Managerial Discretion and Task Interdependence in Teams

This study investigates whether the effect of managerial discretion over team members' compensation on team performance depends on task interdependence. 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, regardless of task interdependence, managers use their discretion over compensation to differentiate team members' compensations. However, the effect of this differentiation 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. Supplemental analysis reveals that differentiating compensation among team members through managerial discretion hurts coordination and helping behavior among them. 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