Incentive and Signaling Effects of Bonus Payments: An Experiment in a Company

ABSTRACT Economists and management scholars have argued that the scope of incentives to increase cooperation in organizations is limited as their use may signal the prevalence of free‐riding among employees. This paper tests this hypothesis with an artefactual field experiment that assigns managers and employees from a large company to stylized roles within a controlled game. We exogenously vary whether managers are informed about prevailing cooperation levels among employees before they can set incentives to promote cooperation. In addition, employees matched to informed managers learn that the manager could base their incentive choice on cooperation levels. We find no evidence for the hypothesized signaling effect. Having an informed manager set the incentive does not change employees' beliefs about the cooperativeness of others. Incentives, hence, have strong positive effects on cooperative beliefs, irrespective of information. The absence of the signaling effect appears to reflect employees' perceptions of managerial intentions: incentives are interpreted not as signals of low cooperation, but as rewards for expected cooperation. A follow‐up survey experiment supports this mechanism, showing that a cooperative culture affects the interpretation of managerial actions.