Managerial Incentives, Operational Decisions, and Firm Outcomes: Evidence from a Quasi-Experiment at a Retail Chain

Using a novel data set from 75 stores of a department store retail chain that changed its incentive plan for store managers to spur greater cooperation among them and with the corporate office, we examine how incentives impact operational decisions and, consequently, store outcomes. We measure store performance using sales growth, accuracy in labor scheduling, and labor productivity. We find that emphasizing corporate goals in managers’ incentives has resulted in worsening of performance at the store level. This effect is mainly the product of store managers exerting less effort in response to the change in their pay schemes. We also document deterioration in three underlying operational decisions involved in labor scheduling, i.e., sales forecasting, labor planning, and labor execution (defined as the adjustments to labor plan in response to new demand information since the labor plan was generated) as a result of the incentive change.