20.01.2016

When Over-Eager Managers Can Benefit a Firm

Conventional thinking in business schools and the business world is that managers who have a tendency to be over-committed to projects – to the point they are unwilling or unable to end a loss-making proposition – are bad for firms. But one study suggests there is an upside to that tendency: when such managers are put in charge, it signals to employees involved in the project that they will be in it for the long haul.

Heli Wang and Kin Fai Ellick Wong argue that this benefits the firm because it will make employees more willing to invest in learning the skills and knowledge specific to their project. This in turn enhances a firm’s assets because firm-specific knowledge (as opposed to the kind easily transferred to another firm) has been shown to have greater potential for generating profits.

“We are particularly interested in risky projects because the fear of project termination often reduces an employee’s incentive to make specific human capital investments,” they said.

“On the one hand, firms generally want to develop firm-specific human capital, which cannot be easily replicated by other firms. This is because firm-specific capital has the potential for superior firm performance. On the other hand, employees in the firms are often reluctant to develop firm-specific knowledge. This reluntance is because this knowledge becomes useless when employees leave the firms. Our research propose a possible solution whereby firms, as represented by the top-management team, can assign projects requiring firm-specific knowledge to managers who are with reputation or track record of a high level of escalation.”

 “We argue that in this situation, firms may find it desirable to commit to a lower probability of project termination in order to encourage the development of specific human capital by employees. A manager’s escalation of commitment tendency may function as just such a commitment mechanism.”

They test this out in two experiments focused on three hypotheses: one is that a manager’s escalation of committee will act as an incentive to employees to make project-specific human capital investments; the second is that this effect will be strengthened if the manager has the discretion to terminate a project or act on their escalation bias; and the third is that both effects will have a stronger effect on employees if the project has a higher chance of failure.

The two experiments involved two groups, one consisting of undergraduates, the other of part-time MBA students with managerial experience. They were presented with a similar scenario in which their firm proposed a project that would require them to acquire certain knowledge and skills – either general or specific to the project, with the opportunity of better transferability with the former but greater pay and promotion prospects with the latter.

The participants were asked to consider which they would choose after being told about the manager and the likelihood of the project failure. These two factors were manipulated to include different variations of manager escalation of commitment, manager discretion and likelihood of project failure.

As expected, the participants were more likely to commit to project-specific human capital investment if the manager had a high escalation of commitment and a high level of discretion, and the project had a high rate of failure. The effect was strongest with the experienced MBA students.

The results suggested managerial escalation of commitment could have a bonding effect on employees and encourage them to make project-specific investments, the authors said.

“They also provide an additional explanation for the persistence of escalation of commitment behaviours in real business settings, and for why market selection forces cannot eventually eliminate this bias. Firms may sometimes purposely select and retain biased managers in order to motivate their employees to make project-specific asset investments.

“In a similar vein, the results contribute to our understanding of strategic change and commitment. In reality, many firms demonstrate some degree of inertia – that is, they seem not to change their strategies as often as the environment demands. Our results suggest firms’ resistance to change may in certain situations be considered a purposeful commitment strategy that enhances firm long-term financial performance.

WONG, Ellick K.F.

Associate Professor
Management