BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting Association

Vol. 28, No. 1 DOI: 10.2308/bria-51147

Spring 2016
pp. 67–81

Using Incentives to Overcome the Negative Effects of

Faultline Conflict on Individual Effort
Yu Tian
University of Central Florida

Brad M. Tuttle
University of South Carolina

Yin Xu
Old Dominion University
ABSTRACT: In this study, we investigate the effects of faultline-induced conflict on individual effort and how
incentives can be designed to overcome these negative effects. Faultlines are hypothetical dividing lines between
group members based on various member attributes that can potentially split the overall group into subgroups.
Results from our experiment show that team members are more likely to perceive conflict when they face a faultline-
related issue, which, in turn, leads to lower effort by individual team members. Consistent with the theory of
cooperation and competition, incentives moderate the effect of conflict on effort, such that team incentives have a
greater effect to increase effort than individual incentives when the level of conflict is high, rather than low.
Collectively, our findings suggest that competitive team incentives may be an effective tool to overcome the negative
effects of faultline conflict in a group.
Keywords: faultlines; conflict; incentives; group decision making; effort.
Data Availability: The data are available upon request.

INTRODUCTION

T
he objective of this study is to examine whether incentives can help overcome the negative effects of conflict associated
with a faultline within a group. Faultlines are defined as hypothetical dividing lines based on various attributes of group
members that can potentially split a group into subgroups (Lau and Murnighan 1998). Faultlines can be created based
on demographic attributes such as gender, age, or race (Bezrukova, Jehn, Zanutto, and Thatcher 2009; Lau and Murnighan
1998). Strong faultlines are characterized by high similarity within the hypothetical subgroups and low similarity between
subgroups (Shaw 2004). An example of a strong faultline based on demographic attributes would be a group of three men and
three women in which the two subgroups also differ substantially from each other in age and/or race (Bezrukova et al. 2009). It
is also possible that different business units in organizations create hypothetical lines that can divide groups into subgroups.
While such a group may function quite well in many instances, faultlines, when activated by a relevant issue, problem, or
decision that triggers their action, can create conflict within a group and thus are likely to decrease group performance (e.g., De
Dreu and Weingart 2003). Faultline conflict is critical and pervasive in many organizations that purposefully seek heterogeneity
in groups with the aim of drawing on varied backgrounds to improve decisions. To the extent that such heterogeneity creates
subgroups that are diverse, faultlines will occur. Therefore, it is important for organizations to understand and find ways to
mitigate the potential negative effects of faultline conflict.

We gratefully acknowledge the very constructive and helpful comments from Richard C. Hatfield (editor), Geoffrey B. Sprinkle (associate editor), two
anonymous reviewers, Jason L. Smith, Sherry Thatcher, and workshop participants at the University of Nevada, Las Vegas. We also thank the Kenneth G.
Dixon School of Accounting at the University of Central Florida for financial support.
Editor’s note: Accepted by Geoffrey B. Sprinkle.
Submitted: March 2014
Accepted: April 2015
Published Online: May 2015
67
68 Tian, Tuttle, and Xu

In this study, we first investigate the effects of conflict induced by faultlines on the individual effort exerted by group
members in a business decision context. We then go beyond this to examine whether incentives moderate the impact of conflict
on individual effort. Incentive systems are a key management tool used by organizations to influence individual and group
behavior (e.g., DeMatteo, Eby, and Sundstrom 1998; Bonner and Sprinkle 2002). Specifically, we are interested in whether
different bonus pool allocations, i.e., team incentives versus individual incentives, can overcome the negative effects of
faultline conflict on individual effort.
M.B.A. students at a large university participated in a single period experiment with a 2 3 2 between-subjects design. The
independent variables are the presence of a manager-responsibility-based faultline (Faultline-No versus Faultline-Yes) and the
type of incentive (individual versus team). Participants were randomly formed into teams and were asked to assume the role of
managers in a company who, together, must discontinue one of two previously important products. In Phase 1 of the task, the
team collectively decides which product to discontinue and which product to keep. In Phase 2, participants decide the amount
of costly effort they are willing to individually spend to increase the output of the product the team decided to keep in Phase 1.
We find that the presence of a faultline results in higher levels of perceived conflict in teams, compared to the absence of a
faultline. We also find that perceived conflict negatively influences participants’ individual effort. Results show that perceptions
of conflict act as a mediating variable between faultline and effort. There is a significant interaction between the type of
incentives and the level of perceived conflict on individual effort. The type of incentives does not matter when the perceived
conflict is low, but it does matter when the perceived conflict is high. Consistent with the theory of cooperation and competition
(Deutsch 1949, 1980) that a competitive team incentive may serve to build a cooperative environment within a team in
opposition to the conflict, we find that team incentives increase effort more than individual incentives when the perceived
conflict is high, suggesting that team incentives may be an effective mechanism to overcome the negative effect of faultline
conflict on effort.
Our study has several important implications and contributions. First, we develop a model of conflict effects on individual
goal-related effort in groups within the framework of both faultline and cooperation/competition theories. Previous faultline
literature suggests that social category/identity faultlines in groups can cause conflict and adversely affect group performance, but
it does not extend the effect of conflict to effort or examine how economic incentives might mitigate its effects (e.g., Bezrukova et
al. 2009). Our data are consistent with the notion that faultlines induce conflict, but that team-based incentives can be used to
strengthen and motivate individual effort despite this conflict. We view our results as contributing to research examining the
interaction of incentive systems and key environmental variables and to research examining the efficacy of team incentives.
Second, we extend research examining faultlines and their consequences. While previous faultline research has primarily
focused on faultlines created around demographic attributes or social categories and on group outcomes (e.g., Bezrukova et al.
2009; Lau and Murnighan 1998, 2005; Thatcher, Jehn, and Zanutto 2003; Thatcher and Patel 2011), we use the attribute of
management responsibility to create faultlines and also shift the focus from group outcomes to individual effort. This is
important in a business context because firms often establish responsibility structures as part of management control
(Zimmerman 2006). As such, we extend the faultline literature to common work situations where job functions define one’s
role in a team and where subsequent independent effort is required to achieve the team’s goals.
Third, conflict resulting from faultlines is pervasive in that many organizations purposefully seek heterogeneity in groups
with the aim of drawing on varied backgrounds to improve decisions. To the extent that subgroups share common attributes but
are dissimilar from other subgroups, faultlines occur. Our study helps organizations identify the type of incentives (e.g., team
incentives) that can be used to overcome the negative effects of faultline conflict.
The rest of this paper is organized as follows. The next section provides background to the study and develops the
hypotheses. The third section describes the methodology, and the fourth reports the results of the analyses. In the final section,
we conclude and discuss the implications and limitations.

