Framing contractual performance incentives: Effects on supplier behaviour

Wendy van der Valk, Kostas Selviaridis

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Purpose – This paper investigates the effects that the framing of contractual performance incentives has on supplier behavioural and relational responses and on the buyer-supplier relationship.

Design/ methodology/ approach – We draw on three in-depth case studies of contractual relationships, which exhibit differences in terms of how performance incentives are framed i.e. using promotion, prevention, and ‘hybrid’ frames respectively. The study involved 38 semi-structured interviews and analysis of contract agreements.

Findings – First, while promotion-framed incentives lead to positive supplier responses and improved relationships, prevention-framed incentives result in negative responses and deteriorating relations. Second, hybrid-framed incentives can lead to productive supplier responses when positive ex ante expectations are met, although the creation of such positive expectations in the first place depends on the proportionality of bonus and penalty elements. Third, promotion- and hybrid-framed incentives do not by default lead to positive effects, as these are contingent on factors pertaining to contractual clarity. Fourth, the overall overarching purpose of the contract moderates the effects of contract framing on supplier responses.

Research limitations/ implications – The study contributes to contracting research by showing how the framing of performance incentives influences supplier behavioural and relational responses. It also extends existing literature on contract framing by examining the effects of hybrid-framed incentives, and stressing that contract framing should be considered in joint with the clarity and overall purpose of the contract.

Practical implications – Managers may differentiate their approach to contract framing approaches depending on the type of supplier relationship in focus. Furthermore, effective design of promotion- and hybrid-framed incentives requires attention to setting: a) realistic performance targets (on the short, medium and long term); b) salient bonuses related to these targets; c) incentive structures that appropriately balance rewards and risks; and: d) mechanisms that explicate and consider uncontrollable factors in the calculation of bonus /malus payments.

Originality/ value – The paper examines the role of contract framing and its effects on supplier behaviour, thereby stressing the psychological impact of contracts on buyer-supplier relationships.
LanguageEnglish
JournalInternational Journal of Operations and Production Management
StateE-pub ahead of print - Aug 2018

Fingerprint

Incentives
Incentive effect
Suppliers
Managers
Factors
Buyer-supplier relationships
Bonus
Incentive structure
Payment
Proportionality
Penalty
Bonuses
Psychological
Reward
Structured interview
Supplier relationships
Contracting
Design methodology
Bonus-malus

Keywords

  • framing
  • performance incentives
  • contracting
  • buyer-supplier relationships

Cite this

@article{b403ccf65f644e6e9df93db94f5db701,
title = "Framing contractual performance incentives: Effects on supplier behaviour",
abstract = "Purpose – This paper investigates the effects that the framing of contractual performance incentives has on supplier behavioural and relational responses and on the buyer-supplier relationship. Design/ methodology/ approach – We draw on three in-depth case studies of contractual relationships, which exhibit differences in terms of how performance incentives are framed i.e. using promotion, prevention, and ‘hybrid’ frames respectively. The study involved 38 semi-structured interviews and analysis of contract agreements. Findings – First, while promotion-framed incentives lead to positive supplier responses and improved relationships, prevention-framed incentives result in negative responses and deteriorating relations. Second, hybrid-framed incentives can lead to productive supplier responses when positive ex ante expectations are met, although the creation of such positive expectations in the first place depends on the proportionality of bonus and penalty elements. Third, promotion- and hybrid-framed incentives do not by default lead to positive effects, as these are contingent on factors pertaining to contractual clarity. Fourth, the overall overarching purpose of the contract moderates the effects of contract framing on supplier responses. Research limitations/ implications – The study contributes to contracting research by showing how the framing of performance incentives influences supplier behavioural and relational responses. It also extends existing literature on contract framing by examining the effects of hybrid-framed incentives, and stressing that contract framing should be considered in joint with the clarity and overall purpose of the contract. Practical implications – Managers may differentiate their approach to contract framing approaches depending on the type of supplier relationship in focus. Furthermore, effective design of promotion- and hybrid-framed incentives requires attention to setting: a) realistic performance targets (on the short, medium and long term); b) salient bonuses related to these targets; c) incentive structures that appropriately balance rewards and risks; and: d) mechanisms that explicate and consider uncontrollable factors in the calculation of bonus /malus payments. Originality/ value – The paper examines the role of contract framing and its effects on supplier behaviour, thereby stressing the psychological impact of contracts on buyer-supplier relationships.",
keywords = "framing, performance incentives, contracting, buyer-supplier relationships",
author = "{van der Valk}, Wendy and Kostas Selviaridis",
year = "2018",
month = "8",
language = "English",
journal = "International Journal of Operations and Production Management",
issn = "0144-3577",
publisher = "Emerald Group Publishing Ltd.",

}

Framing contractual performance incentives : Effects on supplier behaviour. / van der Valk, Wendy; Selviaridis, Kostas.

