How the element of choice in business contracts can affect work quality- 5 questions with Dr. George Gonzalez

Ever wonder if certain stipulations in a contract can affect the effort workers put into their jobs? University of Lethbridge accounting faculty member on the Dhillon School of Business' Calgary campus, Dr. George Gonzalez’s research looks at how the element of choice really can affect work quality.

George's most recent publication called "Do Effort Differences between Bonus and Penalty Contracts Persist in Labor Markets?" will have companies thinking twice about how they award contracts.

When companies award contracts to executives, contractors, workers and other employees for work they're needing to get done, what are some of the terms that can be included that could affect performance?

When awarding contracts for work, companies can incorporate clauses that include penalties or bonuses. With a penalty contract, workers have to pay back some sort of compensation for a breach of contract, or other failure to achieve expectations, such as finishing a job late. Bonus contracts, on the other hand, give a reward for exemplary work.

Do workers work harder depending on what kind of clause they get in their contracts?

Previous accounting research studies on the differential effects of bonus contracts versus penalty contracts consistently found that workers prefer bonus contracts but work harder under penalty contracts. Something that was missing in those previous experimental studies, however, was a dynamic labour market in which employers offered whichever contract they preferred to offer, and employees chose whichever contract they preferred to work under. With this study we included this missing element of choice mimicking the real world more closely.

How did the element of choice you included in your research affect performance of workers?

There have been many research studies in psychology, education and other fields that have shown that giving a choice to an individual usually enhances their performance. The psychological mechanism at work behind these studies is that choice increases an individual’s intrinsic motivation, and in turn, they do a better job than they otherwise would. In our study we incorporated choice as a variable by setting up a dynamic labour market in which worker-participants had a choice (the bonus contract or the penalty contract) in some periods of the experiment and did not have a choice in other periods. We found that the element of choice drove workers’ efforts more than any other variable. That is to say, workers with a choice of which contract to work under gave a greater effort than those who did not have a choice. The effect of choice was so strong, in fact, that it canceled the effect of contract type (bonus versus penalty) on worker effort which had been found in prior studies.

Were there any surprising results from your study?

The biggest surprise for me was how consistently people chose one or the other – the bonus contract or the penalty contract – over the multiple periods, or rounds, of our experiment. Very few, given a choice, “hip hopped” between one contract type one period and the other contract type another period. Among those who consistently chose one contract type over the other, a minority chose the penalty contract over the bonus contract, but, again, they were consistent with this choice. In analysing this, we found that the penalty contract choosers preferred a penalty-type contract to a bonus-type contract because they feel that they perform better “under fire”.

What do you think is the biggest thing employers can learn from this?

The biggest takeaway for employers, I would say, is the value of giving choice to employees. Past research has shown that giving an individual choice increases their intrinsic motivation, which leads to higher performance; our study validates this. In a bonus-versus-penalty situation, not all will necessarily prefer the bonus to the penalty, as per my answer to the last question and it is important for employers to recognise this. Overall, wherever and whenever possible, it can be to the employers’ benefit to give employees choice.

Dr. George Gonzalez started his career in in the United States as a Certified Public Accountant. After spending many years running his own accounting practice, he sold his business and pursued doctoral studies at the University of Pittsburgh. Upon completing his doctoral degree he accepted a position with the University of Lethbridge. During his professional accounting career George worked in half a dozen countries in North America, Latin America and the Far East. His work often involved international planning for tax clientele. Today George teaches a tax course with the Dhillon School of Business and specializes in behavioural research, internal auditing, management accounting and tax. He also writes a column on Canadian tax and estate planning for an international publication. You can find more publications by George here.