Academic journal article International Journal of Management

Controllability as a Moderator of the Effect of Salaries on Performance: An Empirical Study

Academic journal article International Journal of Management

Controllability as a Moderator of the Effect of Salaries on Performance: An Empirical Study

Article excerpt

Monetary incentives have a substantial impact on performance. This research investigates the effects of salary on performance. The performance of 269 hitters and 228 pitchers of Major League Baseball in the United States were examined for the 2004 regular season. Results obtained in this study indicate that salary is the key determinant of pitchers' performance. However, the effects of salary on hitters' performance are not significant. The feasible set of performance measures can only be deemed as moving toward the first-best solution via maximizing controllability while minimizing distortion effects. The findings imply that controllable characteristics are subject to the performance measures for pitchers, while more distorted ones are subject to hitters' performance measures.

1. Introduction

Compensation is one of the most important motivators of employees as well as an essential tool for organizations (Brown, Sturman & Simmering, 2003; Werner & Ward, 2004). Numerous studies have reported that employees' compensation is highly related to their performance (eg., Azfar & Danninger, 2001; Barkema & Gomez-Mejia, 1998; Harrison, Virick & William, 1996; Holbrook & Shultzs, 1996; Konard & Pfeffer, 1990; MacDonald & Reynolds, 1994; Rudin & Lee, 2002; Scully, 1974; Tosi, Werner, Katz, & Gomez-Mejia, 2000; Welbourne& Gomez-Mejia, 1995; Werner & Mero, 1999). If salary is closely tied to key performance measures, it is reasonable to expect that employees will work to maximize those performance measures (Yilmaz & Chatterjee, 2003).

Monetary incentives have a substantial impact on performance (Werner & Ward, 2004). Some extant literature has investigated the importance of monetary incentives in performance (e.g., Azfar & Danninger, 2001; Harrison, Virick & William, 1996; Welbourne & Gomez-Mejia, 1995; Werner & Mero, 1999); however, findings of previous studies may be constrained by limitations of aggregation. Aggregate incentive plans and performance measures, which are often seen in previous studies (e.g., Azfar & Danninger, 2001; Welbourne & Gomez-Mejia, 1988), are superficially appealing, but they offer no basis for human behavior since the real decision-making unit is individual instead of aggregate level (Proussaloglou & Koppelman, 1989). Aggregate incentive plans and performance measures-namely, team or firm-wide incentive plans and performance measures-are subject to estimation bias and errors (Ittner & Larcker; 2002; Koppelman, 1989). For example, Bushman, Indjejikian, and Smith ( 1995) admit that their empirical proxies for the relative use of aggregate performance measures do not unambiguously capture the relative incentive intensity placed on aggregate measures. Ittner and Larcker (2002) point out the variables used in their research may have significant measurement error because their construct, which is based on company-level measures rather than disaggregate measures, has a relatively low reliability.

The purpose of this research is to conduct a disaggregate analysis that tests the effects of salary on performance. To avoid the disadvantage on aggregation, the disaggregate salary and performance measurement of Major League Baseball players were used in this study. Thus, the measurement error or subjectivity in aggregation is of no concern to this research.

Major League Baseball offers a good business research laboratory for a number of reasons. First, accurate performance, seniority, and salary measures in Major League are available from public data sources (Werner & Mero, 1999) to ensure objectivity. second, Major League Baseball has a wealth of measures pertaining to a player's performance on the field (Yilmaz & Chatterjee, 2003). The degree of sophistication in the performance measurement indexes of Major League Baseball players are no less than what has been observed in measuring employees' performance. …

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