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Influence costs models predict that organizations should limit managerial discretion to deter organizational members from engaging in wasteful politicking activities. We test this conjecture in a controlled, yet realistic, work environment in which we either permit or not permit workers to influence managers' pay decision. We find that influence activities are pervasive and lead to reduced firm performance. Firm performance is reduced because principals offer lower-powered incentives in the environment in which influence activities are permitted than in the environment in which they are not. Importantly, we show that equal pay incentive schemes perform better when influence activities are available than when they are not. Our results thus support the idea that prevalent politicking activities may account for the widespread use of bureaucratic, and apparently inefficient, compensation rules in organizations.
