The Rise of Individual Performance Pay

Existing empirical evidence suggests that individual performance pay is more prevalent in human‐capital‐intensive industries. We introduce a model that can contribute to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peer‐dependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold up, the lower is the implementable degree of peer‐dependent incentives. In a setting with complementary tasks, we show that although team‐based incentives are optimal if agents are dispensable, it may be costly, and, in fact, suboptimal, to provide team incentives when the agents become indispensable.     

Board Effectiveness and CEO Pay: Board Information Processing Capacity,Monitoring Complexity,and CEO Pay‐for‐Performance Sensitivity

We have developed an information processing theory of board effectiveness to examine board‐chief executive officers (CEOs) pay relations. We theorize that CEO pay reflects the information processing context of boards. Boards have limited information processing capacity and therefore prefer to use outcome‐based CEO pay when they have difficulty in processing information for monitoring their CEOs. Using a longitudinal sample of Standard and Poor's (S&P's) large‐, medium‐, and small‐cap manufacturing firms in the United States from 1998 through 2005, we found support for our theory. Large boards and boards in less complex monitoring contexts tend to link CEO pay less tightly to firm performance by providing less stock‐based incentives, and the tendency of large boards to decrease outcome‐based CEO pay is even greater when boards are not busy or when boards are in less complex monitoring contexts. © 2015 Wiley Periodicals, Inc.     

The O‐ring theory of the firm

We develop an O‐ring production function characterized by specialization and division of labor and where shirking or negative shocks can have major adverse consequences. We show that when the principal can monitor individual output, the firm tends be large (potentially larger than first best), with a high degree of specialization and division of labor, weak incentives, and low pay as in traditional nonunion manufacturing. Moral hazard can only limit the size of the firm relative to the first best when the principal can only monitor team output, in which case the firm has the opposite characteristics.     

Pulling in different directions? Exploring the relationship between vertical pay dispersion and high‐performance work systems

Vertical pay dispersion (VPD), a hierarchical pay structure used to motivate employees, has traditionally been studied separately from high‐performance work systems (HPWSs). As a component of HPWSs, incentive‐based compensation schemes focus on employee‐ or team‐level incentives. However, the influence of the simultaneous utilization of VPD and HPWS on performance remains understudied. This study addresses the question of whether these approaches to managing human capital serve as complements or substitutes to one another. VPD and HPWS are argued to substitute for one another with respect to motivation‐ and skill‐enhancing practices. The opposite notion is true in regard to opportunity‐enhancing HPWSs, which serve to amplify the effectiveness of VPD. In a multisource, longitudinal sample of South Korean firms, the hypothesized predictions are supported.     

Team Incentives and Reference‐Dependent Preferences

We investigate a multi‐agent moral‐hazard model where agents have expectation‐based reference‐dependent preferences à la K?szegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, a principal may employ team incentives. Because the agents are loss averse, they have first‐order risk aversion to wage uncertainty. This causes the agents to work harder when their own failure is stochastically compensated through other agents' performance. In the optimal contract, agents with high performance are always rewarded, whereas agents with low performance are rewarded if and only if other agents' performance is high.     

Broad‐based incentive plans,HR practices and company performance

The purpose of this paper is to further develop our knowledge of the complementarities between broad‐based incentives and human resource (HR) management practices, and their combined impact on company performance. We focus on three HR practices that are expected, separately and in combination, to enhance the effectiveness of broad‐based plans: information sharing, upward communication, and training in team skills. Using a sample of 305 Canadian firms, we find that companies with broad‐based incentive plans have lower levels of upward communication and higher levels of information sharing compared with companies that do not offer incentives to the majority of their workforce. Further, we find that companies with broad‐based incentive plans are more productive compared with companies with no such plans, and the presence of supporting HR practices increases their productivity advantage even further. In particular, upward communication combined with broad‐based incentives has a strong positive relationship with productivity.     

