Are You Paying Your Employees to Cheat? An Experimental Investigation

Charles Bram Cadsby (), Fei Song () and Francis Tapon ()
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Fei Song: Ryerson University

No 810, Working Papers from University of Guelph, Department of Economics

Abstract: We compare misrepresentations of performance under a target-based compensation system with those under both a linear piece-rate system and a tournament-based bonus system using a laboratory experiment with salient financial incentives. An anagram game was employed as the experimental task. Results show that productivity, defined as the number of correct words a participant created during the seven experimental rounds, was similar and statistically indistinguishable under the three pay-for-performance schemes. In contrast, whether one considers the number of over-claimed words, the number of work/pay periods in which overclaims occur, or the number of participants making an over-claim at least once, target-based compensation produced significantly more cheating than either of the other two systems. Moreover, consistent with Schweitzer et al. (2004), cheating is more likely under a target-based scheme the closer a participant’s actual production is to the target. The larger amounts of cheating under target-based compensation support Jensen’s (2003) argument that such schemes encourage cheating and should be eliminated in favor of other types of performance pay.

Keywords: Misrepresentation; cheating; guilt; experiment; compensation; target; tournament; piece-rate; pay-for-performance. (search for similar items in EconPapers)
JEL-codes: C91 J33 M52 (search for similar items in EconPapers)
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:gue:guelph:2008-10

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