and Zhang 1448 TABLE 2 The Effect of Productivity Target and Contract on Time Spent Looking for Shortcuts Panel A: Means (Standard Deviations) for Minutes Spent Looking for Shortcutsa (n ¼ 98) Fixed Wage Contract Target-Based Contract Average Easy Target Challenging Target Average 5.4 (2. Specifically.48.01). they would have an opportunity to search for shortcuts in early periods to increase their chance of attaining the challenging targets in later periods. p ¼ 0.22 23. As a result. ANCOVA using the same factors as above for this measure.05 0.73 17.90). F ¼ 0.28 2.6) 4. The Accounting Review July 2013 . F ¼ 6.4 percent of these participants ultimately reached a challenging target by period three. p . The effects of target difficulty on searching Time are significant for participants working under a target-based contract (not tabulated.9 minutes) (not tabulated.06 Average time spent searching for shortcuts per period for the three production periods based on participants’ selfreported time allocation. p . F ¼ 0.5) Panel B: Analysis of Variance Factor df CONTRACT PRODUCTIVITY TARGET CONTRACT 3 PRODUCTIVITY TARGET GENDER Error 1 1 1 1 93 a b Sum of Squares F p-valueb 1.05) qualified by a significant Productivity Target 3 Contract interaction (F ¼ 2.05) but not a fixed-wage contract (not tabulated. one-tailed).40).7 (2.47.2 (2.01. p .24 We also expect that the pressure associated with meeting a challenging target would make the time spent searching for shortcuts less efficient.81.73. We observe a significant Productivity Target main effect (F ¼ 2. while no participant reached an assigned challenging target in period one.05 0.9 (2. 0. the Time spent searching for shortcuts did not differ across contracts (not tabulated.09 0. p ¼ 0.5) 4. 0.9 (2. For those with challenging targets.06.81 2. Williamson. p . Participants responded as anticipated in that those not reaching their performance target in period one increased the percentage of time searching for shortcuts in the next period from 36. 22.66 0. We examine this possibility by dividing the Time 24 We utilized a three-period experiment because we believed that this design choice gave the challenging target the best chance of encouraging individuals to search for and potentially identify shortcuts. as signified by bold.76 17. 0.60 0.61. participants with an easy target and a fixed wage contract spent marginally significantly more time (5 minutes) searching for shortcuts than those with an easy target and a target-based contract (3.9 (2. which biases against H1. F ¼ 2. As expected.05).8) n ¼ 25 5.8 percent to 57. 0.5) n ¼ 24 3.73 3.6 (2.0 (2.6 percent (t ¼ 3.5) n ¼ 25 4. Thus.3) n ¼ 24 5.03.Webb. p ¼ 0.

94.7 minutes finding each shortcut.52 2. one-tailed p ¼ 0.20 5.7 (5. As reported in Panel A of Table 3.25 Descriptive statistics for Time per Shortcut are reported in Table 3. participants with an easy target spent an average of 4.07) of Contract type.Productivity-Target Difficulty. Target-Based Pay. we divide the total number of shortcuts discovered by the total time spent looking for shortcuts across all three production periods. participants paid a fixed wage spent about 4. Consistent with our theory development. Panel A.13 2.6) 5..725 2. we examine Time per Shortcut discovered.9) 5. with the means in Panel A showing that target-based pay leads participants to be less efficient at finding production efficiencies than those paid a fixed wage.9 minutes per shortcut discovered.9 minutes per shortcut for participants with a challenging target. 25 26 To simplify the reporting for this measure.5) n ¼ 25 4.1 (2. while those under the target-based contract spent 5.74.26 We also observe a marginally significant main effect (F ¼ 2. p ¼ 0.9 (4. as signified by bold.2) n ¼ 25 6. As shown in Panel A of Table 3.3) Panel B: Analysis of Variance Factor df CONTRACT PRODUCTIVITY TARGET CONTRACT 3 PRODUCTIVITY TARGET GENDER Error 1 1 1 1 93 a b Sum of Squares F p-valueb 27.59 68.04).7 (2.02 Total time spent searching for shortcuts across the three production periods divided by the total number of shortcuts discovered.7 (2. p ¼ 0.5) n ¼ 24 5.34 0.65 0. Reported p-values are two-tailed unless testing a one-tailed prediction.94 0.07 0. The Accounting Review July 2013 . indicating that participants assigned challenging targets were less efficient at finding shortcuts than those assigned an easy target. we observe a significant main effect of Productivity Target (F ¼ 2. We also observe that participants who were assigned challenging targets make marginally significantly more mistakes than those in the easy target condition.e. which is suggestive of higher levels of stress or anxiety (F ¼ 1. and Outside-the-Box Thinking 1449 TABLE 3 The Effect of Productivity Target and Contract on Time Spent per Shortcut Found Panel A: Means (Standard Deviations) for Minutes Spent per Shortcut Founda (n ¼ 98) Fixed Wage Contract Target-Based Contract Average Easy Target Challenging Target Average 4.3 (2.09). i.13.7) n ¼ 24 5.41 37.5) 4.7 minutes per shortcut discovered compared to 5. participants spent searching for shortcuts by the number of shortcuts they discovered.1 (3.04 0. and the ANCOVA results using the same factors as above are reported in Panel B.9 (4.

