5 - On the need to extend tournament theory through insights from status research

Summary

Whatever organizational theory one considers, organization and management are viewed as means to motivate and coordinate individuals most efficiently so as to direct all their competences and efforts to the organization’s goals. For instance, early concepts such as Scientific Management proposed selecting the best workers, assigning them to the most appropriate tasks, and using money as a predominant motivator (e.g., Locke, 1982). Despite fierce criticism, especially from advocates of the Human Relations movement, monetary incentives are still considered by scholars and practitioners alike as prime motivators of individual behavior and performance. Studies and publications focusing – on the one hand – on single problems and issues of motivating workers and managers by means of money to work hard, and rewarding them for their productive contribution, or – on the other hand – on developing the optimal compensation schemes are overwhelming.

Explaining existing compensation structures, analyzing normative properties of alternative compensation schemes, and determining efficient executive compensation systems are at the center of personnel and organizational economics (e.g., Lazear, 1999; Encinosa, Gaynorb, and Rebitzer, 2007; Lazear and Shaw, 2007). This literature analyzes the motivational effects of compensation and reward systems at the organizational level, and predominantly emphasizes the need to increase shareholder interests by defining and applying optimal employment contracts and efficient pay structures (e.g., Becker and Huselid, 1992). Of special interest among neoinstitutional economists and organizational theorists is the theory of tournaments, as it provides a rigorous formal model to explain the phenomenon of disproportionate executive compensation, for instance.