OntheMeritofEqualPay.docx

On the Merit of Equal Pay:Influence Activities Incentive SettingBrice Corgnet, Ludivine Martin, PeguyNdodjang, Angela SutanAbstractInfluence costs models predict that organizations should limit managerial discretion to deter organizational members from engaging in wasteful politicking activities. We test this conjecture in a controlled, yet realistic, work environment in which we either permit or not permit workers to influence managers’ pay decision. We find that influence activities are pervasive and lead to reduced firm performance. Firm performance is reduced because principals offer lower-powered incentives in the environment in which influence activities are permitted than in the environment in which they are not. Importantly, we show that equal payincentive schemes perform better when influence activities are available than when they are not. Our results thus support the idea that prevalent politicking activities may account for the widespread use of bureaucratic, and apparently inefficient, compensation rules in organizations.Keywords: Influence activities, incentive theory, theory of the firm, organizational economicsJEL Codes:?C91, D23, D86, M52“Wheredifferentpartsoftheorganizationhave responsibilityfordifferent piecesofinformationrelevanttoadecision,wewouldexpect…someattemptstomanipulateinformationasadeviceformanipulatingthedecision.”Cyert March,1963,p791. INTRODUCTIONOne of the main challenges of economic science is to provide a unifying model of the boundaries of the firm (Gibbons, 2005). To understand firm boundaries one must not only explain why all economic activity is not coordinated through markets but also why “all production is not carried out by one big firm” (Coase, 1937). Following Williamson (1985), one should explain the limits of the “selective intervention”argument under which firms can do at least do as well as markets by having firm executives selectively intervene to coordinate only those activities for which markets fail.To understan