If you want your managers to do a better job of working together, try giving them a financial stake in the company, new research finds.
While giving company equity to higher-level executives is common practice, a study recently published in the Strategic Management Journal shows that equity compensation packages can be just as beneficial when given to middle-level managers.
Researchers discovered that managers further down the organizational hierarchy collaborate more with their peers in other parts of the organization when company equity, rather than cash bonuses, is part of their compensation.
For the study, researchers developed a theoretical model where company managers were given an incentive package built on combinations of firm equity, unit profits and companywide profits.
The study shows that when shares of a company are part of a manager's compensation, the manager not only puts more effort into the performance of his or her own employees and division, but also toward helping managers across the organization. [Is Your Management Style Hurting Your Team? ]
"Our results suggest that you should use equity incentives more for managers who need to collaborate across divisions than for those who are focused on their own tasks," Joanne Oxley, one of the study's authors and a professor of strategic management at the University of Toronto's Rotman School of Management, said in a statement.
The model predicts that this strategy is most successful in businesses where short-term profits are uncertain, but long-term growth looks positive.
"The model enables us to make precise predictions on how the optimal composition of equity and profit incentives, as well as business-unit managers' collaborative and own-division efforts, is influenced by various firm and organizational characteristics," the study's authors wrote.
Oxley said the research is an indication that being able to give out equity-based compensation packages can be a useful tool for many businesses.
We believe that our paper has taken an important first step toward a better understanding of the positive role that equity- and profit-based incentives can jointly play in fostering collaboration," the study's authors wrote.
The research was co-authored by Gurupdesh Pandher, a professor at the University of Windsor.