Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness: An Empirical Investigation

    Publikation: Working paperForskning

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    Resumé

    The existing empirical evidence is somewhat inconclusive with respect to a number of the key predictions of the agency model. Although the reach of agency theory is considerably wider, the dominant portion of work has been taken up with examining the nature of the trade-off between risk and incentives, and the implications thereof for contractual design. More specifically, some researchers have recently noted that the predicted trade-off between risk and incentives turns out to be rather weak, and perhaps non-existent, when confronted with the available empirical evidence. In this paper, we examine the risk-incentives trade-off and related predictions from agency theory on the basis of data from a data set encompassing close to 1000 Danish firms. We find that the relation between the use of performance pay in these firms and the environmental uncertainty they confront - which is one way to test the risk/incentives tradeoff - is indeed weak and in many cases even perverse. We then suggest, in line with other recent contributions to the literature, that this may be caused by the widespread use of delegation. One effect of delegation is that it breaks the simple relation between risks and incentives. We examine the suggestion that that those firms that are more prone to use delegation of decision rights in their internal organization are facing an uncertain environment to a larger extent than the rest of the population. We argue that this constitutes an indirect confirmation of the hypothesis. We also examine the multi-tasking agency hypothesis that as risk increases, the flexibility of agents is restricted. We fail to find support for this hypothesis. It is suggested that the reason for this finding is also related to delegation.
    OriginalsprogEngelsk
    Udgivelses stedFrederiksberg
    UdgiverDRUID - Danish Research Unit for Industrial Dynamics
    Antal sider25
    ISBN (Trykt)8778731305
    StatusUdgivet - 2002
    NavnDRUID Working Paper
    Nummer02-14

    Emneord

    • Løn
    • Løndifferentiering
    • Lønformer
    • Resultatløn

    Citer dette

    Foss, N. J., & Laursen, K. (2002). Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness: An Empirical Investigation. Frederiksberg: DRUID - Danish Research Unit for Industrial Dynamics. DRUID Working Paper, Nr. 02-14
    Foss, Nicolai J. ; Laursen, Keld. / Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness : An Empirical Investigation. Frederiksberg : DRUID - Danish Research Unit for Industrial Dynamics, 2002. (DRUID Working Paper; Nr. 02-14).
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    Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness : An Empirical Investigation. / Foss, Nicolai J.; Laursen, Keld.

    Frederiksberg : DRUID - Danish Research Unit for Industrial Dynamics, 2002.

    Publikation: Working paperForskning

    TY - UNPB

    T1 - Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness

    T2 - An Empirical Investigation

    AU - Foss, Nicolai J.

    AU - Laursen, Keld

    PY - 2002

    Y1 - 2002

    N2 - The existing empirical evidence is somewhat inconclusive with respect to a number of the key predictions of the agency model. Although the reach of agency theory is considerably wider, the dominant portion of work has been taken up with examining the nature of the trade-off between risk and incentives, and the implications thereof for contractual design. More specifically, some researchers have recently noted that the predicted trade-off between risk and incentives turns out to be rather weak, and perhaps non-existent, when confronted with the available empirical evidence. In this paper, we examine the risk-incentives trade-off and related predictions from agency theory on the basis of data from a data set encompassing close to 1000 Danish firms. We find that the relation between the use of performance pay in these firms and the environmental uncertainty they confront - which is one way to test the risk/incentives tradeoff - is indeed weak and in many cases even perverse. We then suggest, in line with other recent contributions to the literature, that this may be caused by the widespread use of delegation. One effect of delegation is that it breaks the simple relation between risks and incentives. We examine the suggestion that that those firms that are more prone to use delegation of decision rights in their internal organization are facing an uncertain environment to a larger extent than the rest of the population. We argue that this constitutes an indirect confirmation of the hypothesis. We also examine the multi-tasking agency hypothesis that as risk increases, the flexibility of agents is restricted. We fail to find support for this hypothesis. It is suggested that the reason for this finding is also related to delegation.

    AB - The existing empirical evidence is somewhat inconclusive with respect to a number of the key predictions of the agency model. Although the reach of agency theory is considerably wider, the dominant portion of work has been taken up with examining the nature of the trade-off between risk and incentives, and the implications thereof for contractual design. More specifically, some researchers have recently noted that the predicted trade-off between risk and incentives turns out to be rather weak, and perhaps non-existent, when confronted with the available empirical evidence. In this paper, we examine the risk-incentives trade-off and related predictions from agency theory on the basis of data from a data set encompassing close to 1000 Danish firms. We find that the relation between the use of performance pay in these firms and the environmental uncertainty they confront - which is one way to test the risk/incentives tradeoff - is indeed weak and in many cases even perverse. We then suggest, in line with other recent contributions to the literature, that this may be caused by the widespread use of delegation. One effect of delegation is that it breaks the simple relation between risks and incentives. We examine the suggestion that that those firms that are more prone to use delegation of decision rights in their internal organization are facing an uncertain environment to a larger extent than the rest of the population. We argue that this constitutes an indirect confirmation of the hypothesis. We also examine the multi-tasking agency hypothesis that as risk increases, the flexibility of agents is restricted. We fail to find support for this hypothesis. It is suggested that the reason for this finding is also related to delegation.

    KW - Løn

    KW - Løndifferentiering

    KW - Lønformer

    KW - Resultatløn

    KW - Uncertainty

    KW - Pay-for-performance

    KW - Delegation

    KW - Innovation

    KW - Competition

    M3 - Working paper

    SN - 8778731305

    T3 - DRUID Working Paper

    BT - Performance Pay, Delegation and Multitasking under Uncertainty and Innovativeness

    PB - DRUID - Danish Research Unit for Industrial Dynamics

    CY - Frederiksberg

    ER -