Organization
On the folly of principals' power: Managerial psychology as a cause of bad incentives
Joe Magee, Gavin Kilduff & Chip Heath
Research in Organizational Behavior, forthcoming
Abstract:
Faulty and dysfunctional incentive systems have long interested, and frustrated, managers and organizational scholars alike. In this analysis, we pick up where Kerr (1975) left off and advance an explanation for why bad incentive systems are so prevalent in organizations. We propose that one contributing factor lies in the psychology of people who occupy managerial roles. Although designing effective incentive systems is a challenge wrought with perils for anyone, we believe the psychological consequences and correlates of higher rank within organizations make the challenge more severe for managers. Patterns of promotion and hiring typically yield managers that are more competent than their employees, and ascending to management positions increases individuals' workload and power. In turn, these factors make managers more egocentrically anchored and cognitively abstract, while also reducing their available cognitive capacity for any given task, all of which we argue limits their ability to design effective incentives for employees. Thus, ironically, those with the power to design incentives may be those least able to effectively do so. We discuss four specific types of bad incentive systems that can arise from these psychological tendencies in managers: those that over-emphasize compensation, generate weak motivation, offer perverse motivation, or are misaligned with organizational culture.
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When Hierarchy Wins: Evidence From the National Basketball Association
Nir Halevy et al.
Social Psychological and Personality Science, forthcoming
Abstract:
Past research on pay dispersion has found that hierarchy hurts commitment, cooperation, and performance. In contrast, functional theories of social hierarchy propose that hierarchy can facilitate coordination and performance. We investigated the effects of hierarchical differentiation using a sample of professional basketball teams from the National Basketball Association (NBA). Analyses of archival data revealed that hierarchical differentiation in pay and participation enhanced team performance by facilitating intragroup coordination and cooperation. The data provide the basis for a theoretical analysis which suggests that hierarchy is particularly beneficial for procedurally interdependent tasks (e.g., basketball) but can harm team performance for procedurally independent tasks (e.g., baseball; Bloom, 1999). Overall, the current data indicate that team structure (hierarchy) affects team outcomes (performance) through team processes (cooperation and coordination). Thus, under certain conditions, hierarchical differentiation helps lead groups to victory.
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Martin Schmidt
Review of Industrial Organization, November 2011, Pages 187-205
Abstract:
One version of the Coase Theorem suggests that the distribution of resources is invariant to the assignment of rights. The lack of real world examples has made empirical tests difficult. However, such a ‘rights' change did occur in Major League Baseball in the 1970s where the ‘rights' of players were switched from owners to players. We examine whether this change impacted the distribution of players. In the end, the characteristics of player movement do appear to have been impacted by the re-assignment of rights and therefore, calls into question the relevance of this version of the Coase Theorem.
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David Cohen, Justin Vaughn & José Villalobos
Political Research Quarterly, forthcoming
Abstract:
In an effort to examine the causal determinants of performance dynamics for the administrative presidency, the authors apply empirical public management theory to White House administration to explain managerial performance. Utilizing original survey data that measure the perceptions of former officials from the Reagan, George H. W. Bush, and Clinton administrations, we conduct quantitative analyses to determine the extent to which a chief of staff's background, relationship with the president, and internal as well as external management approaches shape overall perceptions of White House administrative efforts. The authors find that managerial dimensions matter considerably when explaining the dynamics of White House organizational performance.
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Why Are Quit Rates Lower Among Defense Contractors?
Todd Watkins & Thomas Hyclak
Industrial Relations, October 2011, Pages 573-590
Abstract:
This paper presents empirical evidence of lower quit rates at small manufacturers with defense contracts and examines whether this is associated with differences in their human resource policies and organizational practices and strategies. We take advantage of an original data set to compare labor quits, workforce skills, and occupational structure between defense-contracting and noncontracting small manufacturers in eastern Pennsylvania. We find that the remarkably large defense contractor advantage in quit rates - 7 percentage points - is almost totally explained by differences in skills, operational strategies, and workforce management and training practices, suggesting a mediation effect through these HR practices. Defense-contracting status emerges as an important overlooked variable in HRM studies.
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No margin, no mission? A Field Experiment on Incentives for Pro-Social Tasks
Nava Ashraf, Oriana Bandiera & Kelsey Jack
Harvard Working Paper, August 2011
Abstract:
A substantial body of research investigates the design of incentives in firms, yet less is known about incentives in organizations that hire individuals to perform tasks with positive social spillovers. We conduct a field experiment in which agents hired by a public health organization are randomly allocated to four groups. Agents in the control group receive a standard volunteer contract often offered for this type of task, whereas agents in the three treatment groups receive small financial rewards, large financial rewards, and non-financial rewards, respectively. The analysis yields three main findings. First, non-financial rewards are more effective at eliciting effort than either financial rewards or the volunteer contract. The effect of financial rewards, both large and small, is orders of magnitude smaller and not significantly different from zero. Second, non-financial rewards elicit effort both by leveraging intrinsic motivation for the cause and by facilitating social comparison among agents. Third, contrary to existing laboratory evidence, financial incentives do not crowd out intrinsic motivation in this setting.
