White collar incentives

Abstract

This study analyzes the incentive design structure for a sample of mid-level white collar managers (WCM) in large, technology-oriented U.S. firms whose knowledge-based outputs are difficult to measure objectively. Consistent with the limited availability of objective outcome measures for WCM, we find that the sample firms make significant use of tournament-like implicit promotion incentives to motivate WCM, in addition to using explicit financial incentives. We also find that implicit and explicit incentives are complements rather than substitutes in our setting in which sample firms are generally not constrained in their ability to adjust implicit and explicit incentives. Finally, while both implicit and explicit incentives increase in job level, explicit incentives increase more rapidly than implicit incentives, resulting in an increase in the intensity of explicit incentives relative to implicit incentives. We attribute this finding to WCM at higher job levels exercising greater influence on organization performance, making organization-level performance measures more informative. Overall, the results are consistent with the availability of objective performance measures for WCM influencing the structure of their implicit promotion and explicit financial incentives.