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When do Employees Pursue Firm Goals versus their Career Concerns?

Working Paper
As firms grow, they must continually adapt to environmental changes. Prior literature suggests that adaptation to environmental changes improves with delegation because delegation facilitates the acquisition of relevant information and a quicker response. Yet, environmental changes can also change the incentives employees face to act on the information they gather, leading them to prioritize their own self-interest over that of their employers. As a result, while delegation can improve employees’ access to vital information, it can also reduce their incentives to use the information for the benefit of their employer. This paper explores the trade-off between information and incentives in the wake of environmental change by asking when employees will pursue their career concerns at the expense of organizational goals. The authors study the effects of two unexpected external and internal changes: changes in customer relationship appropriability and changes in firm performance. The authors theorize that both of these changes require employees to collect new information and adapt their behavior, but both also change employees’ incentives to adapt in the direction preferred by the firm. The authors test their predictions using data on the US sell-side security analysts working for US banks. Our empirical approach is twofold. First, we empirically map analysts’ observed behaviors (their earnings forecasts) to their career concerns (internal promotion and external mobility) and to firm-level goals (underwriting and trading revenue generation). Second, they examine the effects of unexpected changes in customer appropriability and firm performance on analysts’ pursuit of their career concerns versus their employers’ goals. These findings suggest that environmental change can play an important role in shaping employees’ career concerns. Specifically, the authors find that increases (decreases) in customer appropriability trigger (reduce) employee focus on their career goals relative to firm goals, and positive (negative) shocks to firm performance reduce (increase) their focus on their career goals relative to firm goals. The authors discuss the implications of our results for the literatures on organization design and the theory of the firm.
Faculty

Assistant Professor of Strategy