Managerial Attention and Worker Performance

We present a novel theory of the employment relationship. A manager can invest in attention technology to recognize good worker performance. The technology may break and is costly to replace. We show that as time passes without recognition, the worker’s belief about the manager’s technology worsens and his effort declines. The manager responds by investing, but this investment is insufficient to stop the decline in effort and eventually becomes decreasing. The relationship therefore continues deteriorating, and a return to high performance becomes increasingly unlikely. These deteriorating dynamics do not arise when recognition is of bad performance or independent of effort. ∗An earlier version of this paper was circulated under the title “Managerial Attention and Worker Engagement.” We thank Dirk Bergemann, Simon Board, Patrick Bolton, Alessandro Bonatti, Sylvain Chassang, Wouter Dessein, Marco Di Maggio, Bob Gibbons, Ricard Gil, Chris Harris, Ben Hermalin, Johannes Hörner, Navin Kartik, Amit Khandelwal, Qingmin Liu, Michael Magill, Jim Malcomson, David Martimort, Niko Matouschek, Meg Meyer, Daniel Rappoport, Paolo Siconolfi, Matt Stephenson, Steve Tadelis, various seminar and conference audiences, and four anonymous referees and the Co-editor for helpful comments. Enrico Zanardo and Weijie Zhong provided excellent research assistance. †Columbia University and University of Warwick. Email: [email protected]. ‡Columbia University. Email: [email protected]. What motivates employees to work hard? A large literature in economics has been devoted to this question, focusing for the most part on the optimal design of (explicit or implicit) incentive contracts and on how workers respond to different forms of compensation. In this paper, we provide a novel theory of the employment relationship: workers’ effort depends not only on compensation, but also on their beliefs about whether management is paying attention to their behavior. Only when paying attention can management recognize (good or bad) worker behavior. Because attention is costly and not directly observable, the moral hazard problem that arises inside the firm is two-sided: workers must be incentivized to exert effort; managers must be incentivized to invest in attention. The idea that workers care about whether they are being “watched” is related to the widely studied Hawthorne effect, namely the improvement in workers’ performance possibly caused by the “feeling that they are being accorded some attention” (Oxford English Dictionary). Interpretations of the original Hawthorne experiments and why workers’ behavior may change with their awareness of being observed vary. Our focus is on workers who care about managerial attention because this attention can produce some form of recognition of their performance. Workers value recognition for either psychological or financial reasons, or both. More broadly, our theory is in line with the psychology literature that examines the determinants of worker productivity. This literature finds that employee job satisfaction and workers’ perceptions about management matter for both productivity and profits (Judge et al. 2001; Ostroff 1992; Harter, Schmidt and Hayes 2002). In particular, whether workers believe that they are given “recognition or praise for doing good work” affects their engagement and performance (Harter et al., 2002, p. 269), and these beliefs can have a significant impact on an organization’s bottom line (Harter et al., 2010). We model managerial attention as a technology that recognizes worker performance. For example, consider a chief operating officer (COO) and a division For an excellent survey, see Prendergast (1999). The Hawthorne effect originated in a set of experiments conducted in a Western Electric factory in the 1920s, where workers’ productivity was shown to increase each time a change in lighting was made. For a recent reassessment, see Levitt and List (2011). Saunderson (2004) finds that managers in the public sector know and believe in the importance of employee recognition, yet many fail to have effective recognition programs.