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

  • 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)

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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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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  22. Arora, Ashish, 1996. "Testing for complementarities in reduced-form regressions: A note," Economics Letters, Elsevier, vol. 50(1), pages 51-55, January.
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  24. Sharon Novak & Scott Stern, 2009. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," Management Science, INFORMS, vol. 55(2), pages 311-332, February.
  25. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
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