Abstract

We compare, through a laboratory experiment using salient financial incentives, misrepresentations of performance under target-based compensation with those under both a linear piece-rate and a tournament-based bonus system. An anagram game was employed as the experimental task. Results show that productivity was similar and statistically indistinguishable under the three schemes. In contrast, whether one considers the number of overclaimed words, the number of work/pay periods in which overclaims occur, or the number of participants making an overclaim at least once, target-based compensation produced significantly more cheating than either of the other two systems. While earlier research has compared cheating under target-based compensation with cheating under non-performance-based compensation, which offers no financial incentive to cheat, this is the first study that compares cheating under target-based schemes to cheating under other performance-based schemes. The results suggest that cheating as a response to incentives can be mitigated without giving up performance pay altogether.