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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.
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