BACKGROUND AND HYPOTHESES

Group Faultlines and Conflict

Research in group decision making provides substantial understanding of the impact of group composition on group
decision processes and outcomes. Within this wide ranging literature, one stream of group research has investigated the effect
of member heterogeneity on group outcomes and developed the notion of faultlines. Faultlines are defined as ‘‘hypothetical
dividing lines that may split a group into subgroups based on one or more attributes’’ (Lau and Murnighan 1998, 328). For
instance, a heterogeneous group composed of both males and females may function very well as a group on most issues, but
split into two distinct and homogenous subgroups when the group task is to develop gender equality initiatives in the
workplace. In this case, the issue (i.e., gender equality) serves as a trigger that activates a previously latent faultline (i.e.,
gender).

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Faultline researchers use social psychology theories such as self-categorization (Turner 1985), social identity (Tajfel
1978), and similarity attraction (Bryne 1961) theories to explain the formation of faultlines and the potential impact of faultlines
on team decision processes and outcomes. Self-categorization theory and social identity theory are strongly related and suggest
the basis for the formation of in-groups and out-groups. Self-categorization suggests that individuals tend to classify themselves
and others into categories based on various attributes, such as gender, education level, or skills (Turner 1985). Social identity is
the individual’s self-concept derived from perceived membership in social groups and such identity becomes important when
social groups have meaning within a particular context (Hogg 2006; Hogg and Vaughan 2002). Similarity attraction theory
(Bryne 1961) posits that people are attracted to similar others and more likely to form in-groups and out-groups on the basis of
similarity. These theories together help explain the structure of group composition and the possible effect of faultlines on group
functioning.
When there is strong similarity or team identity within a subgroup and large differences between subgroups, conflict
between subgroups is more likely to arise. This occurs because group members create bonds within their subgroups and
develop distance between groups (Bezrukova et al. 2009; Brewer, Manzi, and Shaw 1993; Hornsey and Hogg 1999; Thatcher
and Patel 2011; Van Knippenberg, De Dreu, and Homan 2004). Thus, conflict created by faultlines can consist of disagreement
about the justice and fairness of different solutions pertaining to subgroups and may be impossible to resolve to the larger
group’s overall satisfaction. The resulting conflict reduces identification with the larger group and negatively influences group
processes and outcomes, including satisfaction with the overall group and group performance (e.g., Homan et al. 2008;
Thatcher and Patel 2011).
Previous faultline research has primarily focused on faultlines created around demographic attributes or social categories
(e.g., gender, race, and age) and on information-based attributes (e.g., education or work experience) (cf. Lau and Murnighan
1998, 2005; Bezrukova et al. 2009; Thatcher and Patel 2011). For example, Bezrukova et al. (2009) investigate the effects of
group demographics in terms of gender, age, level of education, and tenure on the performance of groups. Other faultline
researchers have looked at some organizational attributes. For instance, Polzer, Crisp, Javernpaa, and Kim (2006) find that in
geographically dispersed teams, members’ geographic locations can produce faultlines that, when activated, affect team
performance.1
Expanding upon the attributes that create faultlines, we manipulate the attribute of management responsibility (i.e.,
responsibility for different product lines). In a work environment, we anticipate management responsibility to be a highly
meaningful task-specific attribute. Management responsibility is important in a business context because organizations establish
responsibility structures as part of management control (Zimmerman 2006). Unlike attributes such as gender, race, or level of
education, management responsibility is central to managers’ work environment, their place in the organizational structure, and
their concept of personal responsibility for the interests of their subordinates. Furthermore, in a work situation, many of the
triggers that activate role-based faultlines have important economic implications. As such, if a group’s task triggers a faultline
based on management responsibility, then we argue that it will likely activate highly meaningful issues, thus generating strong
disagreement and high levels of conflict. This leads to our first hypothesis that extends prior faultline research into a business
context where faultlines are based on management responsibility:
H1: The presence of an activated faultline results in higher levels of perceived conflict in groups than when there is no
faultline.
Not all conflict results in negative effects. For instance, task conflict (as opposed to social and interpersonal conflict) is
defined as disagreements among group members about how best to solve a problem involving differences in viewpoints, ideas,
and opinions (Simons and Peterson 2000). As such, task conflict often focuses on how to achieve the best solution for the
overall group and can thus result in positive outcomes (Jehn 1995). In fact, one purpose of forming heterogeneous groups can
be to bring together individuals, who might disagree as a result of their diverse skills and knowledge, to work on a complex task
in order to achieve the best possible outcome. In this case, task conflict is anticipated, desired, and can improve decision-
making outcomes and group productivity by incorporating constructive criticism (Jehn 1995, 1997). In these instances, group
members may recognize the conflict for what it is and actually increase their motivation and effort toward achieving group
goals.
In contrast, when task conflict becomes associated with faultlines, the presence of faultlines can reduce identification with
the larger group and negatively influence group processes and outcomes. Self-categorization, social identity, and similarity
attraction theories all suggest that individuals will identify less with the overall group and identify more with their subgroup

1
The prior faultline literature generally manipulates more than one difference in order to make the separation between two subgroups stronger. However,
the literature requires only one attribute to create a faultline. Polzer et al. (2006) find one attribute (geographic distribution of groups) results in the
creation of faultlines.

