Firm Lifecycles: Linking Employee Incentives and Firm Growth Dynamics
Bennett, Victor M., and Daniel A. Levinthal. "Firm lifecycles: Linking employee incentives and firm growth dynamics." Strategic Management Journal 38.10 (2017): 2005-2018.
29 Pages Posted: 4 Mar 2015 Last revised: 5 Aug 2020
Date Written: June 1, 2017
Abstract
While the economic advantages of scale are well understood, implications of the rate of firm growth are arguably less appreciated. Since firms’ growth rate influences employees’ promotion opportunities, the growth rate can have significant implications for the incentives employees face. Rapid growth, by creating more promotion opportunities, motivates employees to engage in extra-role behaviors that might result in promotion should an opportunity arise. Building on this argument, we develop a formal model linking the design of firms’ incentive structure to their rate of growth. The associated dynamics lead to three distinct epochs of firms’ lifecycle: rapid growth and high- powered incentives driven by frequent promotion opportunities; moderate growth with infrequent promotion opportunities but large salary increases contingent on promotion; and finally stagnant firms with low-powered incentives.
Keywords: employee incentives, firm growth, firm lifecycle, process innovation, employee compensation
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