“Complementarity of Performance Pay and Task Allocation” by Dr. Mu-Jeung Yang
STRATEGY AND IB SEMINAR
Dr. Mu-Jeung Yang
Assistant Professor of Economics
Department of Economics
University of Washington
Complementarity between different management practices has been argued to be onepotential explanation for persistent performance differences across firms. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementary joint adoption of 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 towards more decentralization throughout the organization.
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