Three-Way Complementarities: Performance Pay, Human Resource Analytics and Information Technology

Innovation and Economic Growth and Privacy and Security

Article Snapshot

Author(s)

Sinan Aral, Erik Brynjolfsson and Lynn Wu

Source

Management Science, Vol. 58, No. 5, pp. 913-931, 2012

Summary

This study considers firms that use Human Capital Management (HCM) software. Firms that adopt performance pay and human resource (HR) analytics together with HCM enjoy large productivity gains. Using the incentives separately is much less effective.

Policy Relevance

Firms wishing to increase productivity should use HCM along with HRA and performance pay.

Main Points

  • HCM systems track employee effort and performance, recording employee attendance, illnesses, vacation time, and, often, tracks the performance of specific tasks.
     
  • HR Analytics uses data mining techniques to analyze workforce data, including time worked and attendance, sales, individual and departmental scorecards, and other information.
     
  • Performance pay programs should be easily understood and clearly communicated, offering rewards for individual performance gains consistent with the firm’s overall strategy.
     
  • The study review data on HCM software adoption at 189 firms over a period of 11 years.
     
    • The sample consisted mainly of manufacturing firms.
       
    • Performance incentives might work differently at service-oriented firms.
       
  • Adoption of HCM software is greatest in firms that also adopted performance pay and HR analytics.
     
  • Knowledge work firms were less likely to adopt HCM; incentive rewards might be more effective at manufacturing firms, where work is measurable.
     
  • Using HCM together with HR analytics and performance pay yields large productivity gains, disproportionately greater than using any two together.
     
    • Some gains were larger than expected, suggesting that beneficial practices other than those we studied were in use at some firms.
       
    • No other differences between HCM adopters and nonadopters explain the gains.
       
  • Incentive pay leads to gains in productivity through two mechanisms:
     
    • Monetary rewards motivate employees to work harder.
       
    • Highly talented employees are more likely to take jobs where they are rewarded, and less talented employees are more likely to leave.
       
  • Productivity increases when HCM systems “go live,” not when HCM systems are purchased. This shows that HCM supports increased productivity, not that gains in productivity leads to use of HCM.
     

 

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