Law Review: How Business Contracts Reduce Productivity, Output

New research published by Stanford Business School shows that business strategy that creates extensive policy documents may be working against the business goals they seek to generate.

The review examines research on staff contracts shows that many of these personnel contracts that seek to micro-manage behavior can, in fact, worsen those counterproductive behaviors. In fact, the research found that more specificity lowered productivity.

Business Contracts: Too Much Detail

For example, one study instructed one group of contracted employees to spend exactly 4.5 minutes on a page of work and focus exclusively on that task, while another group was told to spend around 4.5 minutes on the task.

The latter group spent more time at work, created more ideas, were more cooperative with their colleagues, and were more likely to return for future work.

Business Contracts: Build Entrepreneurial Incentives

Why the difference? The authors noted that the more general wording provided employees with a sense of autonomy, which leads to increased motivation and other desirable outcomes.

Wrote co-author Nir Halevy of the Stanford Graduate School of Business: “Minimal changes to the wording of contracts can have important consequences, especially when it comes to behaviors that are notoriously difficult to include in contracts, such as increasing effort, task persistence, and instilling a stronger sense of autonomy.”

Overly long and restrictive policies meant to curb bad behavior can, in fact, have the opposite effect.

The researchers acknowledge that employers require particular dutiesto mitigate risks and incentivize employees to do good work. There are two types of clauses typical in such contracts. Incorporating specificity in coordination clauses, which define the work to be done, is usually more optimal than in control clauses, which detail how to (and how not to) do the work.

How does this approach apply to other business contracts? The proposed philosophy is to generate agreements that incentivize coordination rather that ones that focus on control. For example:

  • Eliminate tightfisted policies that cause resentment, such as not allowing employees to use frequent flyer and frequent stay miles when traveling on company business.
  • Promote healthy behaviors, especially when it comes to controlling sick leave policies that often force employees to come to work when sick or use vacation time when not feeling well.
  • Be consistent when applying the workplace policies. That means implementation and approach across units and within teams, which requires better business leadership, including training of supervisors on how not to play favorites.
  • Ask for feedback on policies that may not make sense to the workplace by asking them for insights and concerns they may have about policies that are not working.
  • Offer context as to why the policies exist in the first place. Helping employees understand why policies are written and enforced. Explain why you have the IT policies that you do, eg, preventing the use of personal devices to be connected to company computers or servers in order to protect from cyberattacks, helps reduce criticism and promote better adherence.

Details matter, clearly, but only when they don’t detail the policy intent.

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