Abstract
We study the performance effects of two profit sharing schemes in a simplified representation of an organization with high task interdependence. The production process involves three stages such that output of earlier stages is the necessary input for subsequent stages. Work at earlier stages is easier than at later stages and the product is only final if it goes successfully through the highest stage. We compare the effects on the performance of the organization of a payment scheme in which profits are equally shared by all those involved in the production process with one where the participation in profits is strongly increasing in the production stage. The comparison is made for two ways of assigning individuals to the production stage: randomly or by merit. We also study the distinction between sharing schemes that are exogenously imposed and those that are chosen by the person at the top of the hierarchy. We find that overall the type of payment scheme has no effect on profits. We also find that profits increase over time and more so with the equal than with the unequal sharing scheme. The high interdependence in production that we study makes steep incentives ineffective and even counter-productive. These changes in profits over time can be explained by changes in production performance over time. We also find that merit-based assignment to positions in the hierarchy leads to significantly higher profits than random assignment.