Effects of monitoring and incentives on supplier performance: An agency theory perspective

This study empirically investigates the relationship between two key supplier performance measurement and management practices (i.e. monitoring and incentives) and suppliers' operational performance. Grounding on agency theory, a theoretical framework is proposed identifying the mediation effect of goal congruence and supplier opportunism within the direct relationship between monitoring/incentives and suppliers' operational performance. Related hypotheses are tested by applying structural equation modelling on a final sample of 305 responses, collected from a cross-country survey. Results uncover a nuanced and insightful picture: both monitoring and incentives positively affect the suppliers' operational performance. Goal congruence does not result as a significant mediator whereas supplier opportunism mediates the monitoring-performance relationship and the incentives-performance relationship. However, contrary to expectations, providing incentives to suppliers increases the chances of opportunistic behaviours, which in turn diminishes suppliers’ operational performance. While the key empirical evidence supports the general positive impact of monitoring and incentives on performance, incentives appear as a double-edged sword due to their potential counterproductive effect in increasing supplier opportunism.