<p>Prior studies on the relationship between decentralization of decision rights and variable compensation have largely focused on higher managerial levels and typically find a complementarity association. We extend this literature by examining this relationship at the production level, where managers oversee multidimensional tasks and where performance outcomes are often hard to contract upon. This makes the standard complementarity prediction less apparent and suggests a substitutive relationship instead. Using survey data from production managers in industrial firms, we find that the incentive intensity of variable compensation and decentralization of decision rights act as substitutes: production departments with greater decision rights have a lower level of variable compensation for their managers. Consistent with the role of performance contracting conditions, this negative association weakens with higher levels of performance contractibility—i.e., in more stable operational environments and when evaluation relies on more high-quality measures. Overall, the findings highlight that the incentive–decentralization relationship may differ systematically between production settings and higher managerial levels.</p>