Winning at a Losing Game? Side-Effects of Perceived Tournament Promotion Incentives in Audit Firms

Abstract

Tournament-like promotion systems are the default in audit firms, which are generally internally owned professional partnerships. While awarding promotions in a contest-like fashion stimulates contestants' motivation and productivity, it may also upset an organizations' ethical climate and trigger ethically adverse behaviors. Since nearly all research on promotion tournaments in management has been conducted in public firms, little is known about how these incentive systems operate in professional partnerships. In this study, we analyze how the perception of the two controllable design parameters of promotion tournaments-the relative pay spread between winners and losers and tournament breadth in terms of the number of contestants that compete for a prize-affects audit firm behavior. Survey results provide evidence that the tournament's perceived breadth prompts adverse behavior, as it does in public firms. Contrary to conventional wisdom, however, the perceived pay spread has no significant effect on adverse behavior, but triggers desirable behaviors instead. Our study suggests that promotion tournaments indeed provide powerful incentives, but also that understanding the unintended consequences of these incentives on organizational ethical climates and behavior requires tournament theory to be contextualized when it is applied in new settings like internally owned professional partnerships.

Tangible Rewards for More Than Just Productivity: Examining Canadian Public Accounting Firms' Rewards Programs*

“…To our knowledge, only one study has explored auditor rewards below the partner level. Pruijssers et al (2020) collect survey data from nonpartners on their perceptions of the amount of competition for promotion to partner. They find that as the perceived competition for promotion increases, so do quality‐reducing behaviors such as lack of cooperation and skepticism.…”

Can TMT vertical pay disparity promote firm innovation performance? The moderating role of CEO power and board characteristics

“…TMT vertical pay disparity and firm innovation performance Tournament theory, proposed by Lazear and Rosen (1981), assumes there are specific promotion candidates, winners and losers in the tournament (Lazear and Rosen, 1981), and the prize is awarded based on relative performance rather than on absolute performance (Lim, 2019;Pruijssers et al, 2020). Winners obtain promotions and huge bonuses, while losers get nothing (Shi et al, 2016).…”

“…Some studies suggest that the absolute amount of compensation reflects the market price of a top manager and offers him/her some incentive to work hard (Currim et al , 2012). But based on tournament theory (Lazear and Rosen, 1981), in a tournament, there is a clear group of candidates for promotion, with clear winners and losers, and prizes are awarded based on rank in the tournament rather than absolute performance (Pruijssers et al , 2020). Hence, compared with the absolute levels of pay, relative levels of pay are far more influential to the TMT' behavior (Siegel and Hambrick, 2005; Shi et al , 2016; Lim, 2019).…”

“…Hence, compared with the absolute levels of pay, relative levels of pay are far more influential to the TMT' behavior (Siegel and Hambrick, 2005; Shi et al , 2016; Lim, 2019). As a result, scholars gradually attach more attention to the influence of relative levels of pay on TMT' behavior or the consequence of enterprise (Siegel and Hambrick, 2005; Kini and Williams, 2012; Shi et al , 2016; Pruijssers et al , 2020). Previous research confirmed that vertical pay disparity between top managers-ordinary employees (Xu et al , 2017), top managers-middle managers and middle managers-ordinary employees (Chan et al , 2017) has a significant impact on the firm innovation performance.…”

Getting along to get ahead: The role of social context in tournament promotion and reward systems

“…When tournament theory was originally developed, research focused on tournaments with just one prize (e.g., a promotion). Because the size of the winner’s margin is irrelevant in a tournament, just as in a sports tournament (e.g., the difference in prize money between the winner and runner-up in a golf tournament is the same whether the victory is achieved by one shot or by ten), individuals who lose, particularly if it is by a very slim margin, may be inclined to leave the organization [ 22 ]. This departure could result in the loss of potentially very high performing individuals [ 2 , 23 , 24 ], which can have adverse effects on organizational functioning and performance.…”