Stretch Goals and the Distribution of Organizational Performance
Michael Shayne Gary et al.
Organization Science, May-June 2017, Pages 395-410
Many academics, consultants, and managers advocate stretch goals to attain superior organizational performance. However, existing theory speculates that, although stretch goals may benefit some organizations, they are not a “rule for riches” for all organizations. To address this speculation, we use two experimental studies to explore the effects on the mean, median, variance, and skewness of performance of stretch compared with moderate goals. Participants were assigned moderate or stretch goals to manage a widely used business simulation. Compared with moderate goals, stretch goals improve performance for a few participants, but many abandon the stretch goals in favor of lower self-set goals, or adopt a survival goal when faced with the threat of bankruptcy. Consequently, stretch goals generate higher performance variance across organizations and a right-skewed performance distribution. Contrary to conventional wisdom, we find no positive stretch goal main effect on performance. Instead, stretch goals compared with moderate goals generate large attainment discrepancies that increase willingness to take risks, undermine goal commitment, and generate lower risk-adjusted performance. The results provide a richer theoretical and empirical appreciation of how stretch goals influence performance.
Innovative Originality, Profitability, and Stock Returns
David Hirshleifer, Po-Hsuan Hsu & Dongmei Li
NBER Working Paper, May 2017
We propose that innovative originality (InnOrig) is a valuable organizational resource, and that owing to limited investor attention and skepticism of complexity, firms with greater InnOrig are undervalued. We find that firms’ InnOrig strongly predicts higher, more persistent, and less volatile profitability; and higher abnormal stock returns — findings that are robust to extensive controls. The return predictive power of InnOrig is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to InnOrig. This evidence suggests that innovative originality acts as a ‘competitive moat,’ and that the market undervalues InnOrig.
A Pari-Mutuel-Like Mechanism for Information Aggregation: A Field Test inside Intel
Benjamin Gillen, Charles Plott & Matthew Shum
Journal of Political Economy, August 2017, Pages 1075-1099
A new information aggregation mechanism (IAM), developed via laboratory experimental methods, is implemented inside Intel Corporation in a long-running field test. The IAM, incorporating features of pari-mutuel betting, is uniquely designed to collect and quantize as probability distributions dispersed, subjectively held information. IAM participants’ incentives support timely information revelation and the emergence of consensus beliefs over future outcomes. Empirical tests demonstrate the robustness of experimental results and the IAM’s practical usefulness in addressing real-world problems. The IAM’s predictive distributions forecasting sales are very accurate, especially for short horizons and direct sales channels, often proving more accurate than Intel’s internal forecast.
The Dark Side of Employee Referral Bonus Programs: Potential Applicants’ Awareness of a Referral Bonus and Perceptions of Organisational Attractiveness
Sara Stockman, Greet Van Hoye & Marieke Carpentier
Applied Psychology, forthcoming
The purpose of this study is to examine the effects of potential applicants’ awareness of employees being rewarded for referrals on organisational attractiveness, based on credibility theory and the multiple inference model. In a first study (N = 450), final-year students were less attracted to the organisation when they knew employee referrals were rewarded, which was partially explained by lower credibility perceptions. Moreover, varying the specific characteristics of the referral bonus program (i.e. timing, size, type, recipient) did not improve potential applicants’ perceptions of credibility and attractiveness. A second study (N = 127) replicated the negative effect of referral bonuses on organisational attractiveness and found that it could be explained by both potential applicants’ inferences about the referrer's other-oriented motive and lower referrer credibility. Whether employees explicitly stated that their referral reason was bonus-driven or not did not affect these results.
Poisoned Praise: Discounted Praise Backfires and Undermines Subordinate Impressions in the Minds of the Powerful
Jonathan Kunstman, Christina Fitzpatrick & Pamela Smith
Social Psychological and Personality Science, forthcoming
High-power people frequently receive compliments from subordinates, yet little is known about how high-power people respond to praise. The current research addresses this gap in the empirical literature by testing the primary hypothesis that high-power people discount others’ praise more than equal- and low-power people. Secondary hypotheses also tested whether high-power people’s tendency to discount positive feedback would paradoxically heighten negative perceptions of others. Evidence from two experiments (one preregistered) reveals that high-power participants discounted feedback from others more than low- and equal-power participants. However, high-power people’s tendency to discount feedback only produced negative partner perceptions when positive feedback, but not neutral feedback, was discounted. These results suggest that compliments may sometimes backfire and lead high-power people to discount praise and form negative impressions of subordinates.
Equilibrium Effects of Pay Transparency
Zoë Cullen & Bobak Pakzad-Hurson
Harvard Working Paper, April 2017
The public conversation about increasing pay transparency largely ignores equilibrium effects, namely how it leads firms to change hiring and wage-setting policies and workers to adjust bargaining strategies. In this paper, we study these effects with a methodologically diverse approach. Our analysis combines longitudinal study of thousands of workers and employers facing different levels of pay transparency on TaskRabbit, an online labor market, with a parsimonious equilibrium model of dynamic wage setting and negotiation. We find, theoretically and empirically, that increasing pay transparency can increase employment, decrease inequality in earnings, and shift surplus away from workers and toward their employer. Intermediate levels of pay transparency, achieved through a permissive environment to discuss relative pay, can exacerbate the gender pay gap by virtue of network effects. Government intervention may be necessary to maintain a desirable level of transparency. We also conduct a field experiment on internet workers to investigate an alternative model in which wage compression is driven by social aversion to observed wage inequality. Our findings are consistent with our bargaining model but not with this alternative.
