How do incentive systems spread through organizations?

The research conducted within a large cooperative bank reveals that the initial adoption and subsequent diffusion of performance-based incentive systems are governed by a combination of economic trade-offs and organizational learning processes. While agency theory variables, specifically the balance between high expected incentive benefits and low expected risk-sharing costs, successfully explain why certain banks choose to adopt the system immediately, the gradual spread to other units is primarily attributed to extensive learning-by-doing and strong learning spillovers. Early adopters facilitate this diffusion by experimenting with different performance measures and weights, which effectively reduces the uncertainty surrounding the innovation's actual value. This acquired information is then disseminated to potential adopters through formal channels, such as regional consultancy offices and specialized committees, as well as through informal social interactions encouraged by the cooperative's non-competitive structure. Furthermore, the characteristics of a bank's social network, including its size and the physical proximity of its members, directly influence the speed of diffusion by determining the availability and accessibility of early adopters' experiences. Contrary to institutional theory's suggestion that late adoption is merely a symbolic response to social pressure, the findings indicate that these banks genuinely use the system as intended and that incentive contracting should be viewed as a dynamic process where continuous learning allows for the refinement of contract design over time.