Performance Management and Management's Performance: Do Incentives Substitute for Control?

Abstract

We propose an intuitive and simple-to-implement empirical classification of management models, based on whether agency issues are tackled by hierarchical monitoring or incentive contracts. The analysis of granular data from a large sample of Italian private firms reveals that the adoption of alternative models depends on many of a rich array of predetermined firm characteristics, including CEO's and workforce characteristics, type of ownership, and unionization. By regressing a number of firm outcomes against the different models, we also find that a unique best model does not seem to emerge in general. Yet, incentive-based management appears more likely associated with greater innovation effort with respect to control-based management. The paper adds to a recent empirical literature on management quality and productivity.

Keywords: management models, incentive contracts, span of control, productivity

JEL Classification: L22, M52, M54