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.