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Are Administrative Pay Systems a Veil? Evidence from Within-firm Data

34 Pages Posted: 1 Feb 1997  

Michael Gibbs

University of Chicago Booth School of Business; Institute for the Study of Labor (IZA)

Wallace E. Hendricks

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: October 13, 1995

Abstract

Using detailed personnel data from a firm, we analyze the real effects of the kind of compensation system that is used in many large firms--the Hay system. Such compensation systems are highly centralized and bureaucratic, with little ability for managers to adjust incentives for different job designs, individuals, and circumstances. We find that this system does appear to have real effects, particularly for those who are at the maximum salary in their allowable range. Such employees tend to have falling performance ratings and salary growth, are less likely to win promotion, and are more likely to exit the firm. We interpret these facts as suggesting that such employees have lower motivation from the incentive system than other employees. Moreover, the firm's bonus system is not designed to mitigate these effects. These findings suggest that theories emphasizing such formal, bureaucratic pay systems (e.g., influence costs) may be very important in understanding actual incentive contracting
schemes.

JEL Classification: J33

Suggested Citation

Gibbs, Michael and Hendricks, Wallace E., Are Administrative Pay Systems a Veil? Evidence from Within-firm Data (October 13, 1995). Available at SSRN: https://ssrn.com/abstract=473 or http://dx.doi.org/10.2139/ssrn.473

Michael Gibbs (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Wallace Edward Hendricks

University of Illinois at Urbana-Champaign - Department of Finance ( email )

219 LIR Building, MC-504
Urbana, IL 61801
United States
217-333-6028 (Phone)
217-333-6028 (Fax)

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