Complementarity of Performance Pay and Task Allocation

Bryan Hong (), Lorenz Kueng and Mu-Jeung Yang ()
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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
Mu-Jeung Yang: Department of Economics, University of Washington, Seattle, Washington 98195

Management Science, 2019, vol. 65, issue 11, 5152-5170

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.

Keywords: incentives; decentralization; management; organizational design; firm performance (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://doi.org/10.1287/mnsc.2018.3193 (application/pdf)

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Working Paper: Complementarity of Performance Pay and Task Allocation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:11:p:5152-5170

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