Strategic promotion tournaments and worker performance

Abstract

Abstract[Excerpt] In this analysis I study promotion schemes as human resource management strategies by which the firm can realize strategic goals by motivating workers to higher levels of effort and performance. Using information on promotions, wages, and performance for professional workers in a cross section of establishments in four metropolitan areas of the U.S., I investigate empirically the proposition that firms strategically organize promotion tournaments to motivate workers to higher levels of performance. I present evidence suggesting that relative performance of workers determines promotions, supporting the notion of internal promotion competitions in which internal hiring policies and fixed job slots combine to create competitions among workers of a given rank in a firm. I then estimate a structural model of promotion tournaments that simultaneously accounts for worker and firm behavior and how the interaction of these behaviors gives rise to promotions. The results are consistent with the prediction of tournament theory that workers are motivated by larger spreads. AbstractIn this analysis I study promotion schemes as human resource management strategies by which the firm can realize strategic goals by motivating workers to higher levels of effort and performance. Using information on promotions, wages, and performance for professional workers in a cross section of establishments in four metropolitan areas of the U.S., I investigate empirically the proposition that firms strategically organize promotion tournaments to motivate workers to higher levels of performance. I present evidence suggesting that relative performance of workers determines promotions, supporting the notion of internal promotion competitions in which internal hiring policies and fixed job slots combine to create competitions among workers of a given rank in a firm. I then estimate a structural model of promotion tournaments that simultaneously accounts for worker and firm behavior and how the interaction of these behaviors gives rise to promotions. The results are consistent with the prediction of tournament theory that workers are motivated by larger spreads.* I have benefited considerably from discussions of this work with numerous colleagues. The comments of Chris Collins, Daniel Simon, the editor, and an anonymous referee were particularly helpful. David Rosenblum provided outstanding research assistance.

Promotion, Relative Performance Information, and the Peter Principle

“…Such implicit incentives are particularly strong for those at lower levels of the organizational hierarchy (Gibbons and Murphy 1992;Ederhof 2011). Further, while many explicit incentives such as bonuses are recurring in nature, most firms have a fixed number of positions to which workers can be promoted, making promotions particularly valuable to workers (DeVaro 2006).…”

“…For example, employers could reward workers with cash bonuses and other recognition awards for strong current job performance. However, it is unlikely that such alternative incentives could fully replace the financial and non-financial benefits of receiving a promotion (Gibbs 1996;DeVaro 2006).…”

13. Theory and Evidence in Internal Labor Markets

“…That is, as discussed later, the idea that the wage increase due to promotion is potentially related to the number of workers at the job from which the promoted worker is drawn could be explained using the promotion-as-signal hypothesis. 7 In a recent analysis, DeVaro (2006aDeVaro ( ,2006b) uses a structural-estimation approach to consider simultaneously both worker-effort and firm-side predictions of tournament theory.…”

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“…Furthermore, the theory supposes that employees could be further motivated by greater rewards. Therefore, the organisation tries to create incentives (DeVaro, 2006). The winner of the tournament will be rewarded and her/his efforts during the tournament will be compensated, depending on the profit that she/he has generated for the organisation.…”