The Sociology of Groups and The Economics of Incentives: Theory and Evidence on Compensation Systems

This paper incorporates the sociological concept of “group norms” into an economic analysis of pay systems. We use a behavioral microeconomic model and a unique survey of medical groups to examine the theoretical and empirical relationship between group norms and incentive pay. Our findings suggest that, at least for medical groups, norms are binding constraints in the choice of pay practices. While group norms matter, the patterns in the data suggest that they are not all that matters. Analysis of the preferences and activities of individual physicians indicate that factors highlighted by the economic theory of agency, notably income insurance and multi-task considerations, also shape pay policies. The conclusion we draw from these results is that the sociological concept of group norms augments rather than replaces more conventional economic analyses of pay practices.