Are Administrative Pay Systems a Veil? Evidence from Within-Firm Data
34 Pages Posted: 1 Feb 1997
Date Written: October 13, 1995
Using detailed personnel data from a firm, we analyze the real effects of the kind of compensation system that is used in many large firms--the Hay system. Such compensation systems are highly centralized and bureaucratic, with little ability for managers to adjust incentives for different job designs, individuals, and circumstances. We find that this system does appear to have real effects, particularly for those who are at the maximum salary in their allowable range. Such employees tend to have falling performance ratings and salary growth, are less likely to win promotion, and are more likely to exit the firm. We interpret these facts as suggesting that such employees have lower motivation from the incentive system than other employees. Moreover, the firm's bonus system is not designed to mitigate these effects. These findings suggest that theories emphasizing such formal, bureaucratic pay systems (e.g., influence costs) may be very important in understanding actual incentive contracting schemes.
JEL Classification: J33
Suggested Citation: Suggested Citation