Research News

Improving Performance: Managerial Control and Performance Pay

Kirabo Jackson examines auto-repair shops for lessons on compensation

auto repair

While widely used in the business world, pay-for-performance is a much, and often hotly, debated topic in education circles. What if there was a better way to boost effort rather than, for example, simply paying teachers according to student test-score improvements?

Kirabo Jackson
            Kirabo Jackson

“A lot of the conversation about motivating teachers is, ‘Let’s measure teacher performance and then pay them to teach well,’” said IPR economist Kirabo Jackson. “Much less of the conversation is devoted to … ways to give them more professional development so they’ll be more productive.”

In a recent working paper, Jackson and Henry Schneider of Cornell University tackle the issue by being among the first to evaluate the role of managerial control in improving employee performance and comparing it with performance pay. When designing the study, they selected the auto-repair industry, where performance pay is widespread. Their 5-year study collected data on 108 mechanics, working in 11 auto-repair shops, as well as their managers, customers, and repairs.

To measure the effects of increased managerial control, the researchers distributed checklists in three randomly selected shops. Around one-third of the time, the mechanics filled them out, returning them to their supervisors. Jackson and Schneider discovered that when using checklists, the mechanics worked more hours and did more repairs. Shop revenue also increased by 20 percent. But when the experiment ended, the mechanics generally quit using the checklists—indicating that worker shirking was occurring.

In another experiment gauging performance pay, the researchers observed those mechanics who worked mainly on commission. A 6 percent increase in commissions lead to a jump of 11.7 percent in shop revenue. Because the checklist method brought in more money than increasing commissions, the researchers concluded that managerial control is a viable means of improving worker outcomes and that, in some cases, it might even be more cost effective than raises. 

“It’s a lot cheaper to send out checklists and collect them than it is to give someone a 2 percent pay raise,” Jackson said.

Overall, though, the mechanics with the highest commissions performed best under the checklist experiment, suggesting that managerial control and performance pay might work best in tandem in compensation schemes.

Interestingly, though the mechanics with higher commissions brought in more revenue, they did not work more hours or conduct more repairs. Instead, they completed more expensive repairs. The study suggests that these mechanics might have “gamed the system” by talking customers into paying for higher-priced repairs.

“The broad takeaway is that when looking for ways to improve a worker’s performance, using the stick and the carrot is only one way to do it,” Jackson concluded, noting a need for improved performance monitoring and guidance.

Source: Jackson, K., and H. Schneider. 2014. Reducing moral hazard in employment relationships: Experimental evidence on managerial control and performance pay? IPR Working Paper, WP-14-06.

Photo credit: Robert Donovan [photo of wheel], S. Drey [photo of Kirabo Jackson]