Incentive pay and performance: Insider econometrics in a multi-unit firm

Exploiting organizational reforms in a foreign-owned bank in Central-East Europe, we carry out an insider econometrics study of the implementation of modern human resource management reforms giving some employees high-powered incentives. We use branch-level panel data and particular features of the reform process to implement two estimators that address endogeneity bias (an outstanding issue in this literature) in a complementary fashion: an IV approach and Generalized Propensity Score estimation. In line with theory we show that some reforms had a positive impact on productivity. We also underscore the risks of introducing quantity-based incentives where quality is important.