Complementarity of Performance Pay and Task Allocation

Bryan Hong, Lorenz Kueng and Mu-Jeung Yang
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Bryan Hong: New York University (NYU) - Leonard N. Stern School of Business
Mu-Jeung Yang: University of Washington - Department of Economics

No 20-31, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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 non-managerial 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 towards more decentralization throughout the organization.

Keywords: performance pay; decentralization; management practices (search for similar items in EconPapers)
JEL-codes: D2 G29 H32 J33 L2 M1 M5 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2020-04
New Economics Papers: this item is included in nep-bec, nep-gen, nep-hrm, nep-lma and nep-ore
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Journal Article: Complementarity of Performance Pay and Task Allocation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2031

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