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Michele Campolieti, Rafael Gomez & Morley Gunderson
Journal of Industrial Relations, September 2011, Pages 425-449
Abstract:
We utilize two representative cross-national data sets to shed light on what has been a vexing problem in the industrial relations literature; namely, the existence and persistence of the representation gap documented more than a decade ago by Freeman and Rogers (1999). Specifically, we estimate the determinants of employee desire for a range of collective voice mechanisms, including unionization. We do this separately for the US and Canada and then, using an application of the Oaxaca decomposition technique, we decompose the differences in those desires between the two countries into a component due to differences in the characteristics of respondents and another due to differences in preferences for collective voice mechanisms. Our results indicate that: (1) roughly half of workers in both countries expressed a desire for a range of collective voice mechanisms to deal with workplace issues; (2) that desire for collective voice was stronger in the US than in Canada; and (3) that virtually all of the stronger desire for collective workplace voice in the US, as compared to Canada, was due to stronger employee preferences for collective solutions as opposed to differences in the characteristics of workers. We offer plausible explanations for our findings and discuss the implications for labour law reform.
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Incentives versus Sorting in Tournaments: Evidence from a Field Experiment
Edwin Leuven et al.
Journal of Labor Economics, July 2011, Pages 637-658
Abstract:
Existing field evidence on rank-order tournaments typically does not allow disentangling incentive and sorting effects. We conduct a field experiment illustrating the confounding effect. Students in an introductory microeconomics course selected themselves into tournaments with low, medium, or high prizes for the best score at the final exam. Nonexperimental analysis of the results would suggest that higher rewards induce higher productivity, but a comparison between treatment and control groups reveals that there is no such effect. This stresses the importance of nonrandom sorting into tournaments.
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Compensation Policy and Quit Rates: A Multilevel Approach Using Benchmarking Data
Chris Riddell
Industrial Relations, October 2011, Pages 656-677
Abstract:
Using unique linked employee-employer benchmarking data, the paper estimates the impact of compensation policy on quit rates using multilevel models. The analysis examines several aspects of an organization's compensation policy with a focus on the effect of pay dispersion between employees at the same level in the firm hierarchy, as well as pay dispersion throughout the hierarchy. Overall, the results indicate that firms with egalitarian pay structures have lower quit rates, a finding that is robust to a large set of empirical specifications.
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Unions and firm innovation in China: Synergy or strife?
Tony Fang & Ying Ge
China Economic Review, forthcoming
Abstract:
The 'monopoly face' of unions suggests that the rent-seeking activities of unions discourage research and development investment and that the collective bargaining rules may restrict management flexibility, thus deterring innovations. On the other hand, the arrival of unions in the workplace may 'shock' the management into adopting more systematic rather than ad hoc management practices and that such innovative workplace practices may enhance an organization's ability to introduce new products or/and new processes. Further, the 'voice face' of unions argues that the independent 'questioning' of the management deliberations by the unions can also lead to better, more creative and, hence, more productive solutions. This paper investigates the link between unions and firm innovations in China. Different from their counterparts in advanced economies, Chinese unions are found to encourage firm innovations and R&D investment.
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‘My Brilliant Career'? New Organizational Forms and Changing Managerial Careers in Japan, UK and USA
John Hassard, Jonathan Morris & Leo McCann
Journal of Management Studies, forthcoming
Abstract:
The end of the traditional management career has been heralded with supporting, albeit largely anecdotal, data. The ‘old' career was set within internal labour markets in large organisations and characterised by long-term stability. The ‘new' arrangements have apparently shifted responsibility from employer to employee, with careers being developed across organizations. Such change is premised on new organisational forms and is often associated with a growing sense of employee insecurity. We explore the reality of this ‘new' scenario through interpretation of in-depth semi-structured interviews conducted with middle- and senior human resources managers in large firms in Japan, UK, and USA. The data indicate that most of our case study organizations had downsized and delayered, with hybrid structural forms emerging. Career prospects were diminished, with fewer vertical promotions and a greater emphasis on lateral ‘development′; middle managers were generally resentful of such factors and forces. Although not directly reflective of ‘Anglo-American' business practice, similar changes to career trajectories were witnessed in Japan as in the UK and USA.
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Fidan Ana Kurtulus
Industrial Relations, October 2011, Pages 678-712
Abstract:
This study explores the consequences of grouping workers into diverse divisions on the performance of employees using a dataset containing the detailed personnel records of a large U.S. firm from 1989 to 1994. In particular, I examine the effects of demographic dissimilarity among co-workers, namely differences in age, gender, and race among employees who work together within divisions, and non-demographic dissimilarity, namely differences in education, work function, firm tenure, division tenure, performance, and wages among employees within divisions. I find evidence that age dissimilarity, dissimilarity in firm tenure, and performance dissimilarity are associated with lower worker performance, while wage differences are associated with higher worker performance. My analysis also reveals that the effects of certain types of dissimilarities get smaller in magnitude the longer a worker is a part of a division. Finally, the paper provides evidence that the relationships between performance and the various measures of dissimilarity vary by occupational area and division size.
