Contract Frame and Participation: mitigating Disadvantages of penalty Contracts

Contracting is an important aspect of IT governance and control. This aspect involves the manner in which goals are set, their achievements rewarded and penalized. In the context of service level agreements it has been shown that contracts that involve penalties have positive effects on individuals’ effort and negative effects on individuals’ attitude such as fairness perception. The negative effects of penalty clauses are a likely reason why they are rarely found in contracting with individuals. Our study was motivated by the question whether negative effects of penalty contracts can be mitigated. In an experiment we found that controllee participation can mitigate such negative effects. This implies that controllee participation is even more important in the face of penalty contracts in order to maintain high fairness perception levels.