Experimental Business Research II springer 2005 phần 7 pps

154 Experimental Business Research Vol. II

H1: Employees prefer bonus contracts to economically equivalent penalty

contracts.

Before we address expected differences in effort between bonus and penalty

contracts, we first hypothesize general effects in our second and third hypotheses

that we expect to hold for both bonus and penalty contracts. Our second hypothesis

addresses the effect on effort of employees’ expected disappointment about having

to pay a penalty or not receiving a bonus. We do not distinguish between bonus

contracts and penalty contracts because disappointment is expected to affect effort

regardless of whether the contract is framed as a bonus or as a penalty. Specifically,

we predict that employees who expect to feel more disappointed about the pro￾spect of receiving lower compensation (either by having to pay a penalty or by not

receiving a bonus) will expend more effort to avoid that outcome than employees

who expect to feel less disappointed about receiving the lower final payment. This

prediction is consistent with conventional economic theory, which assumes that

employees with greater incremental utilities for a higher monetary outcome (i.e.,

receiving the higher final payment without having to pay a penalty or forgo a bonus)

will expend more effort to ensure that they receive that outcome. Thus, it follows

that employees with a greater incremental utility for receiving a higher monetary

outcome will experience a greater reduction in utility from not receiving that out￾come. In our study, “expected disappointment” about not receiving the bonus or

having to pay the penalty corresponds to this reduction in utility from not receiving

the higher final payment.

H2: Greater expected disappointment will result in higher employee effort.

Our third hypothesis relates to the effect of perceived fairness on effort. Many

studies in psychology (e.g., Goranson and Berkowitz 1966; Greenberg and Frisch

1972; Greenberg 1978) and experimental economics (e.g., Kahneman, Knetsch and

Thaler 1986; Fehr, Kirchsteiger and Riedl 1993; Fehr, Gächter and Kirchsteiger

1997; Fehr, Kirchler, Weichbold and Gächter 1998; Charness and Rabin 2002;

Hannan, Kagel and Moser 2002) have shown that individuals who feel they are

treated fairly by another party will reciprocate by treating that party kindly in return.

This theory of “reciprocity” underlies our third hypothesis, which predicts that

employees who perceive their contract to be fairer will choose a higher level of

effort than those who perceive their contract to be less fair. As was the case for H2,

this is a general hypothesis that does not distinguish between bonus contracts and

penalty contracts. That is, higher perceived fairness is predicted to yield higher

employee effort in both bonus contracts and penalty contracts.

H3: Employees who perceive their contracts to be fairer will expend higher

effort.

EFFECTS OF CONTRACT FRAME ON EMPLOYEE EFFORT 155

As explained above, the general effects of expected disappointment (H2) and

perceived fairness (H3) on effort are predicted to operate in the same manner within

both bonus contracts and penalty contracts. However, as discussed below, the levels

of both expected disappointment and perceived fairness are likely to differ across

bonus and penalty contracts.

With respect to disappointment, the theoretical construct of loss aversion pre￾dicts that expected disappointment would be greater under penalty contracts than

under economically equivalent bonus contracts. Loss aversion describes the well￾documented finding that individuals are more averse to suffering a loss than they are

to forgoing the same amount of gain (Kahneman and Tversky 1979). If employees

facing penalty contracts frame the prospect of having to pay the penalty as a loss,

they will expect to be very disappointed about having to pay the penalty. In contrast,

if employees facing bonus contracts frame the prospect of not receiving an econom￾ically equivalent bonus as a forgone gain, they will expect to be less disappointed

about not receiving the bonus. These asymmetric framing effects across contract

type lead to our fourth hypothesis.

H4: Employees facing a penalty contract will expect to be more disappointed

about having to pay a penalty than employees facing a bonus contract will

expect to be about not receiving an economically equivalent bonus.

If greater disappointment results in more effort (H2), and disappointment is

greater under penalty contracts than under bonus contracts (H4), then it follows that

employee effort should be greater under penalty contracts than under bonus con￾tracts. However, as explained below, the fact that reciprocity predicts an opposing

effect on effort prevents us from making such a simple directional prediction regard￾ing the effect of contract frame (bonus or penalty) on employee effort.

With respect to perceived fairness, virtually all of Luft’s (1994) participants

indicated in her post-experimental questionnaire that they thought that “most

employees” would perceive a bonus contract to be fairer than an economically

equivalent penalty contract. Such perceptions could be due to a construct that Luft

refers to as “penalty aversion.” If employees are averse to penalty contracts because

they view penalty contracts as punitive or negative, they are likely to perceive

penalty contracts as unfair. In contrast, if bonus contracts are viewed more positively

because employees frame them as offering a potential reward, they are likely to be

perceived as fairer than economically equivalent penalty contracts. These expected

differences across contract types lead to our fifth hypothesis.

H5: Employees perceive bonus contracts as fairer than economically equivalent

penalty contracts.

Hypotheses H2-H5 are depicted in Figure 1, where it can be seen that if employees

consider bonus contracts to be fairer than penalty contracts (H5) and also engage in

156 Experimental Business Research Vol. II

Contract Frame

(Bonus = 1, Penalty = 0)

H4 − + H2

H5 H3 + +

RQ 1

Loss aversion:

Greater expected

disappointment under

penalty contract

Reciprocity

Conventional

economic theory

Penalty aversion:

Bonus contract

perceived as fairer

Employee

Effort

Expected

Disappointment

Perceived

Fairness

Figure 1.

reciprocity (H3), then it follows that employee effort should be higher under bonus

contracts than under economically equivalent penalty contracts (bottom path in

Figure 1). Of course, this prediction regarding employee effort is opposite to the

prediction described earlier that effort will be higher under penalty contracts (top

path in Figure 1) as a result of the combined effect of loss aversion (H4) and expected

disappointment (H2). Because these potential effects work in opposite directions, we

are unable to predict the net effect on effort of framing contracts in bonus versus

penalty terms. Therefore, we do not make a directional hypothesis regarding the

effect of contract frame on effort, but rather address this issue as our first research

question (RQ1 in Figure 1).

RQ1: Does employee effort differ under economically equivalent contracts

framed in bonus versus penalty terms, and if so, which type of contract

results in higher effort?

We expand upon RQ1, by investigating a second research question, RQ2 (not

directly identified in Figure 1), which involves isolating and measuring the poten￾tially offsetting effects of loss aversion and perceived fairness on effort. Specific￾ally, RQ2 addresses whether expected disappointment, perceived fairness, or both

expected disappointment and perceived fairness mediate the effect of contract frame

(bonus versus penalty) on employee effort. As explained earlier, if H4 and H2 (top

path in Figure 1) are supported, then contract frame is likely to affect effort by way