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The Effects of Incentives on Information

Exchange and Decision Quality in Groups

Khim Kelly

University of Waterloo

ABSTRACT: This study uses an experiment to examine the effects of different com-

pensation contracts flat wage, group incentive, and noncompetitive individual incen-

tive on decision quality when information is distributed among different individuals. The

results indicate that information exchange and decision quality are better under the

group incentive than the individual incentive, even when both incentives provide an

economic motivation for information exchange. Information exchange and decision

quality are also better under the flat wage than the individual incentive, despite the

stronger economic motivation for information exchange under the individual incentive.

Analyses indicate that the effect of compensation contracts on decision quality is par-

tially mediated through information exchange between group members. The results are

consistent with higher group membership saliency under the group incentive and the

flat wage than the individual incentive, and group membership saliency promoting in-

formation exchange between group members. The results also suggest that in a group

decision-making context, differences in decision quality across compensation contracts

may be better explained by psychological factors rather than economic factors.

Keywords: group decision-making; group membership; incentives; information ex-

change.

Data Availability: Contact the author.

INTRODUCTION

Information that could improve a decision is often distributed among different individuals due

to either inherent differences in knowledge, experience, and expertise, or the nonintegration of

I thank the anonymous reviewers and the editor for their comments and suggestions; Bran Kelly for his programming

expertise; Stephen Courtenay, Charlene Geisler, Bernardine Low, and Asheq Rahman for piloting the experimental mate-rials; and Adam Ng, Chin Li Peh, Yen Li Poh, Doreen Seah, and Lay Koon Tan for their able research assistance. I alsoappreciate the comments on earlier versions of this paper from Anne Farrell, Julia Higgs, Steve Salterio, Hun Tong Tan,Bill Waller, and participants at the 2006 ABO Research Conference and the 2007 Global Management Accounting Re-search Symposium. Financial support from the Singapore Ministry of Education Academic Research Fund is gratefully

acknowledged.

BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting AssociationVol. 22, No. 1 DOI: 10.2308/bria.2010.22.1.432010 pp. 43–65

Published Online: January 2010

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information systems in the firm.1

Psychological research indicates that decision quality is often

impaired under such a scenario because decision makers do not adequately consider unique infor-

mation but focus more on commonly held information e.g., Winquist and Larson 1998; Gigone

and Hastie 1993; Stasser and Titus 1985. The empirical evidence on how incentives influence

information exchange and employee performance is limited and mixed e.g., Siemsen et al. 2007;Wageman 1995.

2Consequently, there has been a call for more managerial accounting research on

how incentives affect the discussion of differentially distributed information and the resultant

decision quality Sprinkle 2003.

To answer the call for more research in this area, this study uses an experiment to examine the

effects of different compensation contracts flat wage, group incentive, and noncompetitive indi-

vidual incentive on decision quality when each individual in a group possesses private informa-

tion that is useful for improving a decision. The study also examines the mechanism through

which compensation contracts affect decision quality i.e., information exchange between group

members, and attempts to disentangle the economic versus psychological effects of compensation

contracts on decision quality.

This study extends prior research by examining how different compensation contracts affect

the process through which individuals share and discuss private information with fellow groupmembers, and the impact on decision quality. Studies that have examined the impact of incentives

in group settings focus more on effort choices e.g., Coletti et al. 2005; Towry 2003 or production

tasks e.g., Guthrie and Hollensbe 2004; Fisher et al. 2003; Drake et al. 1999; Young et al. 1993,

with less attention on the information exchange process and performance in group decision-

making tasks. Studies that have examined how incentives affect information sharing among em-

ployees either rely on self-reported rather than actual information sharing e.g., Siemsen et al.

2007; Ravenscroft and Haka 1996; Wageman 1995, or do not link information sharing to perfor-

mance e.g., Taylor 2006.

Participants in the experiment individually read information about multiple alternatives before

convening in groups of three for a group discussion. Some of the information is commonly held by

all three group members, whereas other information is unique to one group member. The total

information favors one alternative, but that best alternative is hidden from individual group mem-

bers because each member has only a portion of the total information. After the group discussion,participants make two decisions: a group decision and an individual decision.

3The flat wage does

not link compensation to either the group or individual accuracy. The group incentive rewards

participants based on the accuracy of their group decision. The individual incentive rewards

participants if their individual decision is accurate, independent of other group members’ accuracy.

Thus, the individual incentive is noncompetitive in nature.4

1 For example, cost information from the accounting system may not be integrated with information from other systemsin the firm such as production, logistics, human resource, sales and distribution, or customer relationship managementQuattrone and Hopper 2005; Williams 2004.

2Prior psychological research that has examined the effects of information distribution on group decision-making has notdirectly examined the effects of different compensation contracts, and has been criticized for ignoring how informationexchange in natural settings is driven by the incentives and motivations of group members Wittenbaum et al. 2004.

Student participants in prior studies typically receive course credit independent of decision accuracy e.g., Stasser et al.2000; Winquist and Larson 1998; Hollingshead 1996. The exceptions are Fraidin 2004 and Greitemeyer and Schulz-Hardt 2003, which reward participants based on the accuracy of their individual decisions, but these two studies do notexamine different compensation contracts.

3 This study examines both group decision quality and individual decision quality because the problem of differentiallydistributed information can arise in both group decisions and individual decisions in the real world. Teams comprisingmultiple individuals or divisions within an organization, or cross-organization collaborations such as joint ventures,strategic alliances, and integrated supply chains make collective group decisions with each entity possessing differentinformation. In individual decisions, people often do not have all the necessary information and thus require information

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Behavioral Research In Accounting Volume 22, Number 1, 2010American Accounting Association


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The results indicate that information exchange and decision quality are better under the group

incentive than the individual incentive, even when both incentives provide an economic motiva-

tion for information exchange. Information exchange and decision quality are also better under the

flat wage than the individual incentive, despite the stronger economic motivation for information

exchange under the individual incentive. Analyses indicate that the effect of compensation con-tracts on decision quality is partially mediated through information exchange between group

members. The results are consistent with higher group membership saliency under the group

incentive and the flat wage than the individual incentive, and group membership saliency promot-

ing information exchange between group members.

