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

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.

[1]  Ping Wang,et al.  Knowing why and how to innovate with packaged business software , 2005, J. Inf. Technol..

[2]  Paul Milgrom,et al.  Complementarities and fit strategy, structure, and organizational change in manufacturing , 1995 .

[3]  A. Arora.  Testing for complementarities in reduced-form regressions: A note , 1996 .

[4]  E. Brynjolfsson,et al.  Computing Productivity: Firm-Level Evidence , 2003, Review of Economics and Statistics.

[5]  Shamsud D. Chowdhury,et al.  Making Room for the Call Center , 2002, Inf. Syst. Manag..

[6]  Haim Mendelson,et al.  Clockspeed and Informational Response: Evidence from the Information Technology Industry , 1998, Inf. Syst. Res..

[7]  Andrew McAfee.  Do You Have Too Much IT , 2004 .

[8]  Harry J. Paarsch,et al.  Piece Rates, Fixed Wages, and Incentive Effects : Statistical Evidence From Payroll Records , 2000 .

[9]  Edward P. Lazear,et al.  The Power of Incentives , 2000 .

[10]  E. Brynjolfsson,et al.  Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending , 1996 .

[11]  D. J. Wu,et al.  Investment in Enterprise Resource Planning: Business Impact and Productivity Measures , 2002, J. Manag. Inf. Syst..

[12]  H. Mendelson.  Organizational Architecture and Success in the Information Technology Industry , 2000 .

[13]  Paul Milgrom,et al.  The Firm as an Incentive System , 1994 .

[14]  Erik Brynjolfsson,et al.  Intangible benefits and costs of computer investments: evidence from the financial market , 1997 .

[15]  G. Baker,et al.  Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking , 2000 .

[16]  D. J. Wu,et al.  Which Came First, it or Productivity? Virtuous Cycle of Investment and Use in Enterprise Systems , 2006, ICIS.

[17]  Bruce Shearer,et al.  Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment , 2004 .

[18]  Casey Ichniowski,et al.  Beyond Incentive Pay: Insiders' Estimates of the Value of Complementary Human Resource Management Practices , 2003 .

[19]  Sinan Aral,et al.  I.T. Assets, Organizational Capabilities and Firm Performance: Do Resource Allocations and Organizational Differences Explain Performance Variation? , 2007 .

[20]  Casey Ichniowski,et al.  The Effects of Human Resource Management Practices on Productivity , 1995 .

[21]  Lorin M. Hitt,et al.  Intangible assets: how the interaction of computers and organizational structure affects stock market valuations , 1998, ICIS '98.

[22]  E. Brynjolfsson,et al.  Information Technology As A Factor Of Production: The Role Of Differences Among Firms , 1995 .

[23]  Kenneth L. Kraemer,et al.  Review: Information Technology and Organizational Performance: An Integrative Model of IT Business Value , 2004, MIS Q..

[24]  Rajiv Kohli,et al.  Performance Impacts of Information Technology: Is Actual Usage the Missing Link? , 2003, Manag. Sci..

[25]  G. Baker.  Incentive Contracts and Performance Measurement , 1992, Journal of Political Economy.

[26]  Paul R. Milgrom,et al.  The Economics of Modern Manufacturing: Technology, Strategy, and Organization , 1990 .

[27]  E. Lazear,et al.  Peer Pressure and Partnerships , 1992, Journal of Political Economy.

[28]  S. Crowther,et al.  The New Deal at Work – Managing the Market Driven Workforce , 2000 .

[29]  Canice Prendergast.  The Provision of Incentives in Firms , 1999 .

[30]  Prasanna Tambe,et al.  The Extroverted Firm: How External Information Practices Affect Innovation and Productivity , 2012, Manag. Sci..

[31]  Paul R. Milgrom,et al.  AGGREGATION AND LINEARITY IN THE PROVISION OF INTERTEMPORAL INCENTIVES , 1987 .

[32]  Loizos Heracleous.  Strategy and Organization: List of figures , 2003 .

[33]  Stephen D. Oliner,et al.  Computers and Output Growth Revisited: How Big Is the Puzzle? , 1994 .

[34]  John Van Reenen,et al.  It ain't what you do it's the way that you do IT , 2005 .

[35]  John Van Reenen,et al.  Americans Do I.T. Better: US Multinationals and the Productivity Miracle , 2007 .

[36]  Erik Brynjolfsson,et al.  Intangible Assets: Computers and Organizational Capital , 2002 .

[37]  Ann P. Bartel,et al.  How Does Information Technology Affect Productivity? Plant-Level Comparisons of Product Innovation, Process Improvement, and Worker Skills , 2007 .

[38]  Rajiv D. Banker,et al.  Performance Evaluation Metrics for Information Systems Development: A Principal-Agent Model , 2015, Inf. Syst. Res..

[39]  A. Bartel.  Human Resource Management and Organizational Performance: Evidence from Retail Banking , 2004 .

[40]  Scott Stern,et al.  Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development , 2007, Manag. Sci..

[41]  J. V. Reenen,et al.  Skill-Biased Organizational Change? Evidence from a panel of British and French establishments , 2001 .

[42]  Sandra E. Black,et al.  How to Compete: The Impact of Workplace Practices and Information Technology on Productivity , 1997, Review of Economics and Statistics.

[43]  A. Arora,et al.  COMPLEMENTARITY AND EXTERNAL LINKAGES: THE STRATEGIES OF THE LARGE FIRMS IN BIOTECHNOLOGY* , 1990 .

[44]  Paul R. Milgrom,et al.  Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design , 1991 .

[45]  S. Athey,et al.  An Empirical Framework for Testing Theories About Complimentarity in Organizational Design , 1998 .