In: International Journal of Operations and Production Management, 08.2018.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Framing contractual performance incentives

T2 - International Journal of Operations and Production Management

AU - van der Valk,Wendy

AU - Selviaridis,Kostas

PY - 2018/8

Y1 - 2018/8

N2 - Purpose – This paper investigates the effects that the framing of contractual performance incentives has on supplier behavioural and relational responses and on the buyer-supplier relationship. Design/ methodology/ approach – We draw on three in-depth case studies of contractual relationships, which exhibit differences in terms of how performance incentives are framed i.e. using promotion, prevention, and ‘hybrid’ frames respectively. The study involved 38 semi-structured interviews and analysis of contract agreements. Findings – First, while promotion-framed incentives lead to positive supplier responses and improved relationships, prevention-framed incentives result in negative responses and deteriorating relations. Second, hybrid-framed incentives can lead to productive supplier responses when positive ex ante expectations are met, although the creation of such positive expectations in the first place depends on the proportionality of bonus and penalty elements. Third, promotion- and hybrid-framed incentives do not by default lead to positive effects, as these are contingent on factors pertaining to contractual clarity. Fourth, the overall overarching purpose of the contract moderates the effects of contract framing on supplier responses. Research limitations/ implications – The study contributes to contracting research by showing how the framing of performance incentives influences supplier behavioural and relational responses. It also extends existing literature on contract framing by examining the effects of hybrid-framed incentives, and stressing that contract framing should be considered in joint with the clarity and overall purpose of the contract. Practical implications – Managers may differentiate their approach to contract framing approaches depending on the type of supplier relationship in focus. Furthermore, effective design of promotion- and hybrid-framed incentives requires attention to setting: a) realistic performance targets (on the short, medium and long term); b) salient bonuses related to these targets; c) incentive structures that appropriately balance rewards and risks; and: d) mechanisms that explicate and consider uncontrollable factors in the calculation of bonus /malus payments. Originality/ value – The paper examines the role of contract framing and its effects on supplier behaviour, thereby stressing the psychological impact of contracts on buyer-supplier relationships.

AB - Purpose – This paper investigates the effects that the framing of contractual performance incentives has on supplier behavioural and relational responses and on the buyer-supplier relationship. Design/ methodology/ approach – We draw on three in-depth case studies of contractual relationships, which exhibit differences in terms of how performance incentives are framed i.e. using promotion, prevention, and ‘hybrid’ frames respectively. The study involved 38 semi-structured interviews and analysis of contract agreements. Findings – First, while promotion-framed incentives lead to positive supplier responses and improved relationships, prevention-framed incentives result in negative responses and deteriorating relations. Second, hybrid-framed incentives can lead to productive supplier responses when positive ex ante expectations are met, although the creation of such positive expectations in the first place depends on the proportionality of bonus and penalty elements. Third, promotion- and hybrid-framed incentives do not by default lead to positive effects, as these are contingent on factors pertaining to contractual clarity. Fourth, the overall overarching purpose of the contract moderates the effects of contract framing on supplier responses. Research limitations/ implications – The study contributes to contracting research by showing how the framing of performance incentives influences supplier behavioural and relational responses. It also extends existing literature on contract framing by examining the effects of hybrid-framed incentives, and stressing that contract framing should be considered in joint with the clarity and overall purpose of the contract. Practical implications – Managers may differentiate their approach to contract framing approaches depending on the type of supplier relationship in focus. Furthermore, effective design of promotion- and hybrid-framed incentives requires attention to setting: a) realistic performance targets (on the short, medium and long term); b) salient bonuses related to these targets; c) incentive structures that appropriately balance rewards and risks; and: d) mechanisms that explicate and consider uncontrollable factors in the calculation of bonus /malus payments. Originality/ value – The paper examines the role of contract framing and its effects on supplier behaviour, thereby stressing the psychological impact of contracts on buyer-supplier relationships.

KW - framing

KW - performance incentives

KW - contracting

KW - buyer-supplier relationships

M3 - Article

JO - International Journal of Operations and Production Management

JF - International Journal of Operations and Production Management

SN - 0144-3577

ER -