Using Fixed Wages for Management Control: An Intra-Firm Test of the Effect of Relative Compensation on Performance

James Hesford, Nicolas Mangin, Mina Pizzini

    Research output: Contribution to journalArticleAcademicpeer-review

    Abstract

    Efficiency wage theory predicts employers can elicit better employee performance ex post by paying higher fixed compensation ex ante, relative to the market wage. Relative compensation may thereby constitute an alternative control mechanism when performance-based compensation is difficult to implement. Using proprietary data from 436 hotels in a U.S. lodging chain, we find that relative compensation is positively associated with performance, and additional profits associated with higher compensation exceed the wage increase. Relative compensation has a larger impact on profit when tasks are more complex and a smaller impact on profit, revenue, and quality when chain monitoring is stronger. Finally, the magnitude of the relation between relative compensation and financial performance (nonfinancial) is larger (the same) for employees earning more than the median wage compared with those earning less. Overall, our results are consistent with assertions that higher relative compensation attracts more capable candidates and mitigates shirking, but provide little support for reciprocity.

    Original languageEnglish
    Pages (from-to)137-154
    Number of pages18
    JournalJournal of Management Accounting Research
    Volume32
    Issue number3
    Early online dateDec-2019
    DOIs
    Publication statusPublished - 2020

    Keywords

    • efficiency wage
    • selection
    • shirking
    • reciprocity
    • monitoring
    • task complexity
    • rank-and-file employee compensation
    • GIFT EXCHANGE
    • TASK COMPLEXITY
    • MONETARY INCENTIVES
    • LABOR-MARKETS
    • SUPERVISION
    • RECIPROCITY
    • MODEL
    • FIRM
    • UNEMPLOYMENT
    • PRODUCTIVITY

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