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Three-Way Complementarities: Performance Pay, Human Resource Analytics, and Information Technology

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Author Info

  • Sinan Aral

    ()
    (Stern School of Business, New York University, New York, New York 10012)

  • Erik Brynjolfsson

    ()
    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

  • Lynn Wu

    ()
    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

Abstract

We test for three-way complementarities among information technology (IT), performance pay, and human resource (HR) analytics practices. We develop a principal-agent model examining how these practices work together as an incentive system that produces a larger productivity premium when the practices are implemented in concert rather than separately. We assess our model by combining fine-grained data on human capital management (HCM) software adoption over 11 years with detailed survey data on incentive systems and HR analytics practices for 189 firms. We find that the adoption of HCM software is greatest in firms that have also adopted performance pay and HR analytics practices. Furthermore, HCM adoption is associated with a large productivity premium when it is implemented as a system of organizational incentives, but has less benefit when adopted in isolation. The system of three-way complements produces disproportionately greater benefits than pairwise interactions, highlighting the importance of including all three complements. Productivity increases significantly when the HCM systems "go live" but not when they are purchased, which can be years earlier. This helps rule out reverse causality as an explanation for our findings. This paper was accepted by Sandra Slaughter, information systems.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1460
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 58 (2012)
Issue (Month): 5 (May)
Pages: 913-931

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Handle: RePEc:inm:ormnsc:v:58:y:2012:i:5:p:913-931

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Keywords: incentive systems; information technology; performance pay; human resource analytics; complementarity; enterprise systems; ERP; productivity; production function; principal-agent model;

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Cited by:
  1. Bashir, Sadaf & Sadowski, B. M., 2014. "General purpose technologies: A survey, a critique and future research directions," 25th European Regional ITS Conference, Brussels 2014 101443, International Telecommunications Society (ITS).
  2. Sadaf Bashir & Bert Sadowski, 2014. "General Purpose Technologies: A Survey, a Critique and Future Research Directions," Working Papers, Eindhoven Center for Innovation Studies 14-02, Eindhoven Center for Innovation Studies, revised Feb 2014.
  3. Michael Beckmann & Thomas Cornelissen, 2014. "Self-Managed Working Time and Employee Effort: Microeconometric Evidence," SOEPpapers on Multidisciplinary Panel Data Research 636, DIW Berlin, The German Socio-Economic Panel (SOEP).
  4. Bashir, Sadaf & Matzat, U. & Sadowski, B. M., 2014. "The adoption of information and communication technologies in the design sector and their impact on firm performance: Evidence from the Dutch design sector," 25th European Regional ITS Conference, Brussels 2014 101389, International Telecommunications Society (ITS).
  5. Grabner, Isabella & Moers, Frank, 2013. "Management control as a system or a package? Conceptual and empirical issues," Accounting, Organizations and Society, Elsevier, vol. 38(6), pages 407-419.
  6. Sadaf Bashir & Uwe Matzat & Bert Sadowski, 2014. "The Adoption of Information and Communication Technologies in the Design Sector and their impact on Firm Performance: Evidence from the Dutch Design Sector," Working Papers, Eindhoven Center for Innovation Studies 14-01, Eindhoven Center for Innovation Studies, revised Feb 2014.

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