4) shortcuts and took an average of 6. given that the Time per Shortcut in the easy target/fixed wage condition is significantly lower than the other three conditions combined (t ¼ 1. an alternative explanation is that shortcuts become increasingly difficult to find and that these control tools motivate individuals to persist in trying to do so. 3. Williamson. participants working in the target-based pay condition who were assigned a challenging (easy) target found 3. and Zhang 1450 FIGURE 3 The Distribution of Period 3 Productivity by Number of Shortcuts Discovered While these results are consistent with the pressure induced by challenging targets and targetbased pay leading to inefficiencies in discovering shortcuts. Accordingly. participants would have been utilizing all discovered shortcuts. p . we plot the distribution of participants’ period three productivity by the number of shortcuts they ultimately discovered. we believe the results in Table 3 are consistent with our expectation that the pressure induced both by challenging productivity targets and target-based pay results in a less efficient use of the time spent trying to discover shortcuts. which could account for the higher Time per Shortcut. Panel B. For example. To assess the validity of this expectation. this alternative explanation seems less descriptive of the actual behavior observed in our experiment.0 (2. it may be that the first two shortcuts were relatively easy to discover. Test of Hypotheses 2a. but the third one was more difficult. i.7 (5. The measure of productive effort we use to test these hypotheses is productivity per shortcut discovered in period three calculated as: period three productivity 4 total shortcuts found. During period three.1) minutes each to find them. productivity per shortcut would not reflect differences in the efficiencies generated by specific shortcuts discovered.. and Our Research Question Our second set of hypotheses predict that either a challenging target (H2a) or target-based pay (H2b) will lead to higher productivity per production efficiency identified relative to an easy target or fixed pay. 2b. shown in Figure 3.7). However.Webb. we expect that the average incremental productivity benefit of each discovered shortcut would be similar.10) and these participants found the most shortcuts overall (Table 1. The plot.e. 0. suggests a reasonably linear relation between the number of shortcuts discovered and productivity in The Accounting Review July 2013 . the final production period. Since implementing discovered shortcuts involves recording simple patterns that do not vary much in their complexity.54. Thus.