This study contributes to the existing literature by delineating the economic versus psycho-

logical effects of compensation contracts in a group decision-making setting. A premise of prior

research is that incentives provide economic motivation to direct effort toward improving the

rewarded performance Bonner et al. 2000; Camerer and Hogarth 1999. This study finds evidence

suggesting that in a group decision-making context, differences in decision quality across com-

pensation contracts may be better explained by psychological factors rather than economic factors.

In particular, using group versus individual performance measures in the compensation contracts

influences the psychological salience of group membership Charness et al. 2007; Welbourne and

Cable 1995.5 Group membership saliency may affect the extent to which group members engage

in information exchange, which ultimately impacts the decision quality.

The remainder of the paper is organized as follows. The second section develops the hypoth-

eses. The third section describes the design of the experiment, and the fourth section reports the

results. The final section concludes with a discussion of the findings and the limitations of the

study.

HYPOTHESES DEVELOPMENT

Information exchange is critical for improved decision-making when individuals in a group

each possess unique information that is useful for identifying the best available alternative. The

decision quality is affected by the extent to which individuals share information as well as the

extent to which they assess thoroughly and accurately the positive or negative implications of the

information for the various alternatives Stasser et al. 2000; Hollingshead 1996. However, theinadequate pooling and weighting of unique information vis-à-vis common information during

group discussion often impair decision quality Wittenbaum et al. 2004; Chernyshenko et al. 2003;

Hunton 2001. Compensation contracts can affect information exchange and hence decision qual-

from others before making their decisions independently. For example, it is common for auditors to consult with firmpersonnel who are not on the audit team when they are making audit engagement, planning, and fieldwork decisionsDanos et al. 1989.

4 In a competitive individual incentive, a group member’s compensation would be reduced by other group members’accuracy, thus providing an economic disincentive for information exchange. This study focuses on a non-competitiveindividual incentive rather than a competitive individual incentive for two reasons. First, prior studies have alreadyestablished that performance is lower under a competitive individual incentive than a group incentive e.g., Ravenscroftand Haka 1996; Miller and Hamblin 1963, which is expected given the economic disincentive for cooperation under thecompetitive individual incentive. However, prior studies have not examined a non-competitive individual incentive in

which there is an economic motivation for information exchange. Second, as discussed in greater detail in the paper,contrasting the non-competitive individual incentive against the group incentive and the flat wage enables the study tobetter disentangle the economic versus psychological effects of compensation contracts.

5Incentive contracts may use either group or individual performance measures. Profit-sharing and gain-sharing plans thatreward employees based on firm- or division-wide performance measures are examples of group incentive contractsHansen 1997; Shepard 1994; Kaufman 1992. Individual incentive contracts include piece-rate schemes and bonusplans that are linked to individual performance such as salespersons who receive commissions based on their individualsales, or division managers who are evaluated based on their division’s performance rather than firm-wide performanceCIPD 2008.

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ity through economic and psychological forces. Figure 1 outlines the relationships between com-

pensation contracts, information exchange, and decision quality that are examined in this study.

Group Incentive versus Individual Incentive

First, I consider the economic effect of the group incentive versus the individual incentive. Agroup incentive rewards people based on the accuracy of their group decision. Consequently,

group members under the group incentive have an economic motivation to exchange information

so as to improve their group decision. On the other hand, an individual incentive rewards people

based on the accuracy of their individual decision and provides economic motivation for people to

improve their individual accuracy. Economists argue that a noncompetitive individual incentive

will encourage employees to cooperate and share knowledge with each other when it is mutually

beneficial for them to do so Siemsen et al. 2007; Nalebuff and Stiglitz 1983, 40. Group members

under the individual incentive have an economic motivation to offer information so as to encour-

age others to offer information necessary for improving their individual decision.6

Furthermore,

people are more motivated to incorporate the information and opinions offered by others in their

6Although there may be a concern that group members under the individual incentive would be inhibited from initiatinginformation sharing because they do not trust their fellow group members to reciprocate, prior studies show that peopleare willing to make the first move and trust others to reciprocate even when they risk economic loss to do so e.g.,Kurzban et al. 2008; Ortmann et al. 2000; Berg et al. 1995. Furthermore, group members in this study do not risk anyeconomic loss from initiating information sharing and stand only to gain if other group members reciprocate, whichwould reduce any inhibition to initiate information sharing.

FIGURE 1

Relationships between Compensation Contracts, Information Exchange, and Decision

Qualitya,b,c

Compensation contractsa

•Flat wage

•Group incentive

•Individual incentive

Information Exchange b

•Common information

•Unique information

• Inference statements

Decision Qualityc

•Group accuracy

•Post-discussion individual accuracy

aThere were three types of compensation contracts. In the flat wage condition, a group member was entered

into a lottery with a 1-in-3 chance of winning $20 regardless of group or individual accuracy. In the group

incentive condition, a group was entered into a lottery with a 1-in-3 chance of winning $60 to be divided equally among the three group members if the group decision was accurate. In the individual incentive con-

dition, a group member was entered into a lottery with a 1-in-3 chance of winning $20 if the post-discussion

individual decision was accurate. b

There were a total of 12 information items per company, of which three were common items held by all three

group membersand nine were unique items held byonlyone group member with each group member holding

three unique items. The group discussion transcripts were coded for: (1) number of common information

items discussed; (2) number of unique information items discussed; and (3) number of inference statements

made, which included statements that drew conclusions about a company, made assertions about the conse-

quences arising from the given information, and expanded or elaborated on the given information.c

After the group discussion, participants made a group decision and an individual decision as to which com-

pany out of three companies was the best financial investment.

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individual decisions under performance-contingent rewards Sniezek et al. 2004. Therefore, when

group members are aware that they individually hold unique information that is critical for iden-

tifying the best decision alternative, both the group incentive and the individual incentive would

economically motivate group members to exchange information as well as discuss the implications

of the information more thoroughly, because doing so would improve both group accuracy andindividual accuracy. Under the economic effect, decision quality is expected to be equivalent

between the group incentive and the individual incentive because both incentives provide an

economic motivation for information exchange.

