It's What You Say, Not What You Pay: An Experimental Study of Manager-Employee Relationships in Overcoming Coordination Failure

Abstract

We study manager-employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak-link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal: increasing employees' financial incentives to coordinate and communication with employees. Synthesizing methods drawn from psychology and economics, we quantify the impact of specific types of communication on workers' effort levels and manager's profits. This methodology allows us to rigorously compare the efficacy of communication and direct incentives in an environment where both are available. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective communication strategy is quite simple: specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well. (JEL: C92, D23, J31, L23, M52)