Untabulated results show that each shortcut discovered increased productivity by an average of 16.520 Productivity in period three divided by total number of shortcuts discovered for all three production periods..72 1. We also conduct a regression analysis with period three productivity as the dependent measure and the number of shortcuts discovered as the independent variable. The Accounting Review July 2013 . p ¼ 0. we believe productivity in period three per production efficiency identified represents a reasonable measure of productive effort.00. 0.3 (4.01) and target-based pay (b3 ¼ 5.10.51 2. Productivity Target has a significant effect on Productivity per Shortcut (F ¼ 2. and Outside-the-Box Thinking 1451 TABLE 4 The Effect of Productivity Target and Contract on Productivity per Shortcut Discovered Panel A: Means (Standard Deviations) for Productivity per Shortcut Discovereda (n ¼ 87) Fixed Wage Contract Target-Based Contract Average Easy Target Challenging Target Average 19.73 9.4) Panel B: Analysis of Variance Factor df CONTRACT PRODUCTIVITY TARGET CONTRACT 3 PRODUCTIVITY TARGET GENDER Error 1 1 1 1 82 a b Sum of Squares F p-valueb 145. 0.4) 22. The person-specific controls (b5 through b7 ) are all significant (all p-values . how hard participants worked using either conventional task approaches or more efficient task approaches once discovered. p ¼ 0.03) 24.e.9 (6. t ¼ 17. with participants who were assigned a challenging target being 27 As a second measure of productive effort. those with challenging targets (b2 ¼ 8. p ¼ 0.27 Panel A of Table 4 reports the descriptive statistics by condition for Productivity per Shortcut in period three. t ¼ 1. controlling for the total number of discovered shortcuts (b1¼ 16.11.42 0.10).007 0. i.01) and that the number of shortcuts discovered explains a large proportion (78 percent) of the variance in period three productivity. Target-Based Pay.0) n ¼ 22 23.0 (5. regression results suggest that. and Panel B summarizes the results of an ANCOVA using the same factors as in the previous analysis.0) n ¼ 20 21.5) n ¼ 22 24. p .63. p .050 0. period three.95 0.09) exhibited higher levels of productivity.Productivity-Target Difficulty.1 (5.05). we also use OLS regression to estimate the effect on productivity of our experimental conditions controlling for the number of shortcuts found. Consistent with H2a.5 (4. As such. Reported p-values are two-tailed unless testing a one-tailed prediction.8 (3.3) 21. as signified by bold.37. 0. Further supporting H2a and H2b. we estimate the following equation Productivityperiod 3 ¼ a þ b1(Total Shortcuts Discovered) þ b2(Challenging Target Dummy Variable) þ b3(Target-Based Pay Dummy Variable) þ b4(Challenging Target 3 Target-Based Pay) þ b5(Gender Dummy Variable) þ b6(Preliminary Period Productivity) þ b7(Years in College) þ e.08.86 43.24.0) n ¼ 23 23.8 (4. t ¼ 2.45 6.7 (5.01).71 60. Here.160 0.72.4 (t ¼ 18.

The Accounting Review July 2013 . one-tailed). p . Including the productivity scores of the 11 participants who did not discover a shortcut also yields significant main effects of both contract and productivity target (both p .3). our research question examines the effects of these control tools on total productivity.7). Williamson. we observe no statistically significant differences across our challenging target conditions so we combine these conditions for this summary. As hypothesized and summarized in this figure.28 Finally. since over 80 percent of the total number of shortcuts that would eventually be discovered had 28 Table 4 includes only those results for the 87 participants who discovered at least one production efficiency. more productive than those assigned an easy target (respectively. 0. p .Webb. there is also a significant Contract type effect (F ¼ 6. Figure 4 summarizes our experimental results.05. untabulated results indicate that Productivity per Shortcut in the easy target/fixed wage target condition is significantly lower than the other three conditions combined (t ¼ 3. 0.01). target difficulty and target-based pay had competing effects on the discovery of production efficiencies and productive effort. As such.51. Table 5.0) exhibiting greater Productivity per Shortcut than those in the fixed wage conditions (mean ¼ 21. Consistent with H2b. with participants in the target-based pay conditions (mean ¼ 24. Panel A presents descriptive statistics of Productivity for period three. 0.5 and 21.26. and Zhang 1452 FIGURE 4 Summary of Results a For all variables. means 23.01).

8 easy/target-based. 0.2) 70. tying pay to easy targets protects employees against exogenous uncertainties in their environment and reduces incentives to engage in productivity management practices (Merchant and Manzoni 1989). the negative effect of easy targets and targetbased pay on the discovery of shortcuts (Table 1.7) 72. Reported p-values are two-tailed.8 (27.5.38 0.18 0.4) 63.9. to evaluate the research question.99 3.2 (29.2.06. Target-Based Pay. While easy targets combined with target-based pay resulted in relatively low productivity in our setting. 55.2) Panel B: Analysis of Variance Factor df CONTRACT PRODUCTIVITY TARGET CONTRACT 3 PRODUCTIVITY TARGET GENDER Error 1 1 1 1 93 a b Sum of Squares F p-valueb 1802. 48.15).62 2. Productivity means across periods one. untabulated 29 30 Results from an untabulated repeated measures ANCOVA show that none of the two-way or three-way interactions involving Period and either Productivity Target or Contract are significant (all p-values .1 (27. and 71.8) compared to fixed wage (mean ¼ 75.5.29 Only the Contract 3 Productivity Target interaction is marginally significant (F ¼ 3.Productivity-Target Difficulty. For example. two-tailed) in Panel B. Untabulated results show that this decrease is significant (F ¼ 5. been found by the beginning of the final period. 24. Table 5.7.66.30 Conversely.4) n ¼ 24 71.8) n ¼ 25 65.9 challenging/target-based. and 70. and Outside-the-Box Thinking 1453 TABLE 5 The Effect of Productivity Target and Contract on Productivity Panel A: Means (Standard Deviations) for Productivitya Fixed Wage Contract Target-Based Contract Average Easy Target Challenging Target Average 75. and 75. 27. The descriptive results in Panel A of Table 5 show that the interaction is driven by the decrease in productivity for participants who were assigned an easy target under the target-based contract (mean ¼ 55.03 2774. Thus. 25.1 in easy/fixed.06 0. this resultant cost may be exceeded in some environments by benefits not captured in our setting. and 55. The Accounting Review July 2013 .32 0. Panel B summarizes the results of an ANCOVA using the same factors as above. H1b) was not offset by the positive effect of this combination on productive effort found in support of H2b (Table 4).76.0 (26.46 139. two-tailed).67 Total productivity for the third production period.8.68 751. and three by experimental condition are: 31.7 (27. p . Thus. 40. While our results indicate that this combination comes at the cost of outside-the-box thinking.9 (24. 54.1).9) n ¼ 24 55.2 (29.13 0.66 0.4.8. p ¼ 0.2 in challenging/fixed.05. 0. two.6 (28. the competing effects of targets and performance pay should be observable by period three.2) n ¼ 25 71. some organizations claim to use this combination because of factors not incorporated in our design.

