Working Paper: NBER ID: w20845
Authors: Bryan Hong; Lorenz Kueng; Mujeung Yang
Abstract: The existence of complementarity across management practices has been proposed as one potential explanation for the persistence of firm-level productivity differences. However, thus far no conclusive population-level tests of the complementary joint adoption of management practices have been conducted. Using unique detailed data on internal organization, occupational composition, and firm performance for a nationally representative sample of firms in the Canadian economy, we exploit regional variation in income tax progression as an instrument for the adoption of performance pay. We find systematic evidence for the complementarity of performance pay and decentralization of decision-making from principals to employees. Furthermore, in response to the adoption of performance pay, we find a concentration of decision-making at the level of managerial employees, as opposed to a general movement towards more decentralization throughout the organization. Finally, we find that adoption of performance pay is related to other types of organizational restructuring, such as greater use of outsourcing, Total Quality Management, re-engineering, and a reduction in the number of layers in the hierarchy.
Keywords: Management Practices; Performance Pay; Decentralization; Firm Productivity; Instrumental Variables
JEL Codes: D2; H32; J33; L2; M1; M5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Performance pay (J33) | Decentralization (H77) |
| Performance pay (J33) | Managerial control (M54) |
| Decentralization (H77) | Managerial control (M54) |