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Managerial incentives to improve productivity

Does performance pay for managers boost a firm’s productivity? And if so, what is it that managers focus on to achieve an increase in their workers’ total output? In an effort to answer these questions, Iwan Barankay and his colleagues have been running some field experiments at a large UK fruit farm.

appletree.jpgThe last two decades have seen a surge in the popularity of performance pay for individuals in executive and managerial positions – from chief executives down to middle and lower management. But until now, there has not been much evidence on how managerial performance pay affects a firm’s productivity and the performance of individual workers in lower tiers of the firm’s hierarchy.

In research with Oriana Bandiera and Imran Rasul, I have been seeking to shed light on these issues by running a series of experiments in conjunction with a UK-based firm. In field experiments like ours, one aspect of the firm – typically its employee contracts – is changed in a randomised way that allows a causal interpretation of the effects.

The series of experiments we engineered were designed to understand how individuals respond to changes in the monetary incentives offered to them, and whether this response depends on the type of people they work with or their broader social network in the workplace.

The firm we studied is a leading producer of soft fruit. In this firm, managerial staff belong to two classes: the first consists of a single general manager and the second comprises 10 field managers. The bottom tier of the firm hierarchy consists of workers whose task is to pick fruit, a physically strenuous task for which workers are of varied ability.

Managerial incentives increase workers’ average productivity but also the dispersion of worker productivity

Managers are responsible for field logistics, most importantly to assign workers to rows of fruit within the field and to monitor workers. The general manager’s task is to decide which workers are selected to pick fruit each day and which are assigned to non-picking tasks. He also decides the allocation of workers and managers to fields.

Our experiment involved changing the incentive scheme for both the field managers and the general manager. For the first two months, they were paid a fixed wage. They continued to receive this for a second period of two months, but in addition they could earn a performance bonus based on the average productivity of the workers they managed.

With the incentive of performance pay, managers target their efforts towards more able workers

We found that the introduction of performance pay for managers increased worker productivity by 20%. But it also increased the dispersion of worker productivity: the increase in productivity was the greatest for the most able workers, while low ability workers were less likely to be selected to pick fruit. This suggests that managers target their efforts towards more able workers when they have the incentive of performance pay.

This research has important implications for the organisation of firms, highlighting as it does the interplay between the provision of managerial incentives and earnings inequality among lower-tier workers. For example, managers may show favouritism towards some employees, which can be bad for overall firm performance. Such favouritism can be mitigated if managerial incentives are correctly structured.

Citation Details
The Authors
  • Oriana Bandiera is associate professor of economics at the London School of Economics.
  • Iwan Barankay is associate professor of economics at the University of Warwick and a research fellow of the Institute for the Study of Labor (IZA) in Bonn.
  • Imran Rasul is associate professor of economics at University College London.
  • All three authors are research affiliates of the Centre for Economic Policy Research.