Equality and Equity in Compensation
Jiayi Bao & Andy Wu
Harvard Working Paper, April 2017
Equity compensation is widely used for incentivizing skilled employees, particularly in new technology businesses. Traditional theories explaining why firms offer equity suggest that workers with higher rank should receive compensation packages more heavily weighted in equity. However, we observe the puzzle that many firms adopt an equality-in-equity strategy: they offer different cash salaries across all jobs but the same equity compensation. We propose a behavioral theory of domain-contingent inequality aversion to explain this finding: we argue that workers view salary and equity as two domains and are more inequality averse in the equity domain. Inequality in equity has a negative asymmetric effect on effort whereas the effect of inequality in salary can be positive. Our experimental findings are consistent with the existence of domain-contingent inequality aversion; we also find that inequality aversion in equity is more severe than in salary because of the perceived scarcity of equity.
Can Socially Responsible Firms Survive Competition? An Analysis of Corporate Employee Matching Grant Schemes
Ning Gong & Bruce Grundy
Review of Finance, forthcoming
Employee matching grant schemes are coordination mechanisms that reduce free-riding by socially conscious employee-donors. Matching schemes coupled with lower take-home pay than offered by non-matching firms will survive capital and labor market competition if employee type is not observable and socially conscious employees are more productive or value working together. Matching can enhance employee welfare and raise more for charity without reducing profits. We document that matching firms have higher labor productivity and are more likely to be ranked as one of the “100 Best” employers. The result is robust to managerial entrenchment concerns and is not confined to the high-tech sector.
Employee quality and financial reporting outcomes
Andrew Call et al.
Journal of Accounting and Economics, August 2017, Pages 123-149
We examine the association between employee quality and financial reporting outcomes. Using the average workforce education level in MSA(s) where the firm operates as a proxy for employee quality, we find that firms with a high-quality workforce exhibit higher accruals quality, fewer internal control violations, and fewer restatements. These firms also issue superior management forecasts, in terms of frequency, timeliness, accuracy, precision, and bias. Employees located at the firm's headquarters primarily drive our findings. Our evidence suggests employee quality, particularly at a firm's headquarters, is associated with both mandatory and voluntary disclosure quality.
Does Culture Pay? Compensating Differentials, Job Satisfaction, and Organizational Practices
Christos Andreas Makridis
Stanford Working Paper, June 2017
Work-place practices are becoming an increasingly important mechanism for retaining and motivating employees. Using a new survey tool in partnership with PayScale.com between 2014 and 2016, I first document new facts about the dispersion of employee engagement and organizational practices in the labor market, and, secondly, recover a willingness to pay for these amenities. I show that the provision of these amenities creates a time-varying, firm-specific rent that amplifies traditional selection problems. My identification strategy exploits variation in employees' outside option, which is uncorrelated with contemporaneous organizational factors, but still capitalizes work-place amenities. My estimates imply that employees are willing to pay 2% of their earnings for a standard deviation rise in organizational practices. Through a back-of-the-envelope calculation, I show that these amenities have a benefit-cost ratio of 1.4.
The Consequences (and Nonconsequences) of Ownership Change: The Case of Major League Baseball
Philip Hersch & Jodi Pelkowski
Journal of Sports Economics, forthcoming
Although ultimate responsibility for a professional sports team lies with the owner, little is known about the repercussions of having a new owner at the helm. This article investigates ownership change in Major League Baseball. Estimates indicate that new owners do not impact on-field success relative to teams with continuous ownership. A temporary 8% bump in player payrolls, however, is observed in the first few years of owner transition. Change in ownership increases the odds of general manager and manager dismissals and is also more likely to trigger modifications to team logos and player uniforms.
Motivating underdogs and favorites
Robert Lount, Nathan Pettit & Sarah Doyle
Organizational Behavior and Human Decision Processes, July 2017, Pages 82-93
A core question for managers and leaders is how to motivate individuals in intergroup competitions. We examine how an individual’s effort is affected by whether one’s group is considered the underdog or the favorite and the content of the motivational appeal they receive. Specifically, we first propose and test whether underdogs and favorites enter intergroup competitions with different motivational orientations (Study 1). We then demonstrate that motivational appeals that match these orientations lead to greater effort than appeals which do not (Studies 2–4), with goal commitment mediating this effect (Study 5). Finally, we present a meta-analytic integration of the findings, along with a discussion of the theoretical and managerial implications for individual effort in intergroup competitions.
The Advantage of Being Oneself: The Role of Applicant Self-Verification in Organizational Hiring Decisions
Celia Moore et al.
Journal of Applied Psychology, forthcoming
In this paper, we explore whether individuals who strive to self-verify flourish or flounder on the job market. Using placement data from 2 very different field samples, we found that individuals rated by the organization as being in the top 10% of candidates were significantly more likely to receive a job offer if they have a stronger drive to self-verify. A third study, using a quasi-experimental design, explored the mechanism behind this effect and tested whether individuals who are high and low on this disposition communicate differently in a structured mock job interview. Text analysis (LIWC) of interview transcripts revealed systematic differences in candidates’ language use as a function of their self-verification drives. These differences led an expert rater to perceive candidates with a strong drive to self-verify as less inauthentic and less misrepresentative than their low self-verifying peers, making her more likely to recommend these candidates for a job. Taken together, our results suggest that authentic self-presentation is an unidentified route to success on the job market, amplifying the chances that high-quality candidates can convert organizations’ positive evaluations into tangible job offers. We discuss implications for job applicants, organizations, and the labor market.