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when they experience conflict associated with faultlines. Such decreased group identification in the presence of activated
faultlines and its associated conflict should result in lower motivation to achieve group goals and ultimately lead to decreased
effort by the group members involved.
These discussions are consistent with Bezrukova et al. (2009, 38), who suggest that ‘‘the negative effects of stereotyping,
in-group favoritism, and out-group hostility can cause conflict and dislike to surface, and lead to decreased cohesion and social
integration (Mackie, Devos, and Smith 2000; Tajfel and Turner 1986; Webber and Donahue 2001).’’ Bezrukova et al. (2009)
further state that the in-group/out-group distinctions are likely to occur in groups with faultlines and may cause process losses
and subsequently poor performance (Li and Hambrick 2005). Nevertheless, prior faultline studies have primarily focused on
group outcomes (e.g., Bezrukova et al. 2009; Lau and Murnighan 1998, 2005; Thatcher et al. 2003; Thatcher and Patel 2011)
and have not specifically addressed the effect of conflict on individual effort.
We extend the faultline literature by investigating the effect of faultlines on group members’ effort choices. Specifically,
we predict and examine whether members of a group who experience faultline-induced conflict will also reduce their levels of
effort toward a goal-oriented, employment-related task.
H2: Higher levels of perceived conflict associated with an activated faultline will result in lower levels of effort exerted by
group members.

The Effects of Team and Individual Incentives

Since faultlines can become active and the attendant conflict emerges endogenously and often unexpectedly, it is important
to identify ways to mitigate the negative effects on effort. In this regard, the theory of cooperation and competition proposed by
Deutsch (1949, 1980) provides a helpful framework of interactions among individuals in small groups. The theory posits that
the perceived compatibility of goals tends to influence social interactions among group members and the group processes
emerge as a consequence of the cooperative or competitive social situation (DeMatteo et al. 1998; Deutsch 1949). Specifically,
in a cooperative social situation, the goals of the separate individuals are so linked together that there is a positive relationship
among their goal attainments; movement toward one’s goals facilitates others’ movement toward their goals (Deutsch 1949,
1980; Tjosvold 1984). An individual can attain his or her goal if and only if the other individuals can attain their goals. In a
competitive social situation, the goals of the separate individuals are so linked that there is a negative relationship among their
goal attainments; movement toward one’s goals interferes with and makes less likely the others’ goal attainment (Deutsch
1949, 1980; Tjosvold 1984). An individual can attain his or her goal if and only if the other individuals cannot attain their
goals. Román (2009) provides case evidence consistent with theory of cooperation and competition that mutual goal
dependence can foster cooperation and overcome the negative aspects of competition.
The above observations lead us to investigate the effect of both overall team and individual incentives on effort in a context
where a faultline results in high levels of perceived conflict. We employ relative-performance-based team incentives such that
every team member receives an equal share of a team bonus based on the team output relative to other teams. Our individual
incentive is an individual relative-performance-based incentive based on an individual’s output relative to all other individuals
across all teams. In our study, the incentives (competitive team and individual incentives) serve an important role in
establishing a team’s goal structure that, in turn, is predicted to influence individuals’ effort as described below.
According to the theory of cooperation and competition, individual incentives often lead to a more competitive social
environment because individuals receive their individual bonus based on their relative output, compared to all other
individuals.2 That is, there is a negative correlation among all individuals’ goal attainments: if an individual receives a larger
individual bonus, then other individuals receive a smaller bonus. Hence, the competitive social environment created by
individual incentives is unlikely to mitigate the negative effect of faultline-induced conflict on effort and may even exacerbate
the effect.
In contrast, a competitive team incentive in which individuals within a team equally share in the team bonus (like in our
study) may serve to build a cooperative social environment in opposition to the conflict created by an active faultline.3 This is

2
Individual incentives will lead to a more competitive social environment only if the individuals’ goal attainments are in conflict with each other (like in
our study), but some individual incentives do not necessarily have such an effect. Both types exist in practice.
3
Although we use the theory of cooperation and competition to develop H3, we acknowledge the possibility that a team incentive could exacerbate the
negative effects of conflict on effort due to potential free-riding problems in a team setting. Free-riding problems can prevent sufficient effort within the
overall group to achieve a satisfactory outcome (Holmstrom 1982). When perceived conflict created by faultlines in a team is high, team incentives
may make the free-riding problem worse if individuals rationalize their low effort as justifiable and even retaliatory. In other words, conflict pits one
subgroup against another and may cause members of one subgroup to be reluctant to help the other subgroup achieve a reward. Although some prior
research has shown that intergroup competition reduces free riding within the group and increases group cohesion and collaborative effort (e.g.,
Gunnthorsdottir and Rapoport 2006; Chen, Williamson, and Zhou 2012), no study looks at this issue while examining the effect of faultline conflict.

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because the team bonus is based on the team’s total output relative to other teams, thereby refocusing group identity back to the
larger group as opposed to the subgroups. By pitting the overall team against other teams, there now exists a positive
correlation among all individuals’ goal attainment within a team: if a team receives a larger team bonus, then every member
within the team receives a larger bonus. This cooperative social environment should motivate team members to work together
toward their common goals (i.e., positively correlated goal attainment), perhaps even when faultline-induced conflict within a
team is present. Based on these arguments we propose the following hypothesis:
H3: Incentives moderate the effect of faultline-induced conflict on effort, such that team incentives increase effort more
than individual incentives when the conflict is high, rather than low.

