Cascading controls: The effects of managers’ incentives on subordinate effort to help or harm

Abstract

Whether managers achieve their incentivized goals is a function of their subordinates' effort toward those goals. In this study we use an experiment to examine the effect of the managers' incentives on the effort choices of the subordinates. We consider two factors theory suggests will interact to affect subordinate behavior: 1) the framing of the manager's incentive as either a bonus or a penalty and 2) the subordinate's relationship with the manager. We use the participants' sacrifice of personal compensation as our proxy for effort, and predict and find that subordinates who perceive a high (low) quality relationship expend greater (less) effort to help when their manager faces a penalty relative to a bonus. In a typical hierarchy, these results reveal that a single incentive placed on a given manager can also affect the potentially numerous subordinate employees not directly subjected to the incentive. We show that this cross-hierarchy cascading effect is either a greater benefit or greater cost to the organization, depending upon the subordinate's perception of the relationship with the manager. Additionally, we find that a penalty incentive frame motivates low relationship quality subordinates to not only withhold effort to help the manager, but to exert costly effort to harm the manager. Our results advance literature investigating the interactive effects of controls and incentive contract framing by documenting a setting in which penalties negatively affect effort.