Framing: The Holy Grail of Compensation Contracts? - An experimental analysis of the psychological processes that underlie the effect of contract frame on work effort

Abstract: Purpose: The purpose of this study is to analyse the psychological processes that underlie the effect of framed compensation contracts on work effort. Methodology: The study is based on an online survey experiment (N=113) and applies quantitative research methods. In a between-subjects design, participants are randomly assigned to two economically equivalent compensation contracts (bonus contract or penalty contract). Mediation analysis is performed using multiple linear regression. Theory: Prospect theory and self-determination theory are combined to develop a comprehensive model for empirical testing. The study thereby draws upon elements of cognitive, motivation, and social psychology. Focus is set on three potential mediators: loss aversion (prospect theory), the prospect of basic psychological need satisfaction, and the prospect of basic psychological need frustration (self-determination theory). Results: In opposition to previous research, penalty contracts are found to have an insignificant negative effect on intended work effort. This relationship is mediated by the prospect of basic psychological need satisfaction but not by the prospect of basic psychological need frustration. Profound loss aversion is measured, yet, it is unrelated to intended work effort. Conclusion: The survey experiment produces no evidence in favour of penalty contracts over bonus contracts. Contrary to the intuition of loss aversion, findings suggest that realising basic psychological need satisfaction is a bigger motivation for high work effort than preventing basic psychological need frustration.