METHOD

Design and Variables

The hypotheses developed above are tested in an experiment using a single-period 2 3 2 experimental design with faultline
(no versus yes) and incentives (individual versus team) manipulated as between-subject factors. We conduct the study in two
phases, the first phase manipulating faultline and allowing for the generation of conflict, and the second phase measuring
individual reaction to that conflict within the context of their incentives. A total of 64 M.B.A. students at a large university were
recruited to participate in the experiment.4 The average years of work experience of the participants is 4.52 years.
In the experiment, we formed teams of the minimum number for which subgroups are possible; that is, four members per
team yielding two possible subgroups of two members each. Assignment to team was random. Participants were told to assume
the role of managers in a company that needed to discontinue one of two previously important products. In order to provide an
environment that encouraged the presence or absence of perceived conflict, we manipulated faultline (no versus yes) in a two-
step process. The first step of the faultline manipulation consisted of varying the product(s) for which the managers were
responsible. In the Faultline-No condition, all four managers within the team were responsible for both Blue and Green
products. In the Faultline-Yes condition, two managers were responsible for only Blue products and the other two managers in
the same team were responsible for only Green products.
The second step of the faultline manipulation consisted of a trigger intended to activate the faultline in the Yes condition.
All participants were informed that the discontinued product resulted in a reduction in workweek and compensation for the
responsible managers and their employees. In the Faultline-Yes condition, the two managers and their employees who were
responsible for the product that is discontinued receive a 40 percent reduction in workweek and pay. Thus, our faultline
manipulation and trigger are intended to split teams into two subgroups: a Blue products group and Green products group, each
having an incentive to prevent their product from being discontinued. In the Faultline-No condition, all four team members are
responsible for both products so that the workweek and compensation of all four managers and their employees are reduced by
a factor of 20 percent, regardless of which product is discontinued.5
The faultline manipulation varies a number of task aspects consistent with prior studies to increase the strength of the
faultline. For instance, managers of Blue- (Green-) only products (Faultline-Yes condition) received instructions printed on
blue (green) paper, whereas managers of both products (Faultline-No condition) received instructions printed on neutral paper.
This is also consistent with Towry’s (2003) manipulation of team-identity and self-categorization. In addition, the two Blue
managers sat next to each other and opposite the table from the two Green managers, consistent with research showing that
physically arranging group member attributes in this way results in high within-group similarity and high between-group
differences (Homan, van Knippenberg, Van Kleef, and De Dreu 2007; Towry 2003; Van Knippenberg et al. 2004).
Importantly, the reduction in workweek and compensation was set to be equal in total with respect to all teams regardless
of experimental condition. That is, regardless of the product that was eliminated, faultline condition, and incentive condition,
when summing the reduction across all group members, each group experienced the same total reduction in compensation. The
difference lies solely in which team members bear the reduction as explained above.
To further ensure that our manipulations were successful, we performed the following steps. First, we gave each participant
a tag that shows which product(s) (Blue or Green or both) for which are they were responsible. Then, we handed out the study
instructions. At the beginning of the instructions we asked participants to check the product(s) for which they were responsible.
Finally, at the end of the study, we asked participants to indicate the product(s) for which they were initially responsible. All

4
One participant did not answer the questions about perceived conflict. As a result, only 63 participants’ responses are included in the data analyses.
5
To hold constant everything else other than manipulated variables between the faultlines conditions, we present the same three examples (under Phase
1 decisions) about the reduction in workweek and pay to all participants in both conditions.

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participants checked the correct box consistent with the product(s) to which they were assigned. In summary, the Faultline-Yes
condition produces an environment that favors conflict among team members, whereas the Faultline-No condition does not.6
We also manipulate incentives at two levels: individual versus team incentives. In order to implement the incentive
systems, two teams participated in each session of the experiment with four participants (i.e., managers) within each team. In
the individual incentive/bonus condition, the participants received an individual bonus (i.e., a portion of the total bonus
awarded by the company) that was determined by the participant’s individual output, relative to all other participants’ output
across both teams (i.e., company-wide). Participants under the individual incentive condition were provided with the following
information:
Total individual output is important because ABC instituted a new individual bonus to be awarded at the end of the
period. The total amount available for individual bonuses at ABC, Inc. is 1,000 francs. ABC implements their
individual bonus by dividing 1,000 francs among individuals in proportion to the total increase in company output.
In the team incentive condition, each team received a team bonus (i.e., a portion of the total bonus awarded by the
company) that was based on the team’s total output, relative to the other team’s total output. The amount of team bonus
received by each team was then shared equally among all members within the team. Participants under the team incentive
condition were provided with the following information:
Total team output is important because ABC instituted a new team bonus to be awarded at the end of the period. The
total amount available for team bonuses at ABC, Inc. is 1,000 francs. ABC implements their team bonus by dividing
1,000 francs between its two teams in proportion to the total increase in company output. The amount received by each
team is then shared equally among team members within each team.

Procedures and Tasks

The experiment proceeded as follows. As participants arrived, they were randomly assigned to one of the two teams for
that session. Both teams were then randomly assigned to the same experimental condition with the constraint that equal
numbers of sessions per experimental cell were obtained. The teams were then seated around tables with the experimental
materials pre-placed and in separate rooms. If the session was assigned to the Faultline-Yes condition, then the two Blue
managers faced opposite the table to the two Green managers. In order to maintain a controlled environment, different teams
were put in separate rooms, thus allowing team members to freely interact while preventing them from hearing the discussions
and decisions of other teams.
There were two phases of decision making in the experiment. In Phase 1 the team discussed the given information (i.e.,
income statement and other relevant information) about Blue and Green products and then collectively decided the product
(either Blue or Green) to discontinue. Participants read all the given information that provides justifications for continuing both
Blue and Green products. The teams were asked to achieve unanimous agreement regarding which product to discontinue and
the teams were given unlimited time to come to an agreement.7 The teams were asked to indicate, on an eight-point scale, the
product that their team selected to discontinue and how strongly the team feels about that decision. The eight-point scale
contained a vertical line at the mid-point and labels to clearly indicate the dichotomous choices. Responses to the right (left) of
the mid-point are coded as a decision to discontinue the Green (Blue) product. On average participants took about 20 minutes in
Phase 1.
In Phase 2, participants were assigned separate individual rooms with pre-placed materials and asked to individually decide
the amount of effort they were willing to spend to increase the output of the remaining product the team decided to keep in
Phase 1. The cost of effort, in francs, was defined as a convex function.8 An individual’s input (e.g., effort level chosen) was
then transferred into an individual increase in output by adding a random number, which was uniformly distributed between

