Diverse team building a gear bridge at sunrise.

Is Teamwork the Key to Fair Pay? Rethinking Incentives in the Modern Workplace

Kai Mendoza in Business & Economy August 2025 • 4 min read.

"New research reveals how evaluating collective performance can lead to more effective and equitable compensation, even when individual contributions are hard to measure."

In today's fast-paced work environments, motivating employees and ensuring fair compensation are critical challenges for businesses. Traditional incentive models often focus on individual performance, which can be difficult to measure accurately and may not always encourage collaboration. This is especially true in team-oriented settings where the success of a project depends on the combined efforts of multiple individuals.

The standard approach to moral hazard in teams involves a principal designing a contract to motivate a group of agents. While individual actions might be unobservable, they contribute to the overall performance. The ideal contract statistically links actions to performance metrics, which can make compensation more reasonable.

New research is challenging the long-held belief that individual-based incentives are always superior. This emerging field explores non-Bayesian approaches to the moral hazard problem, suggesting that carefully designed team-based incentives can, in some instances, be more effective and fairer. Instead of relying on prior assumptions about the agents' actions, the principal chooses a contract that maximizes worst-case expected profits, considering all possible unknown actions available to the agents.

The Problem with Individual Performance Evaluations

Diverse team building a gear bridge at sunrise.

Traditional methods of evaluating and rewarding employees often fall short, especially in collaborative environments. These shortcomings can stem from several factors:

It's often difficult, if not impossible, to accurately measure each individual's contribution to a team project. Attributing success or failure to specific people can be subjective and may overlook the importance of collaboration and mutual support.

Discourages Collaboration: When employees are solely focused on their own performance metrics, they may be less likely to help colleagues or share knowledge. This can stifle innovation and reduce overall team effectiveness.
Creates Unhealthy Competition: Individual incentives can foster a competitive environment where employees see each other as rivals rather than collaborators. This can lead to stress, decreased morale, and even sabotage.
Ignores External Factors: Individual performance is often influenced by factors beyond an employee's control, such as market conditions, resource availability, and the performance of other team members. Relying solely on individual metrics can create a system that feels unfair and demotivating.
Fails to Reward Teamwork: Many vital contributions, such as mentoring, problem-solving, and conflict resolution, don't always translate into easily measurable individual achievements.

New research suggests that a shift towards team-based incentives can address many of these issues, creating a more equitable and productive work environment.

The Future of Fair Pay: Embracing Teamwork

The research on team-based incentive pay offers a promising path towards more effective and equitable compensation systems. By recognizing the value of collaboration and shared success, businesses can create a work environment that fosters teamwork, boosts morale, and drives better overall performance. As the nature of work continues to evolve, embracing innovative approaches to incentives will be crucial for attracting and retaining top talent and achieving sustainable success.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2401.16542,

Title: Robust Performance Evaluation Of Independent And Identical Agents

Subject: econ.th

Authors: Ashwin Kambhampati

Published: 29-01-2024

Everything You Need To Know

What are the main drawbacks of individual performance evaluations in a team-oriented setting?

Individual performance evaluations in team-oriented settings face several challenges. Firstly, it's difficult to accurately measure each individual's contribution, leading to subjectivity and potential oversight of collaborative efforts. Secondly, such evaluations can discourage collaboration, as employees may prioritize individual metrics over helping colleagues. Thirdly, they can foster unhealthy competition, creating a stressful environment. Finally, they often ignore external factors that influence performance, and fail to reward vital contributions like mentoring or conflict resolution, making the system feel unfair.

How does the 'principal' design contracts in the context of team-based incentives to address the moral hazard problem?

In team-based incentives, the principal designs a contract to motivate a group of agents. While individual actions might be unobservable, they contribute to the overall performance. The contract statistically links actions to performance metrics to make compensation more reasonable. The principal might opt for non-Bayesian approaches, choosing a contract that maximizes worst-case expected profits, which considers all possible unknown actions available to the agents.

How can team-based incentives foster a more equitable and productive work environment?

Team-based incentives address many issues associated with individual performance evaluations. By recognizing the value of collaboration and shared success, they create a work environment that fosters teamwork, boosts morale, and drives better overall performance. This approach encourages employees to support each other, share knowledge, and work towards common goals, leading to a more cohesive and productive team. Furthermore, it can lead to fairer compensation as team success is shared, reducing the feeling of unfairness associated with individual-focused metrics.

What is the 'moral hazard' problem in the context of team-based incentives, and how is it addressed?

The 'moral hazard' problem in teams arises because individual actions, though unobservable, contribute to overall team performance. The ideal contract statistically links actions to performance metrics to make compensation more reasonable. This is typically managed by the principal who designs contracts that motivate the agents effectively. Non-Bayesian approaches offer a different way to manage this, where the principal chooses a contract that maximizes worst-case expected profits, considering all possible actions.

Why are traditional incentive models often ineffective in today's fast-paced work environments?

Traditional incentive models often focus on individual performance, which may not accurately reflect contributions in collaborative environments. This can lead to several issues. Firstly, accurately measuring individual contributions can be challenging, especially when teamwork is crucial. Secondly, these models can discourage collaboration and foster unhealthy competition among employees. Additionally, they might fail to consider external factors influencing individual performance and overlook contributions not easily quantifiable, such as mentoring or conflict resolution. Therefore, these traditional models may not always encourage collaboration, making the work environment less effective.