Managerial Incentives and Favoritism in Promotion Decisions: Theory and Field Evidence

29 Pages Posted: 7 Mar 2011

See all articles by Johannes Berger

Johannes Berger

University of Cologne - Department of Business Administration and Human Resource Management

Claus Herbertz

University of Cologne - Department of Business Administration and Human Resource Management

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Abstract

This paper investigates the effects of managerial incentives on favoritism in promotion decisions. First, we theoretically show that favoritism leads to a lower quality of promotion decisions and in turn lower efforts. But the effect can be mitigated by pay-for-performance incentives for managers who decide upon promotion. Second, we analyze matched employer-employee survey data with detailed firm level information on managerial incentive schemes and find that perceived promotion quality is indeed substantially higher when managers receive performance-related pay or participate in gain sharing plans.

Keywords: incentives, favoritism, nepotism, tournaments

JEL Classification: J33, M51, M52, M54, J71

Suggested Citation

Berger, Johannes and Herbertz, Claus and Sliwka, Dirk, Managerial Incentives and Favoritism in Promotion Decisions: Theory and Field Evidence. IZA Discussion Paper No. 5543. Available at SSRN: https://ssrn.com/abstract=1778887

Johannes Berger (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

Claus Herbertz

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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