You Win Some, You Lose Some : The Framing of Incentives

We use behavioral decision and agency theory to examine how the framing of contingent compensation affects agent preferences and behaviors in three separate studies sampling business undergraduates, MBAs, and physicians. In general, we found support for the risk aversion assumptions of agency theory, as well as the loss aversion posited by prospect theory. In particular, we found agents preferred contracts where there was a higher probability of achieving benchmark goals, and that agents were generally more willing to sacrifice their leisure and less likely to shirk when faced with contingent incentive contracts. We also found that the framing of an incentive as a loss (penalty), rather than a galn (bonus), resulted in a greater willingness to go beyond requirements (organizational citizenship behaviors) and to engage in quot;misquot; behavior (e.g. misrepresenting results, sabotage, and the like). Finally, we found that the framing of incentive affected physicians' recommendations for patient care. Specifically, primary care physicians faced with potential losses were more likely to retain and treat patients themselves rather than refer them to specialists or recommend hospitalization. Physicians found that the procedural fairness of three different compensation plans (salary, fee-for-service and capitation) was equivalent. However, despite equal expected values, the physicians indicated that losses were always distributively unfair