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Three-Way Complementarities: Performance Pay, HR Analytics and Information Technology

Management Science, Forthcoming

33 Pages Posted: 26 Aug 2010 Last revised: 12 Jun 2014

Sinan Aral

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Lynn Wu

University of Pennsylvania - The Wharton School

Date Written: August 25, 2010

Abstract

We test for three-way complementarities among information technology (IT), performance pay, and HR analytics practices. We develop a principal-agent model examining how these practices work together as an incentive system that produces a larger productivity premium when the practices are implemented in concert rather than separately. We assess our model by combining fine-grained data on Human Capital Management (HCM) software adoption over 11 years with detailed survey data on incentive systems and HR analytics practices for 189 firms. We find that the adoption of HCM software is greatest in firms that have also adopted performance pay and HR analytics practices. Furthermore, HCM adoption is associated with a large productivity premium when it is implemented as a system of organizational incentives, but has less benefit when adopted in isolation. The system of three-way complements produces disproportionately greater benefits than pairwise interactions, highlighting the importance of including all three complements. Productivity increases significantly when the HCM systems “go live” but not when they are purchased, which can be years earlier. This helps rule out reverse causality as an explanation for our findings.

Keywords: Incentive Systems, Information Technology, Monitoring, Complementarity, Enterprise Systems, ERP, Productivity, Production Function, Principal-Agent Model

Suggested Citation

Aral, Sinan and Brynjolfsson, Erik and Wu, Lynn, Three-Way Complementarities: Performance Pay, HR Analytics and Information Technology (August 25, 2010). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1665945

Sinan Aral

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)

HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lynn Wu (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

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