Next, I consider the psychological effect of the group incentive versus the individual incen-

tive. The group incentive heightens group membership saliency Charness et al. 2007 and en-

courages cooperative behavior because it ties compensation to group performance Taylor 2006;

Shirani et al. 1998; Welbourne and Cable 1995; Hatcher and Ross 1991; Ackelsberg and Yukl

1979; Deutsch 1949.7

In contrast, the individual incentive which links individual performance to

compensation makes individual performance more salient, and may promote selfish behavior such

as the hoarding of information Van Alstyne 2005; Katz 2000. Rewarding people based on

individual performance may encourage them to behave individualistically, such that they focus on

achieving their personal goal and ignore the goal achievement of others Johnson et al. 1981. This

individualistic orientation and dampened salience of group membership under the individual in-

centive may inhibit group activities such as information sharing and discussion. Rowe 2004

similarly argues that reporting group-level rather than individual-level performance induces people

to adopt a group frame instead of an individual frame, with the group frame encouraging people

to care more about others’ outcomes and the individual frame engendering a more self-centered

focus. A salient group frame also promotes greater trust in fellow group members Rowe 2004;

Yamagishi and Kiyonari 2000; Kramer 1999; Kramer et al. 1996, and trust increases people’s

willingness to exchange information and be influenced by others Butler 1999; Kramer et al. 1996;

Boss 1978; Zand 1972. From the psychological point of view, decision quality is expected to be

better under the group incentive than the individual incentive because the group incentive in-

creases group membership saliency, which fosters an increased level of information exchange.

Based on the preceding discussion, there are two competing hypotheses with respect to the

effects of group versus individual incentives on information exchange and decision quality. Hy-pothesis 1a posits the economic effect of group versus individual incentives, whereas H1b posits

the competing psychological effect.

H1a (Economic effect): Information exchange and decision quality are not different between

the group incentive and the individual incentive.

H1b (Psychological effect): Information exchange and decision quality are better under the

group incentive than the individual incentive.

Flat Wage versus Individual Incentive

Hypothesis 1a argues that both the group incentive and the individual incentive provide an

economic motivation for information exchange. However, group members may arguably face

7Although prior research has found that a group incentive relative to an individual incentive increases cooperativebehavior Taylor 2006; Shirani et al. 1998; Hatcher and Ross 1991; Ackelsberg and Yukl 1979; Deutsch 1949, there istypically an economic incentive for cooperative behavior under the group incentive but not so under the individualincentive in prior studies. Therefore, an increase in cooperative behavior under a group incentive versus an individualincentive in prior studies could be due to either the economic incentive for cooperative behavior or group membershipsaliency under the group incentive. This study is designed such that there is an economic incentive for cooperativebehavior under both the group incentive and the individual incentive. Thus, any difference between the two incentivescould be better attributed to group membership saliency rather than the economic incentive for cooperative behavior.




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lower economic motivation to exchange information under the individual incentive than the group

incentive. Under the individual incentive, group members are motivated to share and discuss their

individual information with others insofar as it would encourage others to offer their individual

information, and if they believe others have insights and expertise that would improve their

individual accuracy. However, they are not motivated to help others make accurate individualdecisions. As such, finding that information exchange and decision quality are better under the

group incentive than the individual incentive i.e., support for H1b rather than H1a may still not

provide a strong conclusion that it is the psychological effect rather than the economic effect that

is driving information exchange and decision quality.

In order to better disentangle the economic versus psychological effects of compensation

contracts, I contrast a flat wage that is not contingent on either group or individual decision

accuracy against the individual incentive. There is a stronger economic motivation for information

exchange under the individual incentive than the flat wage. Under the economic effect, informa-

tion exchange and decision quality should be better under the individual incentive than the flat

wage. However, the flat wage does not highlight individual performance, and therefore group

membership should be more salient under the flat wage than the individual incentive. Under the

psychological effect, information exchange and decision quality are expected to be better under

the flat wage than the individual incentive.

Therefore, there are two competing hypotheses with respect to the effects of flat wage versus

individual incentive on information exchange and decision quality. Hypothesis 2a posits the eco-

nomic effect of flat wage versus individual incentive, whereas H2b posits the competing psycho-

logical effect.

H2a (Economic effect): Information exchange and decision quality are better under the

individual incentive than the flat wage.

H2b (Psychological effect): Information exchange and decision quality are better under the

flat wage than the individual incentive.

Regardless of whether the effects of compensation contracts on information exchange and

decision quality are economic or psychological in nature, Hypothesis 3 posits that the effect of

compensation contracts on decision quality is mediated through information exchange.

H3: The type of compensation contract affects the extent of information exchange, which in

turn positively affects decision quality.

DESIGN OF EXPERIMENT

Participants

In total, 220 junior and senior undergraduate students from a university in Singapore partici-

pated in the experiment. The students were accounting n 108 and business n 112 majors

who had taken at least one financial accounting course and one management accounting course, so

that they had a basic understanding of the information items presented to them for the task, which

involved making an investment decision. The average age of the participants was 21.15 years, and

67.27 percent were females.8

The participants worked in groups of three, forming 68 groups. Four

8 Age and gender are not significant covariates in the logistic regressions for pre-discussion individual accuracy allp-values ≥ 0.129 or post-discussion individual accuracy all p-values ≥ 0.302. Educational major accounting orbusiness is a significant covariate in the logistic regression for pre-discussion individual accuracy p 0.010, but it isnot a significant covariate in the logistic regression for post-discussion individual accuracy p 0.508. Year in theundergraduate program is not a significant covariate in the logistic regression for pre-discussion individual accuracy p

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groups were dropped from the data analyses because participants revealed their real names during

the group discussion or because a group member could not enter the virtual chat room for the

group discussion due to computer software problems.9

Sixteen extra participants remained after

forming groups in the experimental sessions, and they completed an individual decision-making

task instead of the group decision-making task.

Experimental Procedure

The experiment took place at computers. Each experimental session had six to 18 participants.

Participants arrived at the computer laboratory and were seated at computers with an empty space

between each person. They were instructed not to talk to each other during the experimental

session.

