Managerial Discretion and Task Interdependence in Teams

Prior research suggests that providing managers with discretion over team bonus allocation can improve team performance because it enhances the relation between team members’ contributions to team output and their rewards. This study investigates whether task interdependence influences managers’ ability to enhance this relation and, therefore, alters the effect of managerial discretion over compensation on team performance. Task interdependence reflects the degree to which the increase in team performance resulting from a team member’s effort depends on the efforts and skills of the other team members. Consistent with our predictions, we find that, managers are able to use their discretion over compensation to enhance the relation between team members’ contributions to team output and reward to a greater degree when task interdependence is absent than when task interdependence is present. Also consistent with our predictions, we find that the effect of managerial discretion on team performance depends on task interdependence. Specifically, our results show that managerial discretion over compensation has a positive effect on team performance when task interdependence is absent and negative effect on team performance when task interdependence is present. The results also suggest that predicted effects of task interdependence become more pronounced when task interdependence goes up. Our results have practical implications for firms, which have flexibility in designing their incentive systems in a team environment, because we identify conditions under which the effectiveness of granting managers discretion over team compensation is likely to vary