Seminar – Heterogeneous Effects of Performance Pay with Market Competition: Evidence from a Randomised Field Experiment

Professor Tobias Kretschmer, LMU Munich

It is well established that the effectiveness of pay-for-performance (PfP) schemes depends on employee- and firm-specific factors. Much less is known about the role of factors outside the firm. This research investigates the role of market competition on the effectiveness of PfP. The theory posits that there are two counteracting effects, a business stealing and a competitor response effect, that jointly generate an inverted U-shape relationship between PfP effectiveness and competition. Weak competition creates low incentives to exert effort because there is little extra market to gain, while strong competition creates low incentives as competitors respond more. PfP hence has the strongest effect for moderate competition. The study tests this prediction with a field experiment on a retail chain which confirms this theory and refutes alternative explanations.

Speaker bio

Tobias Kretschmer is a Professor of Management, Director of the Institute for Strategy, Technology and Organization (ISTO), and Dean of the Munich School of Management at LMU Munich. He holds a PhD in Economics from London Business School and an MSc in Strategy from the University of St Gallen. Prior to joining Munich, he held full-time positions at London School of Economics and INSEAD. His work focuses on strategy and organisation design in technology-intensive industries, especially platform markets and information and communication technologies. His work appeared, among others, in American Economic Review, Management Science, Information Systems Research, Strategic Management Journal, and Organization Science. He is a Research Fellow in Industrial Organization at the Centre for Economic Policy Research (London), an associate editor at Strategic Management Journal and International Journal of Industrial Organization and on the editorial boards of the Journal of Organization Design, Industry and Innovation and the Review of Network Economics. He likes to run (alone) and cook (with his family) in his spare time.