European Economic Perspectives 25

Team Spirit

Teams are replacing the individual as the primary performance unit in many companies. But in an age when employees’ trust in management is diminishing, new kinds of incentive schemes are needed to encourage people to work together effectively. New CEPR research explains why.

The organization of the workplace has changed drastically during the last two decades. In particular, the practice of teamwork has become widespread, reflecting the belief that teams react faster to volatile environments and allow a more efficient use of employees’ complementary skills. Many corporations now seek to foster teamwork among their employees. A 1994 survey of US firms, for example, found that in 64% of the responding establishments, at least half of the core workers were involved in employee problem-solving groups, work teams, total quality management, job rotation or combinations of these practices.

At the same time, employees’ trust in their management appears to have diminished substantially. In a survey by the Conference Board of executives from 2,900 firms, two-thirds of the responding companies said their employees were ‘highly distrustful’. This feeling may be related to the perception that there is less job security than in the past. Certainly, the rate of job loss in the United States has increased considerably in the 1990s and displaced workers suffer from considerable earnings losses.

Moreover, wages seem to have become more volatile. There is empirical evidence that due to greater product market competition, wages in US firms are more sensitive to the prevailing level of unemployment, and that internal labour markets are less able to shield workers from outside labour market conditions. In general, it appears a rather robust empirical fact that many employees believe their employer has breached some aspect of the employment agreement and that firms are less willing to ‘insure’ their employees against adverse labour market developments through long-term contracts.

A recent CEPR Discussion Paper by Emmanuelle Auriol, Guido Friebel and Lambros Pechlivanos shows how the emergence of teamwork practices in an age of diminishing trust and commitment creates a tension that corporations must try to resolve. While cooperation between employees is desirable from the firm’s point of view, it is harder to induce cooperation if employees do not trust their managers’ promises, that is, if managers make no commitment to long-term contracts.

The researchers investigate the effect of diminishing managerial commitment on two elements of teamwork management: optimal incentive schemes; and optimal team size. In the first case, they show that without commitment from their employer (the principal) to long-term wage contracts or salary paths, employees (the agents) have an increasingly powerful incentive to behave selfishly in order to appear more productive.

Diminishing managerial commitment gives rise to two types of implicit incentives. While career concerns make individual agents work harder on their own tasks, they also reduce their willingness to help their colleagues. Not only does each agent want to appear as being of high ability, but he or she also wants to look better than his or her colleagues. This kind of ‘passive sabotage’ arises even though explicit incentive schemes actually reward employees for their colleagues’ good performance.

A testable prediction of this analysis is that in order to restore the balance between individually-oriented effort and teamwork, the principal must increase the collective orientation of the explicit incentive scheme, rewarding agents more for team performance than for individual performance. This prediction is corroborated by a recent survey among Fortune 1000 firms. Employers are increasingly seeking to base their employees’ wages on team efforts and outputs. This is particularly the case in firms that are ‘downsizing’ their workforce, where presumably employees’ trust in management is very low.

Friebel and his colleagues go on to show that optimal team size is constrained by agents’ risk considerations. Because the innate abilities of fellow team members are unknown, teamwork exposes each agent to more risks than he or she would face in a traditional, individualistic workplace, where salary is determined solely by one’s own performance. These risks mean that the principal cannot take advantage of the full efficiency gains associated with the productive synergy of teamwork. In particular, when managers cannot commit to leaving the size of teams unchanged in the future, the optimal team size shrinks.

The analysis sheds some light on the risks associated with policies that aim to develop the individual’s skills and increase his or her visibility as a substitute for job security. Unless they are accompanied by higher-powered team-oriented incentives, such efforts to increase ‘employability’ may have a serious drawback in exacerbating the tendency for selfish behaviour within the firm. The work is also related to recent research that points out that ‘innovative’ practices in human resource management are effective only if adopted together.

Finally, the research indicates that there are important constraints on the restructuring of companies towards more ‘empowerment’ and teamwork. Even when the individual can be made accountable for his or her performance, it is difficult to implement teamwork practices because of the problem of risk-sharing between team members.

This article summarizes research reported in ‘Teamwork Management in an Era of Diminishing Commitment’, CEPR Discussion Paper No. 2281 (November 1999) by Emmanuelle Auriol, Guido Friebel and Lambros Pechlivanos. Friebel is at the Stockholm Institute of Transition Economics and East European Economies and is a Research Affiliate in CEPR’s Industrial Organization and Transition Economics programmes; Auriol and Pechlivanos are at the Université des Sciences Sociales, Toulouse.

Download PDF

Return to contents

 Browse Archives