Task-Specific Experience, Tacit Knowledge, and Compensation Contracts

ABSTRACT This study experimentally examines whether managers’ task-specific experience influences their reliance on performance-based contracts to motivate employees to perform cognitively stimulating tasks. Building on experiential learning theory, we predict managers who acquire task-specific experience by doing the employee’s task possess tacit knowledge about the task’s cognitive stimulation and associated intrinsic motivation. To motivate their employees, these managers will prefer a fixed-wage contract, which relies on intrinsic motivation, over a performance-based contract. Our results support these predictions. Managers who perform the employee’s task are less likely to choose the performance-based contract than managers who only read a description of the task. Additional analysis shows managers’ perception of the task’s cognitive stimulation and employees’ intrinsic motivation to complete the task explain the contract choice. We run three additional experiments to better understand the impact of task-specific experience on contract choice. Our study underscores the importance of task-specific experience for compensation contract design. JEL Classifications: C91; D83; M4.