Evaluating Form and Functionality of Pay‐for‐Performance Plans: The Relative Incentive and Sorting Effects of Merit Pay,Bonuses, and Long‐Term Incentives

Using two‐year longitudinal data from a large sample of US employees from a service‐related organization, the present study investigates the relative effects of three forms of pay‐for‐performance (PFP) plans on employees’ job performance (incentive effects) and voluntary turnover (sorting effects). The study differentiates between three forms of pay: merit pay, individual‐based bonuses, and long‐term incentives. By definition, these PFP plans have different structural elements that distinguish them from each other (i.e., pay plan form) and different characteristics (functionality), such as the degree to which pay and performance are linked and the size of the rewards, which can vary both within and across plan types. Our results provide evidence that merit raises have larger incentive and sorting effects than bonuses and long‐term incentives in multi‐PFP plan environments where the three PFP plans are operating simultaneously. Only merit pay has both incentive and sorting effects among the three PFP plans. The implications for the PFP‐related theory, as well as for the design and implementation of PFP plans, are discussed. © 2015 Wiley Periodicals, Inc.     

Pay dispersion among the top management team and outside directors: Its impact on firm risk and firm performance

Two key groups central to improving firm performance are the top management team (TMT) and the board of directors. Executives undertake strategic actions, whereas board members fulfill their resource provision and monitoring roles. Drawing on tournament theory and equity theory, we propose that high pay dispersion among outside directors and the TMT is positively associated with strategic risk, whereas high (low) TMT pay dispersion and low (high) outside director pay dispersion are positively associated with firm performance. Our predictor is the unexplained component of horizontal pay dispersion, or the residual of pay dispersion resulting from regressing pay on observable firm, industry, period, and individual characteristics. Our results highlight the importance of unexplained pay dispersion for TMTs, but not for boards of directors, in improving firm performance.     

Delegation in first‐price all‐pay auctions

In a first‐price all‐pay auction buyers have an incentive to delegate the bidding to agents and to provide these agents with incentives to make bids that differ from the bids the buyers would like to make. Both buyers are better off in this strictly non‐cooperative delegation equilibrium and the delegation contracts are asymmetric, even if the buyers and the auction are perfectly symmetric. Copyright © 2004 John Wiley & Sons, Ltd.     

Incentives of low‐quality sellers to disclose negative information

The paper studies incentives of low‐quality sellers to disclose negative information about their products. We develop a model in which one's quality can be communicated via cheap‐talk messages only. This setting limits the ability of high‐quality sellers to separate, as any communication strategy they pursue can be costlessly imitated by low‐quality sellers. We study two factors that can incentivize low‐quality sellers to communicate their quality: buyers' loss aversion and competition. Quality disclosure reduces buyers' risk, thereby increasing their willingness to pay for the product. It also introduces product differentiation, softening the competition.     

The Lure of Work‐Life Benefits: Perceived Person‐Organization Fit As A Mechanism Explaining Job Seeker Attraction To Organizations

Drawing from person‐organization (P‐O) fit theory, we explain how the provision of work‐life benefits (WLBs) increases job seeker attraction to organizations during the early recruitment stage because of a perceived value fit between job seekers and the organization. Our results from an experimental study using a sample of 189 MBA students who belonged to two generational groups (Millennials and Gen Xers) and were seeking employment during a period of economic recession support our expectations. We found that job seekers develop higher P‐O fit perceptions for organizations that supplement standard pay with WLBs in their recruitment materials compared with organizations that supplement standard pay with health care benefits or offer only standard pay. In turn, such organizations are assessed as more attractive prospective employers. We also found that generational group moderated the path between P‐O fit and job seeker attraction such that Millennial job seekers were more likely to be attracted toward organizations with which they had strong fit perceptions than their Gen X counterparts. Theoretical and practical implications of our findings are discussed. © 2016 Wiley Periodicals, Inc.     

