Shikhar Sarin & Vijay Mahajan The Effect of Reward Structures on the Performance of Cross-Functional Product Development Teams This study examines the effect of reward structures on the performance of cross-functional product development teams. Results suggest that when it is easy to evaluate individual performances, position-based differential rewards lead to greater satisfaction. For long and complex projects, process-based rewards have a negative effect and outcome-based rewards have a positive effect on performance. For risky projects and highly competitive or rela- tively stable industries, a nonlinear and monotonically decreasing relationship exists between outcome-based rewards and product quality. N ew product development (NPD) is critical for the renewal, survival, and success of organizations (Brown and Eisenhardt 1995; Wind and Mahajan 1997). To ensure success in the development of new prod- ucts, marketing needs to have a significant influence; how- ever, marketing often ends up playing a secondary role to engineering (Workman 1993). Greater coordination among functional areas is essential for successful NPD (Adler 1995; Olson, Walker, and Ruekert 1995; Wind and Mahajan 1997). Cross-functional teams have become an increasingly popular mechanism for achieving greater interfunctional integration and cooperation in the NPD process (Adler 1995; Griffm 1997; Olson, Walker, and Ruekert 1995; Pas- carella 1997; Wind and Mahajan 1997). Reward structures have been identified as one of the most important determinants of interfunctional integration among organizational employees and units (Coombs and Gomez-Mejia 1991). The use of rewards as a means of con- trolling, managing, and enhancing performance has been well established in marketing, especially in the areas of dis- tribution channels (e.g., Gundlach and Cadotte 1994), sales force management (e.g., Ingram and Bellenger 1983), and organizational buying behavior (e.g., Anderson and Cham- bers 1985). In this article, we extend this line of inquiry to include another vital function of marketing—NPD. We examine how reward structures affect the perfor- mance of cross-functional product development teams (CFPDTs). Performance of CFPDTs is measured in terms of speed to market, level of innovation, product quality, adher- ence to budget and schedule, and market performance Shikhar Sarin is Robert and Irene Bozzone Assistant Professor of Man- agement and Technoiogy, Laily School of Management and Technoiogy, Rensselaer Polytechnic Institute. Vijay Mahajan is John P Harbin Centen- nial Chair in Business, Department of Marketing, University of Texas at Austin. The authors are grateful for the access provided by the participat- ing organizations and the financial support provided by the Bonham Fund, University of Texas at Austin. They also thank Robert Baron, Rohit Desh- pande, Bob Lusch, Rob McDonald, Trina Sego, S. Venkatraman, and the three anonymous JM reviewers for their helpful comments and Stacey Barlow Hills for her research assistance. (among others)—variables that have long been the focus of marketing literature (for some recent examples, see Olson, Walker, and Ruekert 1995; Workman 1993). In their intro- duction to Journal of Marketing Research's Special Issue on Innovation and New Products, Wind and Mahajan (1997) identify speed to market, innovation, and product quality as among the most critical issues facing NPD in marketing. Our study draws attention to the unexplored area of reward structures, which can have a significant influence on these NPD outcomes. Even small changes in the reward and evaluation structures of CFPDTs may lead to relatively large payoffs for NPD performance (Feldman 1996). Despite its obvi- ous potential impact, examination of this topic by either academic researchers or organizations remains sparse (Griffin 1997). As such, an examination of the effect of reward structures on CFPDT performance presents an intriguing problem from both theoretical and managerial perspectives. Organizational reward and evaluation structures have not kept pace with the changes in the work environment (Wallace 1987). Robbins and Finley (1995) contend that outdated reward structures are a common reason teams fail in organizations. They note that rewards and evaluations are still functionally determined: Teams and individual mem- bers are often rewarded for the wrong things. Many articles in the popular business press have also commented on the pervasiveness and complexity of this problem: Building cross-functional teams can work wonders in developing new products, but only if people are rewarded as members of a team.... That's one reason why most teams fail to produce. (.BusinessWeek 1995, p. 154) [In order to succeed in streamlining and flattening their structure,] organizations must change the appraisal and pay systems to reward team results, not just individual per- formance. (Byme 1993, p. 78) When it comes to paying teams, managers still throw up their hand-held computers in despair Pay the team as a group? Then won't your star performers feel slighted? Pay for individual performance? What does that do to encour- age teamwork? (Dumaine 1994, p. 87) Journal of Marketing Vol. 65 (April 2001), 35-53 Reward Structures / 35