6
We note that team members may experience feelings of conflict in either condition based on task characteristics or other social factors. For example, the
decision case is purposefully designed so that a substantial case for either product to be discontinued can be made and conflict based on task
characteristics is possible in even the Faultline-No condition. Furthermore, in the Faultline-Yes condition, it is possible that members of the subgroup
whose product is continued will believe there was less conflict than participants whose product is discontinued. For these reasons and the fact that our
theory is based on perceived conflict, we focus on individual perceptions of conflict.
7
An equal number of teams discontinued the two products (i.e., four teams discontinued Blue and four teams discontinued Green) in the Faultline-Yes
condition. All teams in the Faultline-No condition discontinued Green. There is no normative solution about which product should be discontinued and
we provide evidence/justifications for discontinuing either product.
8
Consistent with prior literature (e.g., Rankin 2004; Nalbantian and Schotter 1997), the cost of effort function in our study is: cost ¼ (effort2)/100.
Participants kept any endowed francs that they did not spend on effort.

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Using Incentives to Overcome the Negative Effects of Faultline Conflict on Individual Effort 73

FIGURE 1
Conflict Measurea

a
Adapted from Jehn (1995).

20 and þ20. The random number can be interpreted as a random shock in production or as the degree of (positive or negative)
synergy created in the team production process.
Next participants answered several questions about the conflict they experienced within their team. Then they answered
some demographic questions and were individually paid in cash. Participant’s earnings were calculated as follows: the
participants’ share of the (individual or team) bonus plus the endowed francs (100 francs) not spent on effort minus the
reduction in compensation (if any) related to the product discontinuation decision as discussed earlier. Earnings were converted
into U.S. dollars at the rate of 20 francs to $1 and participants were paid in private. Sessions lasted about 60 minutes and
participants’ earnings ranged from $4 to $17, with an average of $9.16.

RESULTS

The Effect of Faultline on Conflict

H1 predicts that faultlines result in higher perceived conflict. We measure the level of conflict using five questions adapted
from Jehn (1995), who developed the Intragroup Conflict Scale. We include those items that ask for individual perceptions of
the level of disagreement between group members as shown in Figure 1. These five items in the conflict scale load on a single
factor (eigenvalue ¼ 3.36, all loadings . 0.73). Cronbach’s alpha is 0.877, which is well above the widely used rule of thumb
of 0.70 (Nunnally 1978). Then, we test whether our Faultline manipulation created different levels of perceived conflict
consistent with H1. Panel A of Table 1 provides descriptive statistics of conflict and Panel B provides ANOVA results that
include Faultline and Incentive as the independent variables. We find that perceived conflict (3.75) in the Faultline-Yes
condition is higher than the perceived conflict (1.81) in the Faultline-No condition (F ¼ 44.05, p , 0.0001).9 We also find that
perceived conflict is not affected by the different incentives. Specifically, the level of conflict (2.76) in the individual incentive
condition is no different from the level of conflict (2.80) in the team incentive condition (F ¼ 0.01, p ¼ 0.94). Further, the level

9
All p-values reported in this study are two-tailed, unless otherwise stated.

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TABLE 1
The Effects of Faultlinea and Incentiveb on Conflictc

Panel A: Least Squares Mean (Standard Deviation) of Conflict

Faultline-No Faultline-Yes
Incentive (n ¼ 31) (n ¼ 32) Mean
Individual 1.75 3.76 2.76
(0.85) (1.19)
Team 1.86 3.73 2.80
(0.84) (1.53)
Mean 1.81 3.75

Panel B: Analysis of Variance Results on Conflict (Test of H1)

Mean
Source df Square F-value p-value
Faultline 1 55.57 44.05 , 0.0001
Incentive 1 0.007 0.01 0.94
Faultline 3 Incentive 1 0.004 0.00 0.95
Error 59 1.26
a
Faultline is manipulated between participants at two levels: yes (two participants [out of four] who were responsible for the product that is discontinued
receive a 40 percent reduction in pay) and no (all four participants receive a 20 percent reduction in pay, regardless of which product is discontinued).
b
Incentive is manipulated between participants at two levels: individual incentive (based on an individual’s output relative to all other individuals across
all teams) and team incentive (based on a team output relative to other teams).
c
Conflict is an average of five questions with a seven-point scale, adopted from Jehn (1995) as shown in Figure 1, with the higher number representing
higher conflict.
All p-values are two-tailed unless otherwise noted.

of conflict is not affected by the interaction of faultline and incentives (F ¼ 0.00, p ¼ 0.95). These results together are consistent
with the prior literature and H1 in that our manipulation induced higher perceived conflict in the Faultline-Yes condition and
that the different perceptions of conflict in our study are primarily caused by different faultline conditions.
H2 predicts that higher levels of faultline-induced conflict leads to lower effort. Table 2 presents the results of regression
analysis that includes Incentive, Conflict, and their interaction term as independent variables. The conflict variable in the

TABLE 2
The Effects of Conflict and Incentiveb on Effortc (Regression Analysis)
a

Model: Effort ¼ b0 þ b1 Incentive þ b2 Conflict þ b3 IncentiveConflict

Independent Parameter
Variable df Estimate t-value p-value*
Intercept 1 81.82 13.01 , 0.0001
Incentive 1 3.77 0.60 0.275
Conflict 1 5.44 2.74 0.004
Incentive 3 Conflict 1 3.46 1.99 0.043
Error 59
* These reported p-values are one-tailed tests because we have directional hypotheses.
a
Conflict is an average of five questions with a seven-point scale, adopted from Jehn (1995) as shown in Figure 1, with the higher number representing
higher conflict.
b
Incentive is manipulated between participants at two levels: individual incentive (based on an individual’s output relative to all other individuals across
all teams) and team incentive (based on a team output relative to other teams).
c
Participants indicate, on a scale from 0 to 100, the level of effort they are willing to exert to increase output. Higher numbers represent greater effort.
All p-values are two-tailed unless otherwise noted.

