Competition and Reward Practices: Evidence from Public Schools

Highlights

1. As competition intensity increases, school principals (i.e. managers) are more likely to use financial rewards and differentiate these rewards based on performance.
2. While nonfinancial rewards are more commonly used in schools overall, competition intensity has only a weak association with their use and does not significantly impact how they are distributed among teachers of varying performance.
3. Greater competition leads school principals to focus reward practices more on student achievement and teacher competence, potentially at the expense of broader outcomes like student engagement and well-being.

In this study, the researchers explored how competition intensity in the market for public services affected the reward practices of managers. Financial and nonfinancial rewards were considered, and the following choices were examined when managers faced intensifying competition:

1. Whether more rewards are used or not.
2. How rewards are distributed between employees of varying levels of performance.
3. The specific types of rewarded outcomes.

The study setting was the public education sector in the state of Victoria, Australia, where school principals competed with schools in the local area. Similar to many other sectors in the economy, healthy competition is now viewed as the hallmark of a well-functioning school system. Policymakers regard competition and teacher incentives as two important enablers of better educational outcomes. As such, sizable resources have been directed to increase both competition among public schools and incentives offered to teachers. However, there is limited evidence on how school principals use incentives when their schools face intensifying competition.

Prior research has focused on how competition affects incentive design choices at the highest levels of an organization, such as with CEOs or boards of directors. In a setting where prices are fixed, which is the case for many public sector entities, prior literature would argue for greater use of incentives for top executives to encourage effort when they face more intense competition, because their marginal contribution in gaining market share becomes more valuable.

It is unclear whether this argument also applies to rank-and-file employees in the public-school sector, where teachers are often viewed as motivated agents who may respond differently to rewards. Powerful teacher unions have also opposed the use of incentive-based pay systems for teachers, often clashing with politicians and administrators over these policies. Reasons for this opposition include the difficulty in accurately measuring a teacher’s contribution to students’ success, the potential adverse impact on the willingness of teachers to work with the neediest students, and greater levels of unproductive influence activities.

The study setting was characterized by decentralized decision-making that empowers school principals and gives parents autonomy in their choice of schools. For example, 94.5% of Australian principals reported that they compete with at least one other nearby school for enrollment, whereas 86% reported at least two (OECD 2014). Principals in public schools compete for students, as higher enrollments would reflect more positively on their performance as school leaders, resulting in a lower likelihood of change in school leadership, greater prestige, and career prospects.

The researchers measured competition intensity using a range of commonly used proxies, such as the number of schools within a certain radius of the focal school, as well as the Herfindahl-Hirschman index. The researchers combined competition intensity measures with information about reward practices at public schools gathered from a survey of public-school principals. The researchers also used data from the archival database of the Australian Curriculum and Reporting Authority (ACARA) and the Australian Bureau of Statistics as a source for the various control variables that have the potential to confound the assessment of the relationship between our test variables.

The researchers found that competition intensity is positively associated with a school principal’s use of financial rewards after controlling for various factors, such as school performance, the socioeconomic status of the enrolled students, and the population within the competition radius. In addition, they found that competition intensity is positively associated with a greater differentiation in the distribution of financial rewards between higher versus lower performing teachers.

Even though nonfinancial rewards (e.g., written recognition, verbal recognition, tokens of appreciation) are generally more widely used than financial rewards in schools, the researchers only found a weak association between competition intensity and the use of nonfinancial rewards. The researchers did not find a significant association between competition intensity and how nonfinancial rewards are distributed among teachers of varying performance levels.

With regard to the types of outcomes rewarded by school principals, the researchers found evidence that competition intensity is associated with a greater focus on student achievement as well as teacher competence, relative to student engagement and well-being.

One main reason for the use of performance-based rewards is to attract and retain quality employees. Human capital plays a crucial role for schools with more competitors nearby because this would likely result in competition in the labor market for quality teachers. In additional analyses, the researchers found that the use of financial rewards mediated the positive association between competition and the number of applicants a school receives for a teaching position, as well as the negative association between competition and teacher turnover.

The researchers also found that more intense competition is associated with more extensive use of financial rewards and a greater differentiation in the distribution of financial rewards between higher versus lower performing teachers. However, they did not find similar results for nonfinancial rewards. One possible reason may be the more extensive use of nonfinancial rewards in schools compared with financial rewards.

The researchers also examined how competition affects the relative emphasis placed on different outcomes when rewarding teachers. They found that more intense competition increases the school principal’s focus on student achievement as well as teacher competence, relative to student engagement and well-being. These results shed light on the hidden consequences of competition amongst schools, suggesting that competition may create an imbalance in the emphasis placed on various student outcomes.

Overall, the study findings are consistent with the economics-based theories of competition.

Although the researchers found evidence that competition leads to increased relative focus toward student achievement, survey data did not allow the researchers to examine whether the reward practices ultimately result in improved student achievement in the future. Nevertheless, this study opens the black box of incentive-related choices made by the top decision maker in schools, which provides valuable insights to various stakeholders (e.g., parents, policymakers, and teacher unions). Finally, the focus on a single industry (public schools) may limit the generalizability of this study to other settings, given differences in areas such as the nature of competition, fluidity of the market structure, and funding mechanisms.

Keywords: Competition, Rewards; Effort allocation

* Learn more from the full research article here:
https://doi.org/10.2308/TAR-2024-0041