Performance Pay,Union Bargaining and Within‐Firm Wage Inequality*

Theory predicts that performance pay boosts wage dispersion. Workers retain a share of individual productivity shocks and high‐efficiency workers receive compensation for greater effort. Collective bargaining can mitigate the effect of performance pay on wage inequality by easing monitoring of common effort standards and group‐based pay schemes. Analyses of longitudinal employer–employee data show that the introduction of performance‐related pay raises wage inequality in non‐union firms, but not in firms with high union density. Although performance‐related pay appears to be on the rise, the overall impact on wage dispersion is likely to be small, particularly in European countries with influential unions.     

Hospital competition under pay‐for‐performance: Quality,mortality, and readmissions

Health outcomes, such as mortality and readmission rates, are commonly used as indicators of hospital quality and as a basis to design pay‐for‐performance (P4P) incentive schemes. We propose a model of hospital behavior under P4P where patients differ in severity and can choose hospital based on quality. We assume that risk‐adjustment is not fully accounted for and that unobserved dimensions of severity remain. We show that the introduction of P4P which rewards lower mortality and/or readmission rates can weaken or strengthen hospitals' incentive to provide quality. Since patients with higher severity have a different probability of exercising patient choice when quality varies, this introduces a selection bias (patient composition effect) which in turn alters quality incentives. We also show that this composition effect increases with the degree of competition. Critically, readmission rates suffer from one additional source of selection bias through mortality rates since quality affects the distribution of survived patients. This implies that the scope for counterproductive effects of P4P is larger when financial rewards are linked to readmission rates rather than mortality rates.     

INCENTIVES AND SOCIAL NORMS: A MOTIVATION‐BASED ECONOMIC ANALYSIS OF SOCIAL NORMS

Abstract It is now commonplace to regard social norms as a subject of growing interest in the economic literature (e.g. game theoretical approaches based on ‘other‐regarding’ individual preferences, the analysis of the impact of rewards or punishment on individuals’ behaviour through experimental economics as well as field experiments, the revival of the institutionalist tradition spurred on by the influential work of Douglas North and followed by many others and the growing influence of neuroeconomics). In this paper, we focus on the relationship between incentives and social norms and survey the literature that could constitute the foundations of a motivation‐based economic analysis of social norms. Our main findings are that (1) the interaction between incentives and social norms is far from obvious since taking social norms into account involves the introduction of supplementary motives, in addition to self‐interest, into the economic analytical framework; (2) the analysis of the interaction between incentives and social norms resists an approach exclusively in terms of crowding‐in and ‐out effects because it is sensitive to whether it concerns behaviours driven by honour or by social stigma; (3) as a result, it is difficult to precisely evaluate the policy implication of the interactions between incentives and social norms.     

The empowerment expectation–perception gap: An examination of three alternative models

Previous empowerment research has focused on subordinate perceptions of empowering leadership and its outcomes. Met‐expectations theory suggests that subordinate expectations of leader behaviours are essential in forming their a posteriori evaluations. To address the lack of investigation of individual expectations in the empowerment literature, in this study, we explore how subordinates' empowerment expectations and perceptions combine to influence their job satisfaction and psychological empowerment based on three alternative, theoretically derived met‐expectation models, namely, the disconfirmation model, the ideal‐point model, and the experiences‐only model. The results of a 2‐stage study of 114 respondents indicate that employees are more satisfied with their work when perceived empowerment exceeds expectations. However, both empowerment perceptions and expectations positively contribute to higher psychological empowerment. We then discuss implications and directions for future research.     

Managing Discretionary Accruals and Book‐Tax Differences in Anticipation of Tax Rate Increases: Evidence from China

This paper investigates how firms manage their earnings to trade off various incentives when tax rates increase. We hypothesize and find that firms generally choose to manage their taxable income upward in a book‐tax non‐conforming manner rather than in a book‐tax conforming manner before a tax rate increment, which in turn reduces the detection risk of aggressive financial reporting. These results suggest that firms give more weight to tax incentives and tax audit or regulatory inspection risks than to boosting financial reporting income in tax management. However, when firms have higher book management incentives or lower tunneling incentives (i.e., non‐state‐owned enterprises), we find that they manage their taxable income and book income upward together (i.e., in a book‐tax conforming manner), whereas their counterparts (i.e., state‐owned enterprises) do not. Overall, our paper contributes to the literature by demonstrating the interplay of tax, tunneling and financial reporting incentives in influencing tax management strategies. The findings from our paper should also help government and regulators understand more about firms’ reactions to tax rate increases.     

