Interactions between social norms and incentive mechanisms in organizations

TL;DR

This paper models how social norms and performance incentives interact in organizations with multiple decision-makers, revealing conditions under which social norm compliance affects overall performance and how incentive schemes can mitigate negative impacts.

Contribution

It introduces a model of social norm emergence from agent interactions and analyzes its impact on organizational performance alongside incentive mechanisms.

Findings

Social norm compliance can harm performance unless tasks are highly correlated.

Incentive schemes can offset performance loss caused by social norms.

Different incentive types are effective depending on task complexity.

Abstract

We focus on how individual behavior that complies with social norms interferes with performance-based incentive mechanisms in organizations with multiple distributed decision-making agents. We model social norms to emerge from interactions between agents: agents observe other the agents' actions and, from these observations, induce what kind of behavior is socially acceptable. By complying with the induced socially accepted behavior, agents experience utility. Also, agents get utility from a pay-for-performance incentive mechanism. Thus, agents pursue two objectives. We place the interaction between social norms and performance-based incentive mechanisms in the complex environment of an organization with distributed decision-makers, in which a set of interdependent tasks is allocated to multiple agents. The results suggest that, unless the sets of assigned tasks are highly correlated, complying with emergent socially accepted behavior is detrimental to the organization's performance. However, we find that incentive schemes can help offset the performance loss by applying individual-based incentives in environments with lower task-complexity and team-based incentives in environments with higher task-complexity.