ABSTRACT I empirically investigate the impact of an organization's creativity dependency on the design of its incentive system. In firms for which the primary source of value creation is the creativity of core employees, the designs of incentive systems are particularly challenging. The nature of creative work constrains the feasibility of extrinsic incentives, but at the same time creates a need for them. Accordingly, there is concern that the use of incentives renders people not creative enough, but a lack of incentives makes employees “too creative.” I argue that a solution to this dilemma is the acknowledgment that the decision to use performance-based pay is not made in isolation, but as part of a set of complementary choices. I theoretically argue and empirically show that subjective evaluations of non-task-related performance and performance-based pay are complements in a creativity-dependent setting. I further argue that the intense use of both control mechanisms is the incentive system that best accommodates the control requirements of creativity-dependent firms, and show that the likelihood of choosing this system increases with the creativity dependency.

ABSTRACT We investigate the determinants and consequences of budget reallocations—that is, corrective changes to the budget made during the year. Using proprietary data from a large consumer goods manufacturer, we analyze the extent to which initial budgeting decisions drive reallocations. Examining this relationship is important because initial budget negotiations are often troubled by power struggles and politicking, which may give rise to the need for reallocations. We hypothesize that one important driver of reallocation decisions is the firm's aim to correct systematic deviations from the optimal initial budget that were driven by lobbying during the initial budgeting process. We find evidence that is consistent with this prediction. In a more exploratory analysis, we show that reallocations do not have the desired effects on market performance. In particular, budget cuts are negatively associated with a product's change in market share. More surprisingly, while budget increases do help product lines achieve their sales targets in the last quarter, they do not boost market share. Our results demonstrate that efficient investment planning is essential to achieve an improvement in market performance.

ABSTRACT In this study, we investigate the choice of performance measures in promotion decisions. In particular, we examine the extent to which managers incorporate different performance measures for different types of job assignment. Based on a simple theoretical framework, we predict that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion, while the weight on subjective assessments of ability increases. This result basically follows from the premise that, with increased changes in tasks between hierarchical levels, the ability to master the current job says little about the ability needed in the next job, which makes current job performance less informative and increases the emphasis on subjective assessments. Using panel data of a retail bank, we find that individual managers behave according to our predictions. By examining the choice of performance measures in promotion decisions, we are able to provide unique insights into the incentive versus sorting roles of promotions, which has important implications for performance measurement and incentive system design.

In the creative industries, creative output is often produced in temporary project teams, staffed with employees from within the organization. In this study we make two main contributions regarding the management of creative performance in such teams. First, we provide evidence for a fundamental trade-off inherent in creative teamwork. Team creativity benefits both from high team member autonomy and high task interdependence, but when team leaders give higher autonomy to team members then this undermines the positive effect of a more interdependent design of teamwork on team creativity, and vice versa. Second, we argue that cultural control at the organizational level is an effective means to resolve this team-level trade-off and to enable teams to leverage both high autonomy and high task interdependence for higher team creativity. We test our hypotheses using survey data collected at three different organizational levels (team members, team leaders, and agency heads) from 372 individuals of 101 temporary project teams within 53 advertising agencies, and find evidence consistent with our predictions.

ABSTRACT Firms are facing increasing pressure to provide information about their Corporate Social Responsibility (CSR) commitment. Firms however differ in the quality of how they communicate CSR-related efforts to stakeholders as well as in the intensity of their CSR contracting. We examine the relationship between CSR disclosures and contracting and argue that the designs of the two practices are complements in signaling a CSR commitment. Using hand-collected data to capture disclosure quality of CSR reports and intensity of CSR contracting (i.e., scope, importance, and degree to which CSR metrics are incorporated) for S&P 500 firms, we show that firms indeed align the design choices of the two practices. In addition, firms using both practices intensively are associated with a stronger CSR commitment and more credible CSR disclosures. Finally, we document that firms that face higher credibility concerns show stronger complementarity between the design of these two practices. Data Availability: All data are available from public sources mentioned in the text. JEL Classifications: M14; M40.

ABSTRACT While prior research on performance evaluation bias has mainly focused on the determinants and consequences of rating errors, we investigate how a firm can provide implicit incentives to supervisors to mitigate these errors via its calibration committee. We empirically examine the extent to which a calibration committee incorporates supervisors' evaluation behavior with respect to their subordinates in the performance evaluation outcomes, i.e., performance ratings and promotion decisions, for these supervisors. In our study, we distinguish between lack of skills and opportunism as two important facets of evaluation behavior, which we expect the calibration committee to address differently. Using panel data of a professional service firm, we show that supervisors' opportunistic behavior to strategically inflate subordinates' performance ratings is disciplined through a decrease in the supervisors' own performance rating, while the supervisors' skills to provide less compressed and, thus, more informative performance ratings is rewarded through a higher likelihood of promotion.