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New Research Offers 3-Part Solution to Increase Worker Productivity

A new paper by Sinan Aral, NYU Stern Information, Operations and Management Sciences Professor (@sinanaral) offers a recipe for increasing worker productivity by as much as 16 percent: invest in a complementary “3-way system” of 1.) information technology, 2.) HR analytics practices and 3.) performance pay.

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We find that firms who combine these practices into a ‘3-way’ system earn a productivity premium over firms that only adopt any single practice or pair of practices in isolation, meaning managers need to think holistically about how practices fit together.

NEW YORK--With the US unemployment rate hovering around nine percent and the threat of a double dip recession looming, firms are looking for ways to get the most out of a lean workforce. In a new paper by Sinan Aral, NYU Stern Information, Operations and Management Sciences Professor (@sinanaral) and his co-authors Erik Brynjofsson and Lynn Wu of the MIT Sloan School of Management, the professors offer a recipe for increasing worker productivity by as much as 16 percent: invest in a complementary “3-way system” of 1.) information technology, 2.) HR analytics practices and 3.) performance pay.

Examining data on Human Capital Management (HCM) software adoption over 11 years with detailed survey data on incentive systems and HR analytics practices for 189 firms, the authors provide some of the first firm-level evidence on how clusters of HR practices complement a specific type of information technology. The key insight is that systems of complementary practices together (rather than piecemeal practices adopted in isolation) produce the greatest productivity premiums.

“Successful incentive systems rely on the ability to accurately monitor and manage employee performance to reward those who excel. Some information technologies are specifically designed to help firms manage employee performance and give employees data-driven feedback that helps them work more productively. We find that firms who combine these practices into a ‘3-way’ system earn a productivity premium over firms that only adopt any single practice or pair of practices in isolation, meaning managers need to think holistically about how practices fit together,” said Professor Aral.

Specifically the researchers found that:

1. HCM adoption is associated with a 6 percent increase in productivity and adopters of the 3-way system experience a 16 percent increase.1

2. HCM adoption is associated with a large productivity premium when it is implemented as a system of organizational incentives, but has less benefit when adopted in isolation.

3. The system of 3-way complements produces disproportionately greater benefits than pairwise interactions, highlighting the importance of including all three complements.

To read the full paper, forthcoming in Management Science, visit: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1665945

To speak with Professor Sinan Aral, please contact him directly at sinan@stern.nyu.edu, or contact Rika Nazem in NYU Stern’s Office of Public Affairs, 212-998-0678, rnazem@stern.nyu.edu.

1 They note that these estimated productivity premiums are quite large, leading them to believe there are other unobserved practices that are correlated with HR analytics and performance pay but missing in their data. True organizational complementarities may include larger sets of interlocking firm practices that complement each other.