Firm Lifecycles: Linking Employee Incentives and Firm Growth Dynamics
Copyright © 2017 John Wiley & Sons, Ltd. Research summary: While the economic advantages of scale are well understood, implications of the rate of firm growth are arguably less appreciated. Since firms' growth rate influences employees' promotion opportunities, the growth rate can have significant implications for the incentives employees face. Rapid growth, by creating more promotion opportunities, motivates employees to engage in extra-role behaviors that might result in promotion should an opportunity arise. Building on this argument, we develop a formal model linking the design of firms' incentive structure to their rate of growth. The associated dynamics lead to three distinct epochs of firms' lifecycle: rapid growth and high-powered incentives driven by frequent promotion opportunities; moderate growth with infrequent promotion opportunities, but large salary increases contingent on promotion; and finally, stagnant firms with low-powered incentives. Managerial summary: While being innovative can lead to a firm growing quickly, the opposite may also be true. Growing quickly may contribute to a firm's ability to improve its processes. Employees are often a source of process improving ideas. Employees' primary incentive to go “outside the job description” to improve those processes is often promotion. The availability of promotions, however, is linked to the firm's growth rate. Firms that are growing quickly can credibly promise to reward their most innovative employees with promotions. Established and slowly growing firms have fewer opportunities for growth, which gives employees less incentive to go “above and beyond.” This can mean that rapid growth can reinforce a firm's competitive advantage. Copyright © 2017 John Wiley & Sons, Ltd.
Bennett, VM; Levinthal, DA
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