Incentives in Teams

TLDR

The paper considers a conglomerate organization of semi‑autonomous subunits coordinated by a central head. It investigates how the head can design compensation rules to induce the subunit managers to act as a cohesive team, emphasizing informational aspects. The authors model a resource‑allocation problem and derive optimal incentive rules interpreted as prices for resources charged to subunits. They show that these optimal rules lead to team behavior, as demonstrated in the resource‑allocation example.

Abstract

This paper analyzes the problem of inducing the members of an organization to behave as if they formed a team. Considered is a conglomerate-type organization consisting of a set of semi-autonomous subunits that are coordinated by the organization's head. The head's incentive problem is to choose a set of employee compensation rules that will induce his subunit managers to communicate accurate information and take optimal decisions. The main result exhibits a particular set of compensation rules, an optimal incentive structure, that leads to team behavior. Particular attention is directed to the informational aspects of the problem. An extended example of a resource allocation model is discussed and the optimal incentive structure is interpreted in terms of prices charged by the head for resources allocated to the subunits.