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Framing contractual performance incentives: effects on supplier behaviour

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
JournalInternational Journal of Operations and Production Management
StateAccepted/In press - Aug 2018

    Research areas

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