Organizational Identity, Incentive Schemes, and Performance in a Corporate Hierarchy: Theory and Evidence

Abstract

This study investigates whether the relationship between managers’ organizational identity (OI) and their performance is related to their position in a corporate hierarchy. We assume that managers are sometimes promoted to positions beyond their ability, consistent with the Peter Principle. Adopting economic identity theory, we provide a proposition that when managers are promoted beyond their ability, the expected utility for the firm is not high even if they have high levels of OI, because their effort-standards and incentive schemes are not optimal for their positions. We use this proposition to test a biased promotion hypothesis using data regarding sales managers from a Japanese listed firm. The results show that the relationship between OI and performance is positive in lower-level managers but unclear in higher-level managers. This suggests that promotion schemes are partially incentive driven, and firms should instead consider OI to optimize their job levels, standards, and incentive schemes.

Keywords: Organizational identity; incentive scheme; promotion; performance evaluation; corporate hierarchy

JEL Classification: J33, M12, M21, M46