We find three-way complementarities among IT, performance pay, and monitoring practices. We model these practices as a tightly-knit incentive system that produces the largest productivity premium when implemented in concert. We assess our model by combining fine-grained data on Human Capital Management (HCM) software adoption with detailed survey data on performance pay and monitoring practices at 90 firms from 1995-2006. HCM adoption is associated with a disproportionately large productivity premium when it is implemented within a system of organizational incentives that includes both monitoring and performance pay, but has little benefit when adopted alone. We find no evidence of reverse causality: the complementarities appear when the software goes live, not when the purchase decision is made. Furthermore, we can distinguish two components of performance pay: motivation (inducing employees to increase effort), and talent selection (attracting higher quality employees). We find that the complementarities are entirely explained by talent selection.
Aral, Sinan; Brynjolfsson, Erik; and Wu, Lynn, "Testing Three-Way Complementarities: Performance Pay, Monitoring and Information Technology" (2009). ICIS 2009 Proceedings. 163.