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Complementarity of Performance Pay and Task Allocation

Author

Listed:
  • Bryan Hong

    (Ivey Business School, University of Western Ontario, London, Ontario N6G 0N1, Canada, Leonard N. Stern School of Business, New York University, New York, New York 10012)

  • Lorenz Kueng

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208, National Bureau of Economic Research (NBER), Cambridge, Massachusetts 02138, Centre for Economic Policy Research (CEPR), London EC1V 0DX United Kingdom)

  • Mu-Jeung Yang

    (Department of Economics, University of Washington, Seattle, Washington 98195)

Abstract

Complementarity between performance pay and other organizational design elements has been argued to be one potential explanation for stark differences in the observed productivity gains from performance pay adoption. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementarity between performance pay incentives and decentralization of decision-making authority for tasks. To address endogeneity concerns, we exploit regional variation in income tax progressivity as an instrument for the adoption of performance pay. We find systematic evidence of complementarity between performance pay and decentralization of decision making from principals to employees. However, adopting performance pay also leads to centralization of decision-making authority from nonmanagerial to managerial employees. The findings suggest that performance pay adoption leads to a concentration of decision-making control at the managerial employee level, as opposed to a general movement toward more decentralization throughout the organization.

Suggested Citation

  • Bryan Hong & Lorenz Kueng & Mu-Jeung Yang, 2019. "Complementarity of Performance Pay and Task Allocation," Management Science, INFORMS, vol. 65(11), pages 5152-5170, November.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:11:p:5152-5170
    DOI: 10.1287/mnsc.2018.3193
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    More about this item

    Keywords

    incentives; decentralization; management; organizational design; firm performance;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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