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Does Incentive Pay Substitute for Monitoring? The Role of Managerial Skills and Span of Control

Author

Listed:
  • Filippo Belloc
  • Stefano Dughera
  • Fabio landini

Abstract

We model the conditions under which firm agency issues are tackled through incentive pay as opposed to monitoring. The model shows that a larger span of control makes labor surveillance less effective as an effort extraction mechanism, whereas managerial skills increase the opportunity cost of monitoring. As a result, the use of pay-for-performance schemes is more likely in firms with a lower staff-to-managers ratio and more skilled managers. An empirical analysis on firm-level Italian data produces results coherent with our theoretical predictions. Taken together, our results help to explain the highly heterogeneous use of incentive contracts among firms

Suggested Citation

  • Filippo Belloc & Stefano Dughera & Fabio landini, 2023. "Does Incentive Pay Substitute for Monitoring? The Role of Managerial Skills and Span of Control," Department of Economics University of Siena 901, Department of Economics, University of Siena.
    • Handle: RePEc:usi:wpaper:901
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    More about this item

    Keywords

    Incentive pay; Managerial ability; Span of control;
    All these keywords.

    JEL classification:

    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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