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Aligning Ambition and Incentives
Alexander Koch & Eloïc Peyrache
Journal of Law, Economics, & Organization, October 2011, Pages 655-688
Abstract:
Labor turnover creates longer term career concerns incentives that motivate employees in addition to the short-term monetary incentives provided by the current employer. We analyze how these incentives interact and derive implications for the design of incentive contracts and organizational choice. The main insights stem from a trade-off between "good monetary incentives" and "good reputational incentives." We show that the principal optimally designs contracts to create ambiguity about agents' abilities. This may make it optimal to contract on relative performance measures, even though the extant rationales for such schemes are absent. Linking the structure of contracts to organizational design, we show that it can be optimal for the principal to adopt an opaque organization where performance is not verifiable, despite the constraints that this imposes on contracts.
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Do Higher Wages Come at a Price?
Alex Bryson & Erling Barth & Harald Dale-Olsen
Journal of Economic Psychology, forthcoming
Abstract:
Using linked employer-employee data for Britain we find that higher wages are associated with higher job satisfaction and higher job anxiety. The association between wages and non-pecuniary job satisfaction disappears with the inclusion of effort measures whereas the positive association between wages and job anxiety remains strong and significant providing no support for a compensating differential explanation, but rather for a ‘gift exchange' type of reciprocal behaviour. No support is found for the proposition that within-workplace wage differentials are a source of job anxiety.
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Perceived unfairness and employee health: A meta-analytic integration
Jordan Robbins, Michael Ford & Lois Tetrick
Journal of Applied Psychology, forthcoming
Abstract:
A growing body of research has suggested that the experience of injustice, psychological contract breach, or unfairness can adversely impact an employee's health. We conducted a meta-analysis to examine the effects of unfairness perceptions on health, examining types of fairness and methodological characteristics as moderators. Results suggested that perceptions of unfairness were associated with indicators of physical and mental health. Furthermore, psychological contract breach contributed to the prediction of strain-related indicators of health above and beyond that accounted for by injustice alone.
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James Leonhardt, Robin Keller & Cornelia Pechmann
Journal of Consumer Psychology, October 2011, Pages 405-413
Abstract:
Uncertainty-seeking behavior is currently understood as the result of loss aversion which motivates a preference for the possibility to avoid or lessen an otherwise sure loss. However, when choosing among negative options on behalf of others, we offer responsibility aversion as another possible motive for uncertainty-seeking behavior. Within our conceptual model, responsibility aversion is defined as the preference to minimize one's causal role in outcome generation. Compared to certain options, uncertain options lessen the decision maker's causal role in outcome generation because the outcomes are partially determined by chance. The presence of chance increases indirect agency on behalf of the decision maker and lessens his or her perceived risk of responsibility. The results of five studies support a responsibility aversion motivation behind uncertainty-seeking behavior.
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Craig Landry et al.
NBER Working Paper, September 2011
Abstract:
Several recent laboratory experiments have shown that the use of explicit incentives - such as conditional rewards and punishment - entail considerable "hidden" costs. The costs are hidden in the sense that they escape our attention if our reasoning is based on the assumption that people are exclusively self-interested. This study represents a first attempt to explore whether, and to what extent, such considerations affect equilibrium outcomes in the field. Using data gathered from nearly 3000 households, we find little support for the negative consequences of control in naturally-occurring labor markets. In fact, even though we find evidence that workers are reciprocal, we find that worker effort is maximized when we use conditional - not unconditional - rewards to incent workers.
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Jeremy Bernerth et al.
Journal of Applied Psychology, forthcoming
Abstract:
Many organizations use credit scores as an employment screening tool, but little is known about the legitimacy of such practices. To address this important gap, the reported research conceptualized credit scores as a biographical measure of financial responsibility and investigated dispositional antecedents and performance-related outcomes. Using personality data collected from employees, objective credit scores obtained from the Fair Isaac Corporation, and performance data provided by supervisors, we found conscientiousness to be positively related and agreeableness to be negatively related to credit scores. Results also indicate significant relationships between credit scores and task performance and organizational citizenship behaviors. Credit scores did not, however, predict workplace deviance. Implications for organizations currently using or planning to use credit scores as part of the screening process are discussed.
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Public Participation and Organizational Performance: Evidence from State Agencies
Milena Neshkova & Hai (David) Guo
Journal of Public Administration Research and Theory, forthcoming
Abstract:
Public participation in administrative decision making has been widely advocated by both theorists and practitioners of public administration. Despite the importance of citizen engagement, we know little about its impact on the performance of government agencies. Is participation only normatively desirable or does it have some practical value attached to it? We draw on data from U.S. state transportation agencies to test the relevance of two theoretical perspectives about the effect of public participation on organizational performance. The traditional perspective holds that there is a trade-off between democratic and administrative decision making. A competing perspective suggests that citizen input provides administrators with valuable site-specific information and contributes to more efficient and effective public programs. We find strong support for the latter perspective. Our results show that there is not necessarily a trade-off between the values of democracy and bureaucracy, with clear implications for the theory and practice of democratic governance.