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Using Incentives to Overcome the Negative Effects of Faultline Conflict on Individual Effort 75

TABLE 3
The Effects of Conflict and Incentiveb on Effortc (ANOVA)
a

Panel A: Least Squares Mean (Standard Deviation) of Effort

Low Conflict High Conflict
Incentive (n ¼ 29) (n ¼ 34) Mean
Individual 73.57 49.29 61.43
(n ¼ 31) (19.84) (26.21)
Team 74.13 71.09 72.61
(n ¼ 32) (17.72) (24.40)
Mean 73.85 60.19

Panel B: Analysis of Variance Results on Effort

Source df Mean Square F-value p-value
Incentive 1 1,954.28 3.84 0.055
Conflict 1 2,919.00 5.73 0.020
Incentive 3 Conflict 1 1,762.74 3.46 0.068
Error 59

Panel C: Simple Effects (Planned Contrasts)

Mean
Contrast Difference F-value p-value
Individual Incentive:
Low Conflict vs. High Conflict 24.28 8.89 0.004
Team Incentive:
Low Conflict vs. High Conflict 3.04 0.15 0.705
Low Conflict:
Individual vs. Team Incentive 0.56 0.00 0.947
High Conflict:
Individual vs. Team Incentive 21.80 7.93 0.007
a
Conflict is an average of five questions with a seven-point scale, adopted from Jehn (1995) as shown in Figure 1, with the higher number representing
higher conflict. Conflict in this table is a dichotomous variable. We assign a value of 1 (i.e., high conflict) to the dichotomous Conflict variable if the
perceived conflict is greater than or equal to the median value of all responses provided by participants, and 0 (i.e., low conflict) otherwise.
b
Defined in Table 2.
c
Defined in Table 2.
All p-values are two-tailed unless otherwise noted.

regression analysis is the average response across the five questions adapted from Jehn (1995). We find a significant effect of
faultline-induced conflict on effort. Specifically, individuals exert less effort when they perceive higher conflict in a team
(coefficient ¼ 5.44, t ¼ 2.74, p ¼ 0.004, one-tailed). Therefore, H2 is supported from the regression analysis.

The Moderating Effects of Incentives on Effort

H3 predicts that incentives moderate the effect of conflict on effort such that team incentives have a greater effect than
individual incentives when perceived conflict is high, rather than low. The regression results in Table 2 show that the perceived
conflict in our study generally has a negative effect on effort. The regression results also show a significant interaction between
Conflict and Incentive on effort (t ¼ 1.99, p ¼ 0.043, one-tailed). In order to further examine the interaction effect on effort, we
create a dichotomous conflict variable and perform contrast analysis. We assign a value of 1 (High Conflict) to the dichotomous
Conflict variable if the perceived conflict is greater than or equal to the median value of all responses provided by participants,
and 0 otherwise. Panel A of Table 3 presents descriptive statistics for effort within different combinations of our dichotomous
conflict and incentive variables. Panel B of Table 3 provides analysis of variance results and Panel C shows the simple effects

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76 Tian, Tuttle, and Xu

FIGURE 2
Effects of Conflicta and Incentiveb on Effortc

a
Conflict is an average of five questions with a seven-point scale, adopted from Jehn (1995) as shown in Figure 1, with the higher number representing
higher conflict. Note that in this figure Conflict is coded as a dichotomous variable. We assign a value of 1 (high conflict) to the dichotomous Conflict
variable if the perceived conflict is greater than or equal to the median value of all responses provided by participants, and 0 (low conflict) otherwise.
b
Incentive is manipulated between participants at two levels: individual incentive (based on an individual’s output relative to all other individuals across
all teams) and team incentive (based on a team output relative to other teams).
c
Participants indicate, on a scale from 0 to 100, the level of effort they are willing to exert to increase output. Higher numbers represent greater effort.

using planned contrasts. Consistent with results in Table 2, when we use the dichotomous coding for conflict, as shown in Panel
B of Table 3, we also find that the negative effect of conflict on effort is significant (F ¼ 5.73, p ¼ 0.02). As predicted in H3,
Panel B of Table 3 supports the moderating effect of incentives on effort in a conflict environment (F ¼ 3.46, p ¼ 0.068).10
H2 predicts that higher levels of conflict result in lower effort. H3 modifies this prediction by suggesting that team
incentives will reduce the negative effect of conflict on effort more than individual incentives. Panel C of Table 3 reports simple
effects using planned contrasts. When team members are compensated under an individual incentive, they exert less effort
when they are in a higher conflict environment, compared to in a lower conflict environment (F ¼ 8.89, p ¼ 0.004). This same
contrast is not significant (F ¼ 0.15, p ¼ 0.705) in the team incentive condition as predicted by H3 and contrary to the notion
that team incentives might exacerbate free riding. Instead, team incentives reduce the negative effect of conflict on effort, thus
supporting H3.
We also test the effort level difference between individual and team incentives when the conflict in a team is high versus
low. As reported in Panel C of Table 3, when there is higher conflict in a team, team members exert more effort when they are
compensated under a team incentive, compared to when they are under an individual incentive (F ¼ 7.93, p ¼ 0.007). However,
when perceived conflict in a team is low, the effort between individual and team incentives is not significantly different (F ¼
0.00, p ¼ 0.947). Together, the results suggest that the moderating effect of incentives on effort differ with the level of conflict.
Specifically, we show that when conflict is high, individual incentives lead to lower effort, while team incentives help to
overcome the negative effect of conflict on effort. These results are also reported in Figure 2, which presents the interaction.
Per our theory, we explore whether perceptions of conflict act as a mediating variable to our faultline and incentive
manipulations on the level of individual effort. To aid in this assessment, Table 4 presents correlations between the manipulated
variables, conflict and effort. Using an ANOVA we first test for the direct effects of a faultline by incentive interaction. This is

10
We also perform the ANOVA while controlling for team effect. The results are consistent with Table 3 and the effect of team variable on effort is not
significant (F ¼ 1.33, p ¼ 0.225).

