Conflict between Supervisory Monitoring and Monetary Incentives

Supervisory monitoring and monetary incentives are often used concurrently to mitigate agency conflicts. When an agent has to exert different types of effort for multi-dimensional tasks, little evidence exists on the interaction effect on an agent’s performance when both control mechanisms are present. We explore this question by utilizing the data from a field experiment by a high-end retailer, who used to solely monitor sales staff and introduced a monetary incentive scheme in randomly selected stores. Our results reveal that there is an inverted U-shaped relation between monitoring and performance. The marginal impact of monitoring on performance diminishes and eventually becomes negative as monitoring level increases. The introduction of the incentive plan significantly lowers the optimal level of monitoring. If the monitoring increases beyond the optimal level, a conflicting interaction effect arises because monitoring reduces the marginal impact of monetary incentives on performance