Week 11_Aral et al 2012 Yiran

The authors propose that some information technologies could complement such incentive practices. They develop an analytical model that illustrates this complementarity and demonstrate how the corpresence of IT and incentive practices can explain variation in both the returns to IT and the effectiveness of performance pay contracts and human resource (HR) analytics practices that monitor and provide feedback on performance. A principal–agent model is used with moral hazard to illustrate the complementarity of HCM software and compensation systems that include HR analytics practices and performance pay.

To test three-way complementarities between performance pay, HR analytics, and IT, they used a data set surveying the detailed human resource practices of these 189 firms in 2005, of which about half (90) adopted the HCM system.  To distinguish the reverse causality, that is, firms may choose to adopt HCM when they perform well or experience exogenous shocks to productivity. The authors separately measure the decision to invest and the actual investment itself.

The results show that the adoption of HCM software is greatest in firms that have also adopted performance pay and HR analytics practices. Furthermore, HCM adoption is associated with a large productivity premium when it is implemented as a system of organizational incentives, but has less benefit when adopted in isolation. The system of three-way complements produces disproportionately greater benefits than pairwise interactions, highlighting the importance of including all three complements.