At the beginning of an experimental session, participants were given instructions on the task

and the experimental procedures. The task was to decide which of three companies Alpha, Beta,

and Gamma was the best medium- to long-term five to ten years financial investment. After

reading the task instructions, participants were randomly assigned to groups of three and they did

not know who their fellow group members were. Group members were instructed to refer to each

other only by their group member identification number and to remain anonymous throughout thestudy.

10Each group member maintained the same role throughout the experiment.

The groups were then randomly assigned to one of the conditions in the experiment. Partici-

pants were given a description of their compensation contract. Next, participants answered three

questions about their compensation contract which served as manipulation checks for the com-

pensation contract, and all three questions must be answered correctly before participants could

proceed with the experiment. Then, participants were given ten minutes to individually read

information about the three companies.11

Participants were informed that they would continue to

have access to their individual information throughout the study. They were told that within a

group, some group members might have information that other group members did not have, and

that one company was the best choice when all information was considered. Participants indicated

their individual decision before entering a virtual chat room to discuss with the other two members

of their group. Groups were given a maximum of 30 minutes for the group discussion and to reach

a group decision.12 Groups could end their group discussion earlier if they reached a group

decision before the allotted 30 minutes was up. After the group discussion, a pre-assigned group

0.479, but it is a marginally significant covariate in the logistic regression for post-discussion individual accuracy p 0.077. Given that the results are similar including these demographic variables as covariates, the demographicvariables are ignored for the rest of the paper. All p-values reported in the paper are two-tailed, unless otherwise statedwhere the statistical test is for only one direction.

9 The results are similar including these four groups.10 The experiment uses anonymity and computer-mediated discussion so as to focus on the effects of information distri-

bution and compensation contracts. Anonymity removes effects related to social context cues such as gender, race,physical appearance, and social norms. The group decision support system literature also shows that anonymity resultsin more open discussion Gavish et al. 2000; Jessup et al. 1990. Computer-mediated discussion eliminates effectsrelated to face-to-face, verbal, and non-verbal communication cues such as facial expression, voice inflexion, and bodylanguage. Research on face-to-face versus computer-mediated discussions indicates that computer-mediated discussions

have the advantage of social equalization such that group members participate more equally Kiesler and Sproull 1992;Siegel et al. 1986, and that the process of group decision-making in face-to-face and computer-mediated discussions issimilar Weisband 1992. However, computer-mediated discussions can result in lower social presence which makes itmore difficult to create a cooperative environment Barkhi et al. 2004.

11 The pilot study indicated that ten minutes was sufficient for participants to review the information items.12 The pilot study indicated that 30 minutes was sufficient for the group discussion. The mean time taken by groups to

complete their discussion was 20.77 minutes std. dev. 7.06 minutes. Groups do not spend more time in discussionunder the group incentive versus the individual incentive t 1.21, p 0.233, nor under the flat wage versus theindividual incentive t 0.70, p 0.486.




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member indicated the group decision. Group members indicated their individual decision again

and were told that their individual decision need not agree with the group decision. Finally,

participants answered a post-experimental questionnaire.

Experimental Design

There were three experimental conditions wherein the three group members shared certain

common information items but individually possessed unique information items, and participants

worked under the flat wage, the group incentive, and the individual incentive, respectively. In

addition, there was a control All-Info condition where all information items were shared by all

three group members, and participants worked under the flat wage. The All-Info condition is used

to verify that participants are able to make better decisions when they are given all information

than when information is distributed.

Operationalization of Variables

Decision Task and Information Items

This study uses a decision task, known as the hidden profile decision task, commonly used in

psychological research on information exchange during group decision making e.g., Stasser andTitus 1985; Stasser et al. 2000. In a hidden profile decision task, the total profile of information

favors a decision alternative, but that best alternative is not apparent from the common informa-

tion held by all group members and the private information held by each group member.

The experimental materials were newly developed but adopted similar information distribu-

tion patterns as in prior hidden profile studies. There were 12 information items per company, with

a total of 36 information items for all three companies Alpha, Beta, and Gamma. The total

information favored Beta nine positive items and three negative items over Alpha five positive

items and seven negative items and Gamma five positive items and seven negative items. Each

company had four financial information items earnings per share, gross margin, dividend per

share, and current ratio and eight nonfinancial information items e.g., information regarding

litigation issues, products, marketing strategies, and management.13

Table 1 shows the distribu-

tion of information items across the three companies and a group member.

Each group member had six information items per company prior to the discussion, of which

three items were commonly held by all group members and three items were uniquely held by

only that group member. The superior alternative Beta was hidden from the group members before

group discussion because the pre-discussion information items that each member held did not

favor any company, and the common information items favored Alpha and Gamma over Beta. The

six pre-discussion information items per company were balanced with three positive items and

three negative items. The three common information items per company were such that there were

two positive items and one negative item for both Alpha and Gamma, and three negative items for

Beta.

I conducted two tests to ensure that the total profile of information supported Beta as the best

company and did not differentiate between Alpha and Gamma. First, the experimental materials

13 Examples of information on Beta were an approval from the U.S. Food and Drug Administration for a high potentialdrug, a Standard & Poor’s report on its strong portfolio of drugs and robust R&D pipeline, and a warning on one of itsnew drugs issued by a non-profit organization that publicizes information on drug safety. Information on Alpha includedthe company being ranked the fifth best company to work for by Fortune, an ongoing U.S. Securities and ExchangeCommission investigation for accounting irregularities, and the recall of a product with design flaws. Gamma hadinformation such as the announcement of an important licensing and collaboration agreement with another company, aStandard & Poor’s report on expected sale losses from patent expirations, and a warning received from the U.S.Department of Health and Human Services for violation of U.S. Current Good Manufacturing Practices regulations.