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Using Incentives to Overcome the Negative Effects of Faultline Conflict on Individual Effort 77

TABLE 4
Correlations
Faultlinea Incentive Conflict
b
Incentive 0.016
Conflictc 0.649*** 0.031
Effortd 0.071 0.305* 0.284*
*, *** p-value , 0.05, and p-value , 0.001, respectively.
a
Faultline is manipulated between participants at two levels: yes (two participants [out of four] who were responsible for the product that is discontinued
receive a 40 percent reduction in pay) and no (all four participants receive a 20 percent reduction, regardless of which product is discontinued).
b
Incentive is manipulated between participants at two levels: individual incentive (based on an individual’s output relative to all other individuals across
all teams) and team incentive (based on a team output relative to other teams).
c
Conflict is an average of five questions with a seven-point scale, adopted from Jehn (1995) as shown in Figure 1, with the higher number representing
higher conflict.
d
Participants indicate, on a scale from 0 to 100, the level of effort they are willing to exert to increase output. Higher numbers represent greater effort.

marginally significant (F ¼ 2.23, p ¼ 0.070, one-tailed; untabulated). When we include the dichotomous conflict variable in the
model, conflict is significant (F ¼ 6.55, p ¼ 0.014; untabulated), whereas the faultline by incentive interaction disappears (F ¼
0.03, p ¼ 0.86; untabulated). These results support our arguments that faultlines influence effort because of the conflict they
create and that incentives moderate that relationship.
In addition to looking at individual effort, presumably organizations would be quite interested in how these individual
perceptions of conflict roll up into group effort. We conduct an ANOVA and in general find that higher conflict results in less
effort across the entire team (F ¼ 4.35, p ¼ 0.041; untabulated). Looking at those with team incentives, the level of conflict has
no significant effect on the total effort exerted by team members. For those with individual incentives, high levels of conflict
results in significantly less overall team effort (F ¼ 4.05, p ¼ 0.049; untabulated).

The Effects of Group Decision on Individual Behavior

To further understand the relations among incentives, conflict, and effort, we form a variable labeled DiscontinueMy-
Product, which we coded as a 1 if the participant’s assigned product was discontinued, and as a 0 otherwise. We test whether
DiscontinueMyProduct and Incentives interact (Faultline-Yes condition only) to further explore the effects of a group decision
on individual behaviors. In the Faultline-Yes condition, two team members are solely responsible for one product, while the
other two members are solely responsible for the other product. The team decides which one of the two products to discontinue.
For the two members whose product is discontinued, they and their employees receive a reduction in their workload and
compensation. It is therefore reasonable to expect these participants to view the team interaction differently and likely more
negatively from those whose product is not discontinued. Therefore, we are particularly interested in the behavior of the team
members whose product is chosen by the team to be discontinued.
Panel A of Table 5 presents descriptive statistics. The average perceived conflict is marginally higher when team members’
only responsible product is discontinued than when it is not discontinued (t ¼ 1.64, p-value ¼ 0.055, one-tailed, untabulated).
Panel B of Table 5 provides the results of an ANOVA (on effort) that includes DiscontinueMyProduct and Incentive as
independent variables. The ANOVA shows a marginally significant effect of Incentives as well a marginally significant
interaction on effort. Panel C of Table 5 reports planned contrasts related to this interaction. Specifically, when members’ only
responsible product is discontinued, they exert more effort when they are provided a team incentive compared to when they are
provided an individual incentive (F ¼ 6.62, p ¼ 0.016).
Panel C of Table 5 and Figure 3 also show that members exert more effort when their products are discontinued compared
to when their products are not discontinued.11 Informal debriefing suggests that this might be due to members under team
incentives feeling more committed to the team after having sacrificed during the product discontinuation decision. In support of
this possibility, analysis of the group product discontinuation decision suggests that groups in the individual incentive condition
felt stronger about their choices than did groups in the team incentive condition (p ¼ 0.0003; untabulated).

11
We do not analyze the No-Faultline condition because every participant was responsible for both products and thus everyone in the No-Faultline
condition had one of their products discontinued.

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78 Tian, Tuttle, and Xu

TABLE 5
Effects of DiscontinueMyProduct (Faultline-Yes)a and Incentiveb on Effortc

Panel A: Mean of Conflict and Effort

DiscontinueMyProduct-Yes DiscontinueMyProduct-No
Individual Team Individual Team
Incentive Incentive Incentive Incentive
(n ¼ 8) (n ¼ 8) (n ¼ 8) (n ¼ 8)
Conflictd 4.08 4.18 3.45 3.28
Effort 51.25 85.88 58.25 60.44

Panel B: Analysis of Variance Results—Effort

Source df Mean Square F-value p-value
DiscontinueMyProduct 1 679.88 0.94 0.341
Incentive 1 2,710.32 3.74 0.063
DiscontinueMyProduct  Incentive 1 2,104.38 2.90 0.099
Error 28 724.52

Panel C: Simple Effects (Planned Contrasts)

Mean Difference F-value p-value
DiscontinueMyProduct-Yes:
Individual vs. Team Incentive 34.63 6.62 0.016
Team Incentive:
DiscontinueMyProduct: Yes vs. No 25.44 3.57 0.069
Individual Incentive:
DiscontinueMyProduct: Yes vs. No 7.00 0.27 0.607
a
Faultline is manipulated between participants at two levels: yes (two participants [out of four] who were responsible for the product that is discontinued
receive a 40 percent reduction in pay) and no (all four participants receive a 20 percent reduction in pay, regardless of which product is discontinued).
This table shows the ‘‘yes’’ faultline condition for DiscontinueMyProduct, which equals 1 if the participant’s assigned product was discontinued and 0
otherwise.
b
Incentive is manipulated between participants at two levels: individual incentive (based on an individual’s output relative to all other individuals across
all teams) and team incentive (based on a team output relative to other teams).
c
Participants indicate, on a scale from 0 to 100, the level of effort they are willing to exert to increase output. Higher numbers represent greater effort.
d
Conflict is an average of five questions with a seven-point scale, adopted from Jehn (1995) as shown in Figure 1, with the higher number representing
higher conflict.
All p-values are two-tailed unless otherwise noted.

