n 2003, shortly after being appointed as CEO of IBM, Sam Palmisano declined a substantial end-of-year performance bonus and insisted that a portion of it instead be shared with managers.
His altruistic actions, says Associate Professor of Accountancy Pablo Casas-Arce, were not surprising — especially for a leader focused on developing a culture of cooperation. Palmisano’s choice supports key postulates of research conducted by Casas-Arce and Asis Martinez-Jerez of Cornell University.
The pair designed a field experiment that set out to understand how, or if, leadership styles influence the success of financial incentive programs within organizations. Over four months, teams of individuals within 177 branches of a medium-sized Latin American bank competed in a series of tournaments, unaware they were part of a research study.
Each branch participated in monthly competitions and at the end of each month, the top three branches received a $2,500 performance prize to be shared among branch members. The contest was structured around the World Cup, with teams scoring “goals” for exceeding commercial sales targets.
The study’s findings revealed that such incentives produced a 17% increase on team performance. But Casas-Arce and Martinez-Jerez wanted to know what would happen if a $1,200 leader bonus were thrown into the mix — an individual prize only for the manager of the winning branch. How would teams perform?
It’s all about style
It turns out that a manager’s leadership style influences team performance greatly when a leader bonus is introduced. Transactional managers — those who monitored employee performance more intensely and used rewards and penalties to achieve desired behavior — saw greater productivity increases with their teams than transformational managers who focused on talent development and cohesive team-building to inspire employee performance.
Why was this the case? The transformational leader’s credibility is often diminished by the manager’s prize, because team members see the leader’s goal of obtaining a personal reward — not a team one — as self-serving. “If you’re a manager trying to instill a teamwork culture, it doesn’t square well by rewarding the manager strongly for meeting goals shared by the team,” says Casas-Arce. This failure of credibility would explain Palmisano’s stance. “You can’t say, ‘We’re all in the same boat, but I will get paid a lot and you will not.’ ”
Transactional leaders, on the other hand, have always led by meeting targets and performance measures. “These types of managers don’t care so much about credibility. They focus on hitting the target and pushing their teams even harder to achieve the individual bonus.”
Team characteristics at play
Casas-Arce’s research also revealed that creative teams do not perform well under a highly incentivized manager who monitors them heavily. On the other hand, teams that have too much fun at work — and because of that are less productive — benefit from the enhanced monitoring of a manager who is motivated by strong incentives.
“The main takeaway is that some leaders respond better to individual incentives, while others respond to team-related incentives,” says Casas-Arce. The teams themselves then react to their leaders’ styles.
Real-world application
When it comes to creating financial incentive programs within firms, one size does not fit all, says Casas-Arce. “The incentive you create has to be designed to the type of leadership you want to develop.”
In individualistic corporate cultures, rewards that are tied to individual performance — and rewarding managers for their performance — would be preferred. “But when you’re trying to inspire teams in a cooperative environment, you want to have compensation that rewards the leader less for his or her achievement.”
— Melissa Crytzer Fry