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 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.

Organizations that rely heavily on employee creativity face a dilemma: the particular nature of creative production calls for a substantial use of formal control, yet such control can undermine employee creativity. We examine this dilemma by analyzing how an organization's reliance on creativity influences its choice of control practices. More specifically, we argue that an organization's high reliance on employee creativity generates two types of cost, which will be reflected in the control choices made by its top management. First, a high reliance on employee creativity brings with it particular risks of dysfunctional employee behavior such as an overly narrow focus on the individual task or the opportunistic use of task-specific expertise. Second, it generates costs when it induces organizations to abstain from the use of (otherwise effective) controls because such controls increase the risk of undermining employee creativity. We identify two characteristics of the work setting – the importance of employees' intrinsic task motivation and the lack of task-specific cause–effect knowledge on part of managers – which help us to better understand the sources of the cost of creativity. Using survey data from 457 companies, we provide evidence that the importance managers attach to their employees' intrinsic task motivation is associated with a higher emphasis on assessments of non-task related performance, while a perceived lack of task-specific cause–effect knowledge on the managers' side is associated with more use of predefined targets for performance evaluation. Both work characteristics contribute to explaining higher emphasis on employee selection processes and increased delegation in work settings that heavily rely on employee creativity.

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.

In response to general calls for increased transparency in society, pay transparency policies are growing in importance. Given that pay transparency unavoidably gives employees the opportunity to make comparisons between themselves and others, in this study we address the question of how these comparisons impact the incentive effects of performance contingent pay, and consequently their performance outcomes. Specifically, we empirically examine whether horizontal pay dispersion alters the effectiveness of performance-based pay contracts, which firms typically use to incentivize effort. Exploiting our unique access to a large healthcare provider, we document the moderating role of horizontal pay dispersion on the effectiveness of individual monetary incentives at generating increased individual performance. To provide a more nuanced understanding of the moderating effect of pay dispersion, we further examine the boundary conditions of the proposed interaction. In particular, we examine the differential effect of overall pay dispersion on employees that rank high versus low in the pay distribution and disaggregate overall pay dispersion into performance-related versus performance-unrelated pay dispersion. Our findings consistently show a positive moderating effect of pay dispersion when employees are more likely to consider the observed pay dispersion as legitimate, and a negative moderation effect when this is less likely the case. Our study strengthens the understanding of how individual level incentives function in the context of a multi-person firm setting. Our results document that individual incentives are effective, but also suggest that pay dispersion can have a significant influence on the incentive-performance relation. These findings provide some evidence that individuals are concerned not only with their own payout, but also with that of others, and that this concern has a significant impact on individual’s effort provision, and consequently performance.

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.

Prompted by the weaknesses of standardized risk-management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as a crucial driver of risk awareness. In this study, we take a systems perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that both the interactive and the diagnostic use of budgets and performance measures interact with tone from the top in managing risk awareness. Our results show that interactive control strengthens the effect of tone from the top on risk awareness, whereas tone from the top and diagnostic control are empirically not interrelated with regard to creating risk awareness. To shed light on the boundary conditions of the proposed interdependencies, we further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. We find that the effect of tone from the top and interactive control becomes significantly stronger in a situation of high perceived environmental uncertainty. Most interestingly, tone from the top and diagnostic control are complements with regard to risk awareness in settings of low perceived environmental uncertainty and substitutes at high levels of perceived environmental uncertainty.

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.