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were piloted with four accounting professors. Two accounting professors read all 36 information

items and both identified Beta as their best choice. Another two accounting professors read the

three common information items per company, with one choosing Alpha and the other choosing

Gamma. Second, data from the 16 extra participants who completed an individual decision-

making task were analyzed. These 16 participants reviewed all the 36 information items that were

given to participants in the group decision-making task, made an individual decision, and provided

an importance rating and a direction rating for each information item. The importance rating

concerned the importance of an information item in the participant’s decision, on a scale of 0 not

important at all to 10 extremely important. The direction rating concerned whether an informa-

tion item suggested a positive effect or a negative effect on the company’s prospects as a medium-

to long-term financial investment. The importance rating is multiplied by the direction rating to get

a score for each information item, and the scores for all 12 information items per company areaggregated to get the total score for a company. Alpha had a mean score of 10.25, Beta a mean

score of 43.33, and Gamma a mean score of 14.88. Paired t-tests indicate that Beta had a higher

score than Alpha paired t 11.28, one-tailed p 0.001 and Gamma paired t 10.55, one-

tailed p 0.001, whereas Alpha and Gamma did not have significantly different scores paired t

1.14, p 0.274. In addition, 12 of these 16 participants 75 percent chose Beta, which was

better than a random chance of 33 percent 2 = 12.88, p 0.002.

TABLE 1

Distribution of Information Items in the Decision Task

Panel A: Distribution of Total Information Items across the Three Companiesa

Company Positive Information Items Negative Information Items

Alpha Company 5 positive items• 2 common• 3 unique

7 negative items• 1 common• 6 unique

Beta Company 9 positive items• 9 unique

3 negative items• 3 common

Gamma Company 5 positive items• 2 common• 3 unique

7 negative items• 1 common• 6 unique

Panel B: Distribution of Pre-Discussion Information Items across the Three Companies Held by aGroup Member

b

Company Positive Information Items Negative Information Items

Alpha Company • 2 common• 1 unique

• 1 common• 2 unique

Beta Company • 3 unique • 3 common

Gamma Company • 2 common• 1 unique

• 1 common• 2 unique

a There were a total of 12 information items per company. Three out of the 12 information items per company werecommon items held by all three group members. Nine out of the 12 information items per company were unique itemsheld by only one group member, with three unique items distributed to each group member.

b In the three experimental conditions flat wage, group incentive, and individual incentive, each group member held sixinformation items per company prior to the group discussion, of which three were common items and three were uniqueitems. There was also a control All-Info condition where all information items were given to all three group members.




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Independent Variable: Compensation Contracts

There were three compensation contracts. In the flat wage condition, all participants were

entered into a lottery with a 1-in-3 chance of winning $20 regardless of their group or individual

decision accuracy. In the group incentive condition, groups with the correct group decision were

entered into a lottery with a 1-in-3 chance of winning $60 that was split evenly among the threegroup members. In the individual incentive condition, participants with the correct post-discussion

individual decision were entered into a lottery with a 1-in-3 chance of winning $20. In addition to

the lottery, all participants were paid $10 for participating in the study. The expected value of the

total payment receivable by a participant $16.67 was equal across the three compensation con-

tracts when the correct group decision or post-discussion individual decision was made.

Dependent Variables

Decision quality. Decision quality was assessed by whether groups correctly chose Beta. Anaccurate decision was coded as 1, whereas an inaccurate decision was coded as 0. In addition, the

post-discussion individual accuracy i.e., whether individuals correctly chose Beta was examined

as an alternative dependent variable for decision quality. Examining only group accuracy may bias

toward finding support for H1b Group incentive Individual incentive and H2b Flat wage

Individual incentive because group members under the individual incentive may perform better inindividual accuracy than group accuracy, given that they are rewarded based on individual accu-

racy. Moreover, the problem of differentially distributed information can occur in individual de-

cisions as well as group decisions see footnote3.

Information exchange. The 64 group discussion transcripts were coded by either one of twocoders who were blind to the experimental conditions and the hypotheses. Twenty-two of the 64

transcripts were coded by both coders to calculate inter-coder reliabilities. A third coder resolved

any disagreements while being blind to the experimental conditions. The discussion transcripts are

coded for the following variables: 1 the number of common information items discussed out of

a total of nine common items r 0.97, p 0.001, 2 the number of unique information items

discussed out of a total of 27 unique items r 0.97, p 0.001, and 3 the number of inference

statements made r 0.87, p 0.001. Inter-coder reliabilities, which are reported in parentheses

above, are acceptable Landis and Koch 1977.

Inference statements represent discussion about implications of the information items, which

include statements that draw conclusions about a company, make assertions about the conse-

quences arising from the given information, and expand or elaborate on the given information. In

order to choose the best company, group members not only need to have information about all

three companies, they also need to consider whether a piece of information has a positive or

negative implication on the choice of a particular company. When groups make more inference

statements about the information items, it would help participants assess implications of the

information better and improve decision accuracy. Examples of inference statements from the

discussion transcripts are as follows:

Bear in mind Alpha’s liquidity ratio is dropping due to its ambitions … as a result, its debt rating

is falling, meaning it can be harder for them to get loans at a good rate in the future.

Alpha has got accounting problems…

under investigation by SEC in July, inflated their profits…

so share price might fall suddenly very quickly.

Beta’s product Eleve is the only product curing diabetic pain … five million patients have

diabetic pain … this product Eleve is the only FDA-approved drug, so they have monopoly … with

long-term orientation, we need to have a company which is strong financially and can come up with

new products or they have strong monopoly.

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I will stay with Gamma, take the risk … and it seems that the lawsuit might be ending soon … they

are currently under investigation, as in the outcome is still not known yet, so there is a case that

they might not be found guilty.

RESULTS

Manipulation Checks

I conducted two manipulation checks to verify that the decision task had been successfully

manipulated. First, I verified that pre-discussion individual accuracy was lower when participants

had incomplete information than when they had full information. Participants chose the superior

alternative before group discussion less often in the three experimental conditions where they had

incomplete information than in the control All-Info condition where they had all the information

items Wald 2 = 20.95, p 0.001. Second, the pre-discussion individual accuracy was not

significantly differently across the three experimental conditions where participants had incom-

plete information Wald 2 = 2.53, p 0.283.

