Delegation and Performance Pay: Evidence from Industrial Sales Forces
Abstract: Delegation is a central feature of organizational design that theory suggests should be aligned with the power of incentives in performance pay schemes. Empirical research on factors that influence delegation, and on the relationship between delegation and pay-for-performance, however, remains scarce. We develop a simple model of the delegation decision in the context of industrial sales forces, where delegation takes the form of pricing authority given to sales persons. Consistent with the predictions of our model, we show that the power of incentives is positively and robustly related to the level of pricing authority. We also find that sales people are given more pricing authority when they have superior local information and are less biased. Finally, we find evidence that the positive effect of local information on the extent of delegation is increasing in pay-for-performance but decreasing in agent bias.
