Employee Discretion and Performance Pay

ABSTRACT: This study examines the relationship between performance pay and the decision to delegate the choice of work methods and scheduling. I compare two theoretical approaches, based on specific knowledge and measurement costs, respectively. Both perspectives suggest a complementarity between discretion and performance pay, but the former predicts a positive effect of job complexity on discretion and performance pay, and the latter implies a negative effect. Results suggest that group and firm‐wide incentives are used to decentralize decisions and to take advantage of employees' specific knowledge, whereas piece rates are driven by performance measurement considerations and are not associated with more discretion.