DISCUSSION
Faultlines and the resulting conflict are common to group decision making when groups are composed of heterogeneous
members. It is therefore important for organizations to understand the potential negative impacts of faultlines and their
attendant conflict on individual behavior and what they can do to mitigate or overcome these consequences. In this study, we
investigate the effects of incentives on individual effort when conflict induced by faultlines is present in a working team.
We find that activated faultlines based on a business context created substantial perceptions of conflict among team
members such that perceived conflict is significantly higher in our faultline condition compared to the condition without a
faultline. Our results also show that when perceived conflict is higher, the effort exerted by individual team members is
generally lower. An important finding in our study, however, is that this general conclusion is modified by a significant
interaction between conflict and incentives. We provide evidence that when perceived conflict level is higher (i.e., in the
Faultline-Yes conditions), managers behave differently under team and individual incentives. Specifically, when the perceived
conflict is higher and when team members are compensated using individual incentives, they lower their effort. However, when
members are compensated using team incentives, they do not reduce their effort when the conflict is higher compared to when
the conflict is lower in a team. This suggests that team incentives may be an effective tool to overcome the negative effect of
faultline-induced conflict within groups.

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Using Incentives to Overcome the Negative Effects of Faultline Conflict on Individual Effort 79

FIGURE 3
Effects of DiscontinueMyProduct (Faultline-Yes)a and Incentiveb on Effortc

a
Faultline is manipulated between participants at two levels: yes (two participants [out of four] who were responsible for the product that is discontinued
receive a 40 percent reduction in pay) and no (all four participants receive a 20 percent reduction in pay, regardless of which product is discontinued).
This figure shows the ‘‘yes’’ faultline condition for DiscontinueMyProduct, which equals 1 if the participant’s assigned product was discontinued, and 0
otherwise.
b
Incentive is manipulated between participants at two levels: individual incentive (based on an individual’s output relative to all other individuals across
all teams) and team incentive (based on a team output relative to other teams).
c
Participants indicate, on a scale from 0 to 100, the level of effort they are willing to exert to increase output. Higher numbers represent greater effort.

Interestingly, individuals who had their products discontinued increase their level of effort. One possibility is that
participants who had their sole product discontinued may have exerted extra effort in order to make up their loss by earning
higher bonuses. However, if this were the motivation for the increase in effort, then one would expect more effort in the
individual incentive condition where the relationship between effort and reward is much more direct than in the team incentive
condition. Our results suggest otherwise.
Furthermore, the interaction effects of faultline-induced conflict and incentives are enhanced for participants who bore the
brunt of the product-discontinuation decision. That is, for participants in this subgroup, when they are compensated under
individual incentives and when they perceive high levels of conflict, they significantly reduce their effort compared to when
perceived conflict is lower. However, for those who are provided team incentives, they instead increase their effort when
perceived conflict is higher, compared to lower conflict. We conjecture based on limited debriefing that the higher effort
resulted from participants who have participated in making the decision to discontinue their own product and then have been
asked to implement that decision. For example, several participants in the team incentive condition, when asked about why they
would continue to exert effort after the team had decided to discontinue their product, said they felt an obligation to see the
team through and that disgruntled behavior in this context would be bad form. This result occurred despite these same
participants experiencing higher levels of conflict.
The question may be asked whether the same conflict would have arisen when one is faced with a major reduction in pay
regardless of the presence or absence of faultlines. Two aspects of our study suggest that it is the faultline, rather than the pay
reduction that created differences in conflict across conditions. The first is the design of the study in that every member of the
control condition faced a reduction in pay so that as a group, the reduction in pay across faultline conditions totals to the same
amount. Therefore, if the reduction in pay is driving the conflict, then we expect to find no differences between faultline
conditions contrary to our results. The second is the fact that we observe significant conflict among individuals whose product
is discontinued yet these same individuals increase their group-related goal effort. This pattern of results cannot be explained by
economics alone.
The limitations of this study provide opportunities for future research. First, the experiment consists of a single period and
the task in this study created only moderate levels of conflict. In long-standing teams, however, conflict induced along faultlines

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80 Tian, Tuttle, and Xu

might increase or diminish over time and the effects of conflict and incentives might change as well. Also, individuals whose
products are discontinued react to a change in incentives, but those whose products are not discontinued do not. Future research
is needed to explore and examine whether the pattern of the results found in our study generalize to a multiple period setting or
to environments with a higher level of conflict. Second, groups experience conflict in many ways and for a variety of reasons.
For instance, conflict could occur if everyone in the group had different responsibilities or if only one person had to lose his
product line and experience a major reduction in pay. This situation, however, would not necessarily involve sub-groups or
faultlines and would require a different theory to predict its outcomes, a matter for future research. Third, in our experiment, we
present limited information about the two products to be discontinued in order to contain the experiment into a tractable time
frame. Our individual and team incentives also are based on relative output, and future research might examine the robustness
of our results to other types of individual and team incentives. Moreover, much additional research is needed to understand
whether and how accounting practices and procedures mitigate or exacerbate the effects of faultlines in the workplace.

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