Managerial defections, promotion criteria and firm growth

Abstract

Junior managers' learning decisions and career expectations, promotion criteria, and parent firms' growth strategies are interdependent. We study this interdependence in a two-stage game where a junior manager invests in unobservable industry-specific learning in response to the firm's growth strategy. In the absence of a credible promotion criterion the firm is unable to insure itself fully against defections, growth is low and ex-post regrettable managerial promotions may occur. Higher growth relaxes promotion decisions and erodes managers' learning incentives, whereas lower growth generates the opposite effect but increases the likelihood of defections. (C) 1999 Elsevier Science B.V. All rights reserved.