Complementarity of performance pay and task allocation

Bryan Hong, Lorenz Kueng, Mu Jeung Yang

Research output: Contribution to journalArticle

1 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)5152-5170
Number of pages19
JournalManagement Science
Volume65
Issue number11
DOIs
Publication statusPublished - Jan 1 2019

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Keywords

  • Decentralization
  • Firm performance
  • Incentives
  • Management
  • Organizational design

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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