Acculturation and Individualism as Predictors of Work‐Family Conflict in a Diverse Workforce

Ethnic and cultural diversity is an increasing reality in the US workplace. The current study highlights the importance of acknowledging the culturally heterogeneous nature of ethnic groups, and the need to focus on social identity characteristics such as cultural values when assessing group differences. We demonstrate that cultural values (i.e., individualism) contribute to employees' experiences of work‐family conflict beyond the effects of ethnicity. Specifically, we introduce a model informed by social identity theory that explains why acculturation is related to work‐family conflict. The model was tested with a sample of 309 employed Caucasian and Hispanic Americans. An empirical test of our model provides evidence that individualism mediates the relationship between language‐ and social‐based acculturation and work‐family conflict, even when controlling for ethnicity. Additionally, alternative models further reveal that the effects of acculturation and individualism contribute to work interfering with family. As an implication of the current study, we suggest that researchers and organizational managers should consider the cultural values of their diverse workforce when implementing policies that affect conflict between work and family. © 2013 Wiley Periodicals, Inc.     

Co‐workers' voice climate and affective commitment towards the team: A test of mediation and moderation

This article examines the consequences of co‐workers' voice climate, defined as a shared perception regarding how individuals who work together within the same unit and who do not have formal authority over each other judge the ability to participate in decision making inside teams. We argue that co‐workers' voice climate may influence individuals' perception of quality of social exchange with the team, operationalised through team–member exchange. These high‐quality exchanges with the team should, in turn, promote higher individual affective commitment towards the team. Furthermore, we hypothesised that the social exchange with the supervisor, operationalised through leader–member exchange, buffers the effect of co‐workers' voice climate on team–member exchange. These hypotheses were tested using a sample of 183 employees belonging to 31 teams. Our findings supported the theoretical model that was proposed, attesting to the importance of considering co‐workers' justice climate in the prediction of individual work attitudes. The theoretical and practical implications of these results are discussed.     

Selecting people based on person‐organisation fit: Implications for intrateam trust and team performance

Teamwork is widely adopted in organisations. Although much evidence indicates that using person‐organisation (P‐O) fit as a selection criterion benefits individual employees, little is known about how this practice influences team functioning. Drawing on the input‐mediator‐outcome model and the research on value congruence, this study built and tested a model that links P‐O fit in recruitment to work teams' performance. Based on data collected from team members, team leaders, human resources managers, and chief executive officers in 96 firms, we found that P‐O fit in recruitment had a positive relationship with team performance and that intrateam trust mediated the relationship between P‐O fit in recruitment and team performance. Further, this mediated relationship existed only when the organisation had a weak, rather than strong, respect‐for‐people culture. This study contributes to the P‐O fit and team literature and has practical implications for human resources practices and team management.     

The paradoxical mechanisms of high‐performance work systems (HPWSs) on perceived workload: A dual‐path mediation model

We invoke conservation of resources theory to present an integrative model that simultaneously examines the positive and negative effects of employee‐experienced high‐performance work systems (experienced‐HPWSs) on perceived workload (PW). Analysis of three‐wave, time‐lagged data from 368 employees of four major state‐owned commercial banks in China revealed that experienced‐HPWSs positively predict perceived organisational support, which in turn decreases PW. Experienced‐HPWSs positively predict psychological empowerment, which in turn increases PW. The positive influence of psychological empowerment on PW is stronger than the negative influence of perceived organisational support on PW, indicating that resource loss is more salient than resource gain. This dual‐path mediation model increases our understanding of the mechanisms through which HPWSs influence PW and highlights the coexistence of opposite impacts during the process.