The manipulation checks for the compensation contract involved participants having to an-

swer three questions about their compensation contract correctly before they could begin the

experiment. The three questions tested participants on how their monetary reward was related to

the group accuracy, their own individual accuracy, and the individual accuracy of other members

in the group.14

This experimental procedure ensured that the compensation contracts were suc-

cessfully manipulated.

Tests of Hypotheses

Decision Quality and Information Exchange

Descriptive statistics for decision quality and information exchange are presented in Table 2.

To test the significance of the differences in decision quality observed in Table 2, I performed a

logistic regression testing the effect of compensation contracts on group accuracy and a random

effects logistic regression testing the effect of compensation contracts on post-discussion indi-

vidual accuracy.15

The logistic regression results presented in Table 3, Panel A, indicate that

compensation contracts Wald 2 = 7.25, p 0.027 and mean pre-discussion individual accuracyof group members Wald 2 = 12.28, p 0.001 affected group accuracy.

16Likewise, the random

effects logistic regression results presented in Table 3, Panel B, indicate that compensation con-

tracts F 5.31, p 0.007 and pre-discussion individual accuracy t 6.53, p 0.001 affected

post-discussion individual accuracy.

To test the significance of the differences in information exchange observed in Table 2, I

performed three overall ANOVAs with the number of common information items discussed, the

number of unique information items discussed, and the number of inference statements made as

the dependent variable in each ANOVA and compensation contracts as the categorical independent

14 Participants were asked whether: 1 the accuracy of their post-discussion individual decision, 2 the accuracy of theother two group members’ post-discussion individual decisions, and 3 the accuracy of their group decision increased,

decreased, or did not affect their chance of winning the lottery.15 A logistic regression is used instead of an overall ANOVA to test the effect of compensation contracts on decisionquality because group accuracy and post-discussion individual accuracy are dichotomous dependent variables. In addi-tion, a random effects logistic regression is used for post-discussion individual accuracy because it controls for thenon-independence in the post-discussion individual accuracy of members that belong to the same group.

16 Pre-discussion individual accuracy was measured because prior research indicates that the pre-discussion preference of group members is a key determinant of the post-discussion decision accuracy Greitemeyer and Schulz-Hardt 2003;Winquist and Larson 1998. Therefore, the pre-discussion accuracy of individual group members can be controlled forwhen testing the effects of compensation contracts on group accuracy and post-discussion individual accuracy.




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TABLE 2

Descriptive Statistics

Panel A: Decision QualityPre-Discussion

IndividualAccuracy

bGroup Accuracy

b

Conditiona

n MeanStd.Dev. n Mean

Std.Dev. n

All-Info 42 0.69 0.47 14 0.71 0.47 42

Flat Wage 54 0.35 0.48 18 0.61 0.50 54

Group Incentive 48 0.21 0.41 16 0.50 0.52 48

Individual Incentive 48 0.29 0.46 16 0.19 0.40 48

Panel B: Information Exchangec

Condition n

Number of Common

InformationItems Discussedd

(maximum 9)

Number of UniqueInformation ItemsDiscussed

d(maximum 27)

NumbMa

MeanStd.Dev. Mean Std. Dev. Mean

Flat Wage 18 5.94 1.73 9.72 3.80 25.17

Group Incentive 16 7.19 2.46 12.75 5.77 25.13

Individual Incentive 16 5.44 2.25 8.38 5.43 19.25

a The all-info condition was the control condition where a group member had all 12 information items per company and was entered into a lott$20 regardless of group or individual accuracy. In the three experimental conditions, a group member had six information items per company,held by all three group members and three were unique items held by only one group member. In the flat wage condition, a group member wachance of winning $20 regardless of group or individual accuracy. In the group incentive condition, a group was entered into a lottery with a divided equally among the three group members if the group decision was accurate. In the individual incentive condition, a group member wachance of winning $20 if the post-discussion individual decision was accurate.

b Participants made an individual decision before discussion, followed by a group decision and another individual decision after discussioncompanies was the best financial investment. An accurate decision was coded as 1 and an inaccurate decision was coded as 0.

B e h a v i or a l R e s e ar c h I nA c c o u n t i n g

V o l u m e2 2 , N

u m b er 1 ,2 0 1 0

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c The All-Info condition is excluded from Panel B because all information items were commonly held in that condition.d There were a total of 12 information items per company, of which three were common items held by all three group members and nine were u

member with each group member holding three unique items. The group discussion transcripts were coded for: 1 number of common infor

of unique information items discussed; and 3 number of inference statements made i.e., implications of information, which included statemcompany, made assertions about the consequences arising from the given information, and expanded or elaborated on the given information.


V o l u m e2 2 , N

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variable. The type of compensation contract affected the number of common information items

discussed F 2.82, p 0.070 and the number of unique information items discussed F 3.19,

p 0.050, but not the number of inference items made F 2.08, p 0.137. Planned contrasts

are performed regardless of the omnibus ANOVA results as recommended by Rosenthal et al.

2000, 1–3.Individual contrasts of decision quality and information exchange are conducted to test the

hypotheses. Hypothesis 1a predicts that information exchange and decision quality would not be

different between the group incentive and the individual incentive because both incentives provide

an economic motivation for information exchange. In contrast, H1b predicts that information

exchange and decision quality would be better under the group incentive than the individual

incentive because group membership is more salient under the group incentive than the individual

TABLE 3

Logistic Regressions of Decision Quality

Panel A: Logistic Regression with Group Accuracy as the Dependent Variable (n 50)

Independent VariablesEstimate

(Wald 2, p-value)

Intercept 4.5012.29, 0.001

Compensation Contracts:a 7.25, 0.027

Individual Incentive —

Group Incentive 3.216.34, 0.012

Flat Wage 2.595.62, 0.018

Mean pre-discussion individualaccuracy

7.6612.28, 0.001

Overall model evaluation:Likelihood ratio test

2 = 28.99, df 3, p 0.001

Panel B: Random Effects Logistic Regression with Post-Discussion Individual Accuracy as theDependent Variable

b(n 150)

Independent VariablesEstimate

(t, p-value)

Intercept 4.984.23, 0.001

Compensation contracts:a F 5.31, p 0.007

Individual Incentive —


Flat Wage 4.262.88, 0.005

Pre-discussion individualaccuracy

3.856.53, 0.001

a The compensation contracts variable in the logistic regressions is a categorical variable comprised of the flat wage, thegroup incentive, and the individual incentive. The individual incentive is used as the reference category in the logisticregressions because the group incentive and the flat wage are contrasted against the individual incentive to test H1a/band H2a/b, respectively.

b Random effects logistic regression is estimated using the GLIMMIX macro in SAS and the likelihood ratio test is notavailable. See variable descriptions in Table 2.

