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Under a discontinuous and nonlinear compensation scheme, which is prevalent among car dealerships, the amount of a salesperson’s expected daily commission depends primarily on his position in the pay schedule on the day he makes a sale. Salespeople thus vary their efforts and adopt a different pricing strategy week by week, or even day by day. The purpose of this paper is to examine the incentive effect of such a nonlinear scheme and provide the evidence that salespeople’s behavior is consistent with the theory.

The authors conduct regression analyses using the transaction data provided by two North American auto dealerships. The authors construct a daily measure of varying incentive intensity and evaluate its impact on the distribution of individual daily sales and the dealership’s gross profit rate.

The authors find that the daily measure of varying incentive intensity has a positive effect on the distribution of individual daily sales and a negative impact on the dealership’s gross profit rate. The results suggest that: salespeople adjust their effort levels in response to the intensity of incentives; and they game the system by lowering the prices when the marginal return to doing so is high.

The study shows that there is a high cost associated with the discontinuous nonlinear pay scheme, raising the question of why many auto dealerships use it.

This paper sheds light on the undesirable aspects of discontinuous and nonlinear incentive schemes, varied performance and gaming, by quantifying the effects of the worker’s behavior.

The popular press often touts workforce demographic diversity as profit enhancing because it may reduce the firm's communication costs with particular segments of customers or yield greater team problem-solving abilities. On the other hand, diversity also may raise communication costs within teams, thereby retarding problem solving and lowering productivity. Unfortunately, there is little empirical research that disentangles the above countervailing effects. Diversity in ability enhances the team productivity if there is significant mutual learning and collaboration within the team, while demographic diversity may harm productivity by making learning and peer pressure less effective and increasing team-member turnover. We evaluate these propositions using a novel panel data from a garment plant that shifted from individual piece rate to group piece rate production over three years. Because we observe individual productivity data, we are able to econometrically distinguish between the impacts of diversity in worker abilities and demographic diversity. Teams with more heterogeneous worker abilities are more productive at the plant. Holding the distribution of team ability constant, teams composed of only one ethnicity (Hispanic workers in our case) are more productive, but this finding does not hold for marginal changes in team composition. We find little evidence that workers prefer to be segregated; demographically diverse teams are no more likely to dissolve, holding team productivity (and hence pay) constant, than homogeneous teams.

The purpose of this chapter is to offer new justification for multiskilling practices such as job rotation and extensive training for broad skills and explain why there appear to exist complementarity between multiskilling and the delegation of decision authority to workers.

By developing a new model of incomplete contracting where workers make noncontractable investments in multiple skills, we obtain the key insight that worker investments in firm-specific human capital become strategic substitutes when their skills overlap each other.

The “skill substitution effect” analyzed in this chapter induces the following three major results, unless specialization offers a substantial technological advantage: (1) workers' incentives to invest in firm-specific human capital tend to be stronger; (2) the optimal level of delegation is typically higher; and (3) firms' ex post profits tend to be higher with multiskilling than with specialization.

The novel implication of the chapter is that multiskilling may be desirable from a firm's viewpoint even if there are no technological or informational task complementarities among the combined skills, which have been believed to be primary reasons for multiskilling in prior works.

Continuing in the tradition of earlier volumes in the series, the 12th edition of Advances in the Economic Analysis of Participatory and Labor-Managed Firms interprets the themes of the series quite broadly and, consequently, the following pages traverse a highly variegated terrain. I have marked this expansive landscape with four guideposts around which our discussion is organized, namely sections on job design and organizational performance (Part I); compensation, worker attitudes, and productivity (Part II); worker cooperatives and nonprofit organizations (Part III); and free trade and the ecological effects of alternative socio-economic systems (Part IV). The following essays exhibit a diversity of topics, data sources, modes of analysis, geographic contexts, and philosophies. The contributors are similarly diverse, hailing from seven countries, with representation both inside and outside of academia. It is my hope that, in addition to contributing to our knowledge of the broad subject at hand, the articles contained in this volume will inspire productive future work on the important questions addressed herein.

Mark Klinedinst cuts straight to the chase with a chapter which examines the performance of commercial banks in the United States relative to credit unions which are financial cooperatives with democratic structures. Using panel data for the 1990s and early 2000s Mark shows that credit unions are more efficient than banks that are comparable in size, the metric being the assets per dollar of salary managed by the organization. Given that credit unions in the United States have not required a massive taxpayer bailout, the chapter offers food for thought as to what shape financial institutions should take in the United States going forward.

The purpose of this chapter is to provide fresh evidence and insights on a causal link from product market competition to the nature and scope of employee involvement using a case study of two Japanese manufacturing firms.

The firm’s investment decision on two kinds of innovation activities, discrete innovation and continuous improvement, is likely to be a key driver for the adoption (or lack thereof) of the high-performance work system (HPWS) and employee involvement programs. As product market competitionintensifies (e.g., rising international competition and weakening exclusivesupplier–manufacturer relationships), the firm is likely to shift its innovation strategy from bottom-up continuous improvement activities, which almost always accompany employee involvement, to top-down discrete innovation activities, which downplays employee involvement. Such a shift of the firm’s innovation strategy results in declining employee involvement.

This study will inform policymakers, practitioners of management, and the public about the importance of paying particular attention to the firm’s innovation strategy in understanding the interplay between product market competition and the HPWS and employee involvement.

In spite of the rich body of evidence on the effects of HPWS, there are at least two relatively unexplored yet potentially important questions: (i) The conditions under which the HPWS is best introduced and best sustained; and (ii) in what way the HPWS will need to evolve when external environments change. Our findings fill this important gap in the literature by providing novel evidence and insight on the causal link from product market competition to employee involvement.