The right incentive structure makes firms smarter. (2017)

“As a firm’s dependence on a single leader increases, so does the likelihood that the leader will begin to display overconfidence…”

Guoli Chen, INSEAD Associate Professor of Strategy
1 March 2017

Article based on a paper written with Heli Wang, Lee Kong Chian School of Business, Singapore Management University; and Shan Zhao, Grenoble Ecole de Management

To be published in Strategic Management Journal 

“…firm-specific knowledge resources are the engine of differentiation, and thus are an essential component of competitive advantage.

“For CEOs … building deep-rooted knowledge assets may also strengthen ties to their current organisation, essentially rendering their expertise less translatable across companies.

“…To induce top managers to focus their energy and attention internally rather than toward their next potential perch, firms presumably need to design incentive structures that reward them for doing so.

“My recent research … shows that organisations that have a more firm-specific knowledge structure do, in fact, tend to devise their employment arrangements with CEOs in this way.

“(However) the issue of entrenchment must be kept in mind … As managers embed themselves more deeply in the company they also become more firmly entrenched and harder to replace … As firms’ dependence on a single leader increases, so does the likelihood that the leader will begin to display overconfidence which could make him or her dangerously unresponsive to warning signs or even a socially irresponsible influence.

“To head off that prospect, directors should try to even out the distribution of power across the leadership team.”

Access the full article here: The right incentive structure makes firms smarter.