56 Kelly



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incentive. The results for H1, presented in Panel A of Table 4, indicate that group accuracy Wald

2 = 6.34, p 0.012 and post-discussion individual accuracy t 2.92, one-tailed p 0.002

were better under the group incentive than the individual incentive. Groups also discussed more

common information items t 2.30, one-tailed p 0.013, unique information items t 2.46,

one-tailed p 0.009, and made more inference statements t 1.74, one-tailed p 0.044 underthe group incentive than the individual incentive. Therefore, H1b is supported whereas H1a is not

supported.

Hypothesis 2a predicts that information exchange and decision quality would be better under

the individual incentive than the flat wage because the individual incentive provides a stronger

economic motivation for information exchange than the flat wage. Conversely, H2b predicts that

information exchange and decision quality would be better under the flat wage than the individual

incentive because group membership saliency is lower under the individual incentive than the flat

wage. Since H2a and H2b have opposite directional predictions, two-tailed p-values are reported

for the contrasts used to test the hypotheses. The results for H2, presented in Panel B of Table 4,

indicate that group accuracy Wald 2 = 5.62, p 0.018 and post-discussion individual accuracy

t 2.88, p 0.005 were better under the flat wage than the individual incentive. Discussion of

common information items t

0.69, p

0.496 and unique information items t

0.78, p

0.439 were not significantly different between the flat wage and the individual incentive. How-

ever, the number of inference statements made was marginally higher under the flat wage than the

individual incentive t 1.80, p 0.078. The results support H2b and not H2a.

The results for the group incentive versus individual incentive contrasts and the flat wage

versus individual incentive contrasts suggest that the effects on information exchange and decision

quality are driven by group membership saliency rather than economic motivation.

Information Exchange Variables as Mediators

Hypothesis 3 posits that the effect of compensation contracts on decision quality is mediated

through information exchange. To test H3, the two essential steps outlined in Kenny et al. 1998,

260 to establish mediation are conducted. Step 1 tests whether the independent variable i.e., type

of compensation contract is related to the mediator i.e., information exchange variables. Step 2

tests that the mediator i.e., information exchange variables is in turn related to the dependentvariable i.e., decision quality, while controlling for the independent variable i.e., type of com-

pensation contract. According to Kenny et al. 1998, 260, meeting these two essential steps

implies a relationship between the independent variable and the dependent variable, as well as a

reduction in the effect of the independent variable on the dependent variable after controlling for

the effect of the mediator on the dependent variable.17

The results for group accuracy as the dependent variable for decision quality are reported in

Table 5, Panel A. For Step 1, as reported in the earlier contrasts testing H1a/b and H2a/b, the

number of common information items, unique information items, and inference statements dis-

cussed are related to the type of compensation contract. For Step 2, logistic regressions are

conducted with group accuracy as the dependent variable and each of the information exchange

mediators as the independent variables, while controlling for the type of compensation contract

and the mean pre-discussion individual accuracy of the three group members. The number of

common information items discussed Model 1 in Panel A of Table 5: Wald 2 = 3.72, p 0.054and the number of unique information items discussed Model 2 in Panel A of Table 5: Wald

2 = 4.01, p 0.045 are positively related to group accuracy. However, the number of inference

17 The tests of H1a/b and H2a/b establish that the independent variable i.e., type of compensation contract is related tothe dependent variable i.e., decision quality.




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TABLE 4

Planned Contrasts

Panel A: H1—Group Incentive versus Individual IncentiveVariable Result Statistic

Group accuracy Group Individual Wald 2 = 6.34

Post-discussion individualaccuracy

Group Individual t 2.92

Number of commoninformation items discussed


Number of unique informationitems discussed


Number of inferencestatements made


Panel B: H2—Flat Wage versus Individual Incentive

Variable Result Statistic

Group accuracy Flat Individual Wald 2 = 5.62Post-discussion individual

accuracyFlat Individual t 2.88

Number of commoninformation items discussed

Flat Individual t 0.69

Number of unique informationitems discussed


Number of inferencestatements made


See variable descriptions in Table 2.


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TABLE 5

Logistic Regressions of Decision Quality

Information Exchange Variables as Mediators

Panel A: Logistic Regressions with Group Accuracy as the Dependent Variable (n 50)

IndependentVariables

Model 1 Model 2

Estimate

(Wald 2, p-value)

Estimate

(Wald 2, p-value)

Intercept 8.709.04, 0.003

6.3612.71, 0.001

Compensation contracts:a 5.73, 0.057 5.32, 0.070

Individual Incentive — —


2.242.82, 0.093

Flat Wage 2.815.59, 0.018

2.545.07, 0.024

Mean pre-discussion individual

accuracy

7.76

11.05, 0.001

7.59

10.18, 0.001Common information items

discussed0.67

3.72, 0.054

Unique information itemsdiscussed

0.214.01, 0.045

Inference statements made

Overall model evaluation:Likelihood ratio test

2 = 34.42

df 4, p 0.001

2 = 34.01df 4, p 0.001

Panel B: Random Effects Logistic Regressions with Post-Discussion Individual Accuracy as the Dependent Variableb

(n


Model 1 Model 2

Estimate(t, p-value)


Intercept 10.643.87, 0.001

8.304.71, 0.001


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Panel B: Random Effects Logistic Regressions with Post-Discussion Individual Accuracy as the Dependent Variableb

