Leading by Example in Socially Driven Organizations: The Effect of Transparent Leader Compensation Contracts on Following

The Accounting Review, Forthcoming (https://doi.org/10.2308/TAR-2019-0227)

Posted: 18 Aug 2018 Last revised: 7 Jun 2021

See all articles by Karl Schuhmacher

Karl Schuhmacher

Emory University - Goizueta Business School

Kristy L. Towry

Emory University

Jacob Zureich

Tilburg University

Date Written: May 19, 2021

Abstract

Leading by example is one of the most powerful methods to encourage individuals to work toward a common objective. Despite the importance of leadership, little is known about how the effectiveness of leading by example depends on institutional features, such as the transparency and design of leaders’ compensation contracts. We conduct two experiments to study this interplay between leadership and contracting in organizations with social missions (i.e., socially driven organizations). We find that under non-transparent contracts, leader contributions to the social objective positively influence follower contributions, reflecting effective leading by example. More importantly, under transparent contracts, the positive effect of leader contributions on follower contributions is diminished by an increase in the intensity of variable compensation and/or the amount of fixed compensation in the leader’s contract. Our study informs the debate on pay transparency and demonstrates that organizations need to carefully consider the effects of contract design on leadership effectiveness.

Keywords: contracting, incentives, leadership, leading by example, social mission

JEL Classification: C90, D63, D83, M40, M52

Suggested Citation

Schuhmacher, Karl and Towry, Kristy L. and Zureich, Jacob, Leading by Example in Socially Driven Organizations: The Effect of Transparent Leader Compensation Contracts on Following (May 19, 2021). The Accounting Review, Forthcoming (https://doi.org/10.2308/TAR-2019-0227), Available at SSRN: https://ssrn.com/abstract=3234101 or http://dx.doi.org/10.2139/ssrn.3234101

Karl Schuhmacher (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Kristy L. Towry

Emory University ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-4895 (Phone)

Jacob Zureich

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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