V.31 More generally.20. That is. Williamson. Ruchala 1999. Sprinkle et al. and evaluate whether individuals choose the option that provides the greatest expected value to an assumed employer (e. On the one hand.. First. then the use of easy targets with fixed pay may yield better outcomes. and Zhang 1454 analysis also shows that productivity does not differ significantly (F ¼ 0. we use an experiment to examine the effects of productivity-target difficulty and target-based pay. Importantly. our results provide a better understanding of why there are conflicting prescriptions in the practitioner literature and the business press. but the pressure induced by these targets hindered their success. the organization should consider other costs such as the relative sacrifice of employee productive effort and firm resources needed to generate production efficiencies. p . While representing successful risk-taking in this fashion may be descriptive of some environments. while shortcut discovery had a large effect on productivity relative to more conventional efforts in our setting. and those who were assigned challenging targets under either fixed or target-based pay. our results indicate that if the discovery of production efficiencies is a key objective for management. In particular. 0. the cost of motivating individuals to search for production efficiencies relative to exerting more conventional efforts may vary in practice. by illustrating the differing effects of target difficulty and target-based pay on these two fundamental determinants of productivity. both challenging targets and target-based pay hurt productivity by hindering the discovery of production efficiencies. challenging targets and target-based pay both enhance productive effort by motivating participants to be more productive per production efficiency identified.80) among participants who were assigned an easy target and paid a fixed wage. because our results suggest that different combinations of target difficulty and pay schemes can lead to similar levels of productivity. the recommended target level and contract type would ultimately depend on the trade-off between these two aspects of performance in practice. Participants assigned to an easy target and paid a fixed wage identified the most production efficiencies. Our results suggest that challenging targets and target-based pay have competing effects on two important productivity determinants. Limitations of our study provide opportunities for future research. challenging productivity targets encouraged our participants to engage in the risky endeavor of searching for production efficiencies. it is not surprising that there is not an unequivocal view in practice regarding the most effective approach to reward system design. Holding expected pay constant. these studies typically operationalize risk-taking as a choice among distributions with varying means and variances. Additionally. CONCLUSIONS In an environment where individual productivity can be increased through efforts directed at either a conventional task approach or more efficient task approaches that can be identified through outside-the-box thinking. The Accounting Review July 2013 . our results suggest that this representation would be less descriptive of a setting where the outcome of risky decisions is not a simple function of individuals’ willingness to take risks. While prior research demonstrates that these contracts can be designed to promote greater risk-taking. 2008).Webb.g. Our results also have interesting implications for the burgeoning management accounting literature examining the impact of target-based contract design on risk-taking. That is. On the other hand. this comparison indicates that the beneficial effect of challenging targets on productive effort (H2a) offsets their negative impact on the discovery of production efficiencies (H1a). we examine an environment in which participants identify production efficiencies under short-term time pressure. 31 While we held expected pay constant across our various reward conditions. These results suggest that in settings where conventional approaches and more efficient approaches that can be identified through outside-the-box thinking exist. the choice of reward system depends on the value of promoting the discovery of production efficiencies relative to motivating productive effort.

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