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

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.