When do group incentives for retail store managers work?

Abstract

Retail stores are geographically dispersed as a part of a multiunit organization. In such a setting, store managers play an important role in driving store performance. To motivate them to exert effort, retailers have provided group incentives for store managers. Using data from 75 stores of a U.S.‐based retail chain that changed its incentive plan for store managers from being purely dependent on store performance to being dependent upon both store and corporate performance, we investigate the effect of this change on store performance. We also examine the moderating role of geographical proximity among stores and past performance of the focal store. To establish a causality, we identify a control group from a matched store of another retail chain in the same industry and perform a difference‐in‐differences analysis. We find that making managers' bonus dependent on corporate goals has resulted in overall worsening of store performance. However, such an effect is contingent upon both geographical proximity among stores and past performance of the focal store. The impact of the incentive change on store performance is positively moderated by the increase in stores within close geographical proximity, while it is negatively moderated by the past performance of the focal store. This paper broadens our understanding of how incentives work in practice, and more importantly, documents how firms can design more effective incentive schemes for managers by considering relevant conditions, such as stores' geographical networks and their past performance.