It’s What You Say, Not What you Pay: New Research Sheds Light on Overcoming Coordination Failure

The most effective way to lead organizations out of low performance traps is to increase manager-employee communication, according to a paper titled "It's What You Say, Not What You Pay: An Experimental Study of Manager-Employee Relationships in Overcoming Coordination Failure", published in December 2007 in the Journal of the European Economic Association. Communication is even more effective than increasing financial incentives.

The study's authors, BSE Affiliated Professor and IAE-CSIC Researcher Jordi Brandts and FSU Professor David J. Cooper, examined the question of how to overcome coordination failure in underperforming corporations. Their work focuses on the effectiveness of two prominent management tools, financial incentives and communication, on influencing behavior in such situations.

Says Professor Jordi Brandts, “coordination has long been studied by behavioral game theorists, typically in situations in which the only players in the game are the agents attempting to coordinate. However, in many cases there are important external agents who have a stake in whether coordination is achieved. If a firm earns low profits because of coordination failure among its employees, the management and shareholders suffer as well. If a country fails to develop economically because of coordination failure among industries, the government has a serious problem”.

BSE Affiliated Professor and IAE Researcher Jordi Brandts

To study methods of overcoming coordination failure, the two researchers conducted an experiment set in a corporate environment, called the “turnaround game,” in which the payoffs of the managers and employees depended positively on employees coordinating at high effort levels. The underlying game being played by employees was a “weak-link game” in which the individual doing the worst job (i.e. the “weakest link”) determined the overall productivity of an organization.

In the game, each player simultaneously chose an effort level. Effort is costly and a player’s payoff is an increasing function of the minimum effort chosen by the players in the group. Payoffs were set up so that it was worthwhile for a player to raise his or her effort level only if it would increase the minimum effort for the group. As a result, in the initial phase of the game in which managerial intervention is absent employees invariably slipped into coordination failure.

A new manager was then introduced with the goal of overcoming the incipient coordination failure. The manager was presented with two courses of action: either change employees’ incentives to coordinate by shifting some portion of the organization’s surplus over to employees, or simply communicate with employees.

Results of the experiment revealed that communication was much more effective than increasing incentives in getting employees to emerge from coordination failure and uniformly increase their effort levels. Additionally, the study found that the most successful communication strategy was quite simple: Explicitly request that all employees choose a high effort level, emphasize the mutual benefits of coordinating at a high effort level, and assure the employees that they are being paid well (although it is not necessary to actually pay them well).

Furthermore, results showed that as the available avenues of communication increased, both employees’ effort and managers’ profits increased. The marginal profit from increasing incentives was actually slightly negative, as increased payments to employees more than consume the added revenue from increased effort by employees. In contrast, the most effective types of messages increase profits by over 30% on average.

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