Abstract: We theorize that employees use the performance feedback they receive to reassess their beliefs about the marginal benefit of their effort, which may lead them to increase or reduce their effort. To test our model, we conduct a field experiment at the distribution center of a Fortune 500 firm where employees receive individual performance pay, and we study two types of feedback, individual and relative. The results show that employees react to feedback content in a way that is consistent with the model: they increase their effort if the information provided implies that the marginal benefit of increasing effort is high and decrease it if they learn that it is low. Moreover, performance feedback has a greater impact on the lower quantiles of the distribution of productivity.
Abstract: We study whether organizations that reward individual performance should give autonomy or should control how managers evaluate their subordinates. The normal way to establish control is to formalize the evaluations, so that managers cannot choose when and how to evaluate. We argue that organizations face a trade-off because formalization helps reduce biases but also introduces rigidities. Using linked employer–employee data, we study the link between formal performance appraisals and firm financial performance.
Abstract: In large corporations, divisional managers compete for financial resources in what is often referred to as an internal capital market. However, they also have a common interest in maximizing joint profits, as this determines the resources available to the firm as a whole. Both goals are powerful motivators but can at times conflict: while the amount of resources available to the firm depends on corporate performance, divisional funding depends upon the division’s performance relative to the rest. We propose a model in which organizational form is endogenous, divisions compete for corporate resources, and managers have implicit incentives. We show that organizational design can help companies influence their divisional managers’ potentially conflicting goals. Our analysis relates the firm’s organizational structure to the source of incentives (external versus internal), the nature of the incentives (competition versus cooperation), the level of corporate diversification, the development of the capital market, and to industry and firm characteristics.
“Incentive Contracts and Time Use.” (with Tor Eriksson) Electronic International Journal of Time Use Research Vol. 8 (November 2011): 1-29.
Abstract: Empirical studies on incentive contracts have primarily been concerned with the effects on employees’ productivity and earnings. The productivity increases associated with such contracts may, however, come at the expense of quality of life at or outside work. In this paper we study the effect on the employees’ non-work activities, testing whether incentive contracts lead to a change in the allocation of time across work and non-work activities. In doing so, we distinguish between two effects, a substitution effect and a discretion effect. On the one hand, the introduction of explicit incentives raises the marginal payoff to work, hence employees are expected to work more and spend less time on non-work activities (substitution effect). On the other hand, employees with an incentive contract tend to have more discretion to choose their work hours. Therefore, they may choose to do the same job in less time and have more spare time for non-work activities (discretion effect). Using data from the European Working Conditions Survey, we show that performance pay has a negative effect on non-work activities and a positive effect on work hours. The substitution effect is negative for men’s leisure activities and for women’s charitable and political activities.
“Employee Discretion and the Labor-Market Environment.” In: Eriksson, Tor (ed.), Advances in the Economic Analysis of Participatory & Labor-Managed Firms, Vol. 11 (December 2010): 89-110. Bingley, UK: Emerald Group Publishing Limited.
Abstract:This study is an empirical examination of the relation between the labor-market environment (unemployment rate and labor regulations) and employee discretion at work. From an efficiency-wage perspective, with higher unemployment rates or less protective labor regulations employers can afford to monitor less and tend to give more discretion. However, from a bargaining perspective, if employees place a positive value on discretion a higher unemployment rate or less stringent labor regulations reduce employees’ bargaining power, thus leading to less employee discretion. I find a negative relation between unemployment and discretion, which runs counter to the efficiency wage model. As for labor regulations, some of them have a negative relationship with discretion and others have a positive relationship with discretion. In particular, non-monetary firing costs and labor union power have a positive relation with discretion, but unemployment insurance and worker protection in collective disputes are negatively related with discretion.
“Employee Discretion and Performance Pay.” The Accounting Review Vol. 84, No. 2 (March 2009): 589-612.
Abstract:This study examines the relationship between performance pay and the decision to delegate the choice of work methods and scheduling. I compare two theoretical approaches, based on specific knowledge and measurement costs, respectively. Both perspectives suggest a complementarity between discretion and performance pay, but the former predicts a positive effect of job complexity on the two variables of interest, and the latter implies a negative effect. Results suggest that group and firm-wide incentives are used to decentralize decisions and to take advantage of employees’ specific knowledge, whereas piece rates are driven by performance measurement considerations and are not associated with more discretion.
“Why do Employers give Discretion? Family versus Performance Concerns.” Industrial Relations Vol. 48, No. 1 (January 2009): 1-26.
Abstract: Using a large dataset of Western European employees, I examine two sets of reasons behind employers’ decisions to give discretion: performance concerns (firms give discretion in order to improve performance) and family concerns (firms wish to improve the employees’ work-family balance). I find more support for the former than for the latter. Discretion is positively related to the use of “high-performance” work practices and to employee position and ability, and is smaller in larger establishments, which suggests that loss of control matters to employers. Evidence about family concerns is less compelling. Female participation in the labor force has a positive effect on discretion over work schedules, but women have less discretion than men, and employees with small children do not have more discretion than other employees. Large and governmental organizations, which are expected to care more about work-family balance, do not offer more discretion over work schedules.
Abstract:This paper tests three possible explanations for why firms adopt job rotation: employee learning (rotation makes employees more versatile), employer learning (through rotation, employers learn more about individual workers’ strengths), and employee motivation (rotation mitigates boredom). Whereas previous studies have examined either establishment characteristics or a single firm’s personnel records, this study merges information from a detailed survey of Danish private sector firms with linked employer-employee panel data, allowing firm characteristics, work force characteristics, and firms’ human resource management practices to be included as explanatory variables. The results reject the employee motivation hypothesis, but support the employee learning and, especially, the employer learning hypotheses. Firms allocating more resources to training were more likely to rotate workers; rotation schemes were more common in less hierarchical firms and in firms with shorter average employee tenure; and both firm growth rates and firms’ use of nation-wide recruitment were positively associated with rotation schemes.
“Power in the Firm and Managerial Career Concerns.” Journal of Economics and Management Strategy Vol. 12, No. 1 (Spring 2003): 1-29.
Abstract: More powerful managers make more important decisions. Therefore, firm performance is more informative about the abilities of such managers, who, realizing that they are more visible, are more eager to improve performance. If this reputation effect exists, how should firms allocate power? I analyze the optimal allocation of power and derive implications for several issues that often arise in management practice: the choice of departmentation criteria, the importance given to seniority, and the width of job definitions. Finally, I show that the model is consistent with the empirical evidence on managerial succession.
Abstract: The goal of this study was to identify the determinants of direct participation in organizations across Europe. Some factors were predicted to be related to levels of participation in general, namely competition, sector, the pursuit of a differentiation strategy based on either quality or service, and indirect participation. Two additional factors were expected to be differentially related to two forms of direct participation: consultation and delegation. These factors were organizational size and the pursuit of a cost leadership business strategy. The hypothesized relationships were contrasted using data from the EPOC survey, a representative survey of over 5,700 organizations located in ten European Union countries.
“Job Rotation as a Learning Mechanism.” Management Science Vol. 47, No. 10 (October 2001): 1361-1370.
Abstract: This article analyzes the costs and benefits of job rotation as a mechanism with which the firm can learn about the employees’ productivities and the profitability of different jobs or activities. I compare job rotation to an assignment policy where employees specialize in one job along their career. The gains from adopting a job rotation policy are larger when there is more prior uncertainty about employees and activities. I argue that this firm learning theory fits the existing evidence on rotation better than alternative explanations based on employee motivation and employee learning.