Promotion Decisions under Formal Compensation Rules

Research Seminar

Management & Human Resources

Speaker: Jaime Ortega

Universidad Carlos III de Madrid

room Bernard Ramanantsoa

Abstract:

In most firms compensation plans play a fundamental role in the implementation of organizational incentives. In this study we point out that these plans produce differences between employees in the pay raise that they expect to earn if promoted, so that employees who compete in the same tournament are actually rewarded differently in case of promotion. Using detailed personnel records, we empirically examine whether these firm-level constraints affect managers’ promotion decisions. We find support for the idea that managers use their promotion decisions to compensate the negative incentive consequences of firm-wide pay rules. Specifically, the probability of promotion is negatively associated with the pay raise that the employee would earn if promoted. This effect is larger in organizational units that are more budget-constrained and in which managers therefore have fewer opportunities to promote employees.