Complementarity of Performance Pay and Task Allocation

36 Pages Posted: 12 Mar 2016 Last revised: 4 May 2020

See all articles by Bryan Hong

Bryan Hong

Henry W. Bloch School of Management, University of Missouri-Kansas City

Lorenz Kueng

University of Lugano - Faculty of Economics; Swiss Finance Institute; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Northwestern University - Kellogg School of Management

Mu-Jeung Yang

University of Washington - Department of Economics

Date Written: January 5, 2016

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

JEL Classification: D2, G29, H32, J33, L2, M1, M5

Suggested Citation

Hong, Bryan and Kueng, Lorenz and Yang, Mu-Jeung, Complementarity of Performance Pay and Task Allocation (January 5, 2016). Swiss Finance Institute Research Paper No. 20-31, Available at SSRN: https://ssrn.com/abstract=2746478 or http://dx.doi.org/10.2139/ssrn.2746478

Bryan Hong

Henry W. Bloch School of Management, University of Missouri-Kansas City ( email )

5110 Cherry St
Kansas City, MO 64110
United States

Lorenz Kueng (Contact Author)

University of Lugano - Faculty of Economics

Via Giuseppe Buffi 13
Lugano, TI 6904
Switzerland

HOME PAGE: http://www.usi.ch/en

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.sfi.ch/en/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org/

Northwestern University - Kellogg School of Management

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Evanston, IL 60208
United States
+1 (847) 491-7843 (Phone)
+1 (847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/

Mu-Jeung Yang

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

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