(n


Model 1 Model 2



Compensation contracts:a F 4.02, p 0.021 F 3.84, p 0.025

Individual Incentive — —


3.121.95, 0.054

Flat Wage 4.262.80, 0.006

4.072.73, 0.007

Pre-discussion individual accuracy 3.916.54, 0.001

3.946.52, 0.001

Common information itemsdiscussed

0.942.45, 0.016

Unique information itemsdiscussed

0.362.81, 0.006

Inference statements made

a The compensation contracts variable in the logistic regressions is a categorical variable comprising of the flat wage, the group incentiveindividual incentive is used as the reference category in the logistic regressions because the group incentive and the flat wage are contrasted agH1a/b and H2a/b, respectively.

b Random effects logistic regression is estimated using the GLIMMIX macro in SAS and the likelihood ratio test is not available. See variabl


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statements made Model 3 in Panel A of Table 5: Wald 2 = 1.63, p 0.202 is not significantly

related to group accuracy. The type of compensation contract remains related to group accuracy in

all the logistic regressions all p-values ≤ 0.070, but its significance level decreases when the

information exchange mediators are included in the logistic regressions see Table 3, Panel A.

The results for post-discussion individual accuracy as the dependent variable for decisionquality are reported in Table 5, Panel B. Step 1 is reported as above. For Step 2, random effects

logistic regressions are conducted with the post-discussion individual accuracy as the dependent

variable and each of the information exchange mediators as the independent variables, while

controlling for the type of compensation contract and the pre-discussion individual accuracy. The

number of common information items discussed Model 1 in Panel B of Table 5: t 2.45, p

0.016, the number of unique information items discussed Model 2 in Panel B of Table 5: t

2.81, p 0.006, and the number of inference statements made Model 3 in Panel B of Table 5:

t 2.47, p 0.015 are positively related to post-discussion individual accuracy. The type of

compensation contract remains related to post-discussion individual accuracy in all the logistic

regressions all p-values ≤ 0.047, but its significance level decreases with the inclusion of the

information exchange mediators in the logistic regressions see Table 3, Panel B.

In summary, the results support H3. The effect of compensation contracts on decision quality

is partially mediated through information exchange.

Additional Analyses: Trust

In the discussion of the psychological effect of group versus individual incentive H1b, I

argue that increased group membership saliency under the group incentive promotes trust in

fellow group members and trust encourages people to share information. In a post-experiment

question, participants used a 0 absolutely do not trust to 10 absolutely trust scale to rate the

level of trust in their fellow group members to present truthful information during the group

discussion. The following analyses are conducted to assess the impact of compensation contracts

on trust, and the relationship between trust and information exchange.

The ANOVA results indicate that the type of compensation contract is not related to trust F

1.88, p 0.156. Following the recommendation of Rosenthal et al. 2000, 1–3, planned

contrasts mirroring H1a/b and H2a/b are performed irrespective of the omnibus ANOVA result.Participants reported a higher level of trust in their fellow group members under the group incen-

tive mean 9.00, std. dev. 1.11 than the individual incentive mean 8.52, std. dev. 1.35

t 1.94, one-tailed p 0.027. Trust did not differ significantly between the flat wage mean

8.78, std. dev. 1.16 and the individual incentive mean 8.52, std. dev. 1.35 t 1.07, p

0.286.

Regression analyses indicate that mean trust of members in a group is positively related to the

number of common information items discussed t 2.07, p 0.044 and the number of unique

information items discussed t 3.44, p 0.001. Mean trust of members in a group is not related

to the number of inference statements made t 0.96, p 0.343.

The results are consistent with the group incentive engendering greater trust in fellow group

members as compared to the individual incentive, and trust being positively related to increased

information exchange. However, in this study, trust was measured after rather than before the

group discussion to avoid priming the participants. As such, it is difficult to determine whether

trust precedes, follows, or develops concurrently with information exchange.

DISCUSSION AND CONCLUSION

Information for effective decision-making is often distributed among different people in a

firm, due to either inherent differences in knowledge, experience, and expertise, or the design of




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the information systems. Prior research indicates that decision quality is often impaired under such

a scenario because decision makers do not adequately consider unique information but focus more

on commonly held information. This study examines how different compensation contracts flat

wage, group incentive, and noncompetitive individual incentive affect information exchange and

judgment performance in such group decision-making settings.First, I find that information exchange and decision quality are better under the group incen-

tive than the individual incentive. This is despite both incentives providing an economic motiva-

tion for information exchange. Second, information exchange and decision quality are better under

the flat wage than the individual incentive, although the individual incentive provides a stronger

economic motivation for information exchange. These results suggest that psychological rather

than economic forces better explain the effect of compensation contracts on decision quality in a

group decision-making context. Third, the effect of compensation contracts on decision quality is

partially mediated through information exchange. The type of compensation contract affects the

extent of information exchange, which in turn influences decision quality.

The results in this study highlight the importance of considering the nature of the work and

the costs and benefits of different incentive systems when adopting performance-contingent pay. In

a decision-making task where information that could improve decision quality is distributed

among different individuals and information exchange is essential, a group-based incentive and a

flat wage may outperform an individual-based incentive, even when it is mutually beneficial to

cooperate under the individual-based incentive. An individual-based incentive, which emphasizes

individual performance and reduces the salience of group membership, could reduce information

exchange among employees even when there is an economic incentive for information exchange.

This study has several limitations. First, this study uses anonymous and computer-mediated

discussions. In reality, people working in groups are not anonymous, often interact face-to-face,

and may have established relationships from prior interactions. Many other variables such as

demographic variables, social context cues, verbal and nonverbal communication cues, prevailing

relationships, and career concerns may influence the group decision-making and information ex-

change process and moderate the effect of incentives. Second, this study examines only a group

decision-making task where group members are highly interdependent in the task. The results may

not generalize to other group tasks with varying degrees of task interdependencies among groupmembers. Third, although the study finds that trust in fellow group members is positively related

to information exchange, it is unable to determine the causal directions between trust and infor-

mation exchange because trust is measured after group discussion. Prior research has shown that

trust and acts of trust have reciprocal relationships e.g., Coletti et al. 2005; Butler 1999; Boss

1978; Zand 1972. The type of compensation contract may affect the initial level of trust, which

influences the quantity and quality of information exchange, which in turn affect the further

development of trust.

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