Digital technologies and performance incentives: Evidence from businesses in the Swiss economy

TL;DR

This study uses survey data from Swiss firms to show that digital technologies generally increase the use of performance incentives by improving measurement capabilities, despite potential employee substitution effects.

Contribution

It provides empirical evidence that digital technologies, especially Industry 4.0 tools, promote the use of performance incentives in Swiss businesses, highlighting the dominant measurement effect.

Findings

Digital technologies increase performance incentives in Swiss firms.

Industry 4.0 technologies are associated with higher incentive use.

Technology-friendly companies use incentives more frequently.

Abstract

Using novel survey data from Swiss firms, this paper empirically examines the relationship between the use of digital technologies and the prevalence of performance incentives. We argue that digital technologies tend to reduce the cost of organizational monitoring through improved measurement of employee behavior and performance, as well as through employee substitution in conjunction with a reduced agency problem. While we expect the former mechanism to increase the prevalence of performance incentives, the latter is likely to decrease it. Our doubly robust ATE estimates show that companies using business software and certain key technologies of Industry 4.0 increasingly resort to performance incentives, suggesting that the improved measurement effect dominates the employee substitution effect. In addition, we find that companies emerging as technology-friendly use performance incentives more frequently than their technology-averse counterparts. Both findings hold for managerial and non-managerial employees. Our estimation results are robust to a variety of sensitivity checks and suggest that Swiss businesses leverage digital technologies to enhance control over production or service processes, allowing them to intensify their management of employees through performance incentives.