Differences in Social Preferences: Are They Profitable for the Firm?

This paper analyzes the impact of heterogeneous (social) preferences on the weighting and combination of performance measures as well as on a firm’s profitability. We consider rivalry, egoism and altruism as extreme forms within the continuum of possible preferences and show that the principal can typically exploit both the altruistic and rivalistic behavior of his agents. Firm profits reach their maximum value if the agents are differentiated as much as possible in their individual characteristics. We provide further insight; namely, that in order to realize these gains in profitability, it is necessary to reallocate participation in performance measures such that competitive agents are privileged as compared to altruistic agents. In this context, stochastic interdependencies are of importance since they yield overlapping functions of the share parameters, causing additional adaptations in the optimal design of the wage compensation system. a Prof. Dr. Dr. h.c. Hans-Ulrich Küpper, Institute of Production Management and Management Accounting, University of Munich, Munich School of Management, Ludwigstrasse 28 in 80539 Munich, Germany, e-mail: [email protected], phone: +49 (0) 89 / 2180 – 2093, fax: +49 (0) 89 / 344054. b Corresponding author: Dr. Kai Sandner, Institute of Production Management and Management Accounting, University of Munich, Munich School of Management, Ludwigstrasse 28 in 80539 Munich, Germany, e-mail: [email protected], phone: +49 (0) 89 / 2180 – 3889, fax: +49 (0) 89 / 344054. 1. Motivation ............................................................................................................ 1 2. Framework of Analysis ........................................................................................ 3 2.1. Conceptual Framework and Determinants of the Problem...............................3 2.2. Relation to the Literature ........................................................................................4 2.3. Prerequisites and Structure of the Basic Model .................................................6 3. Analyzing the Structure of the Optimal Incentive System...................................10 3.1. Solving the Basic Model for the Optimal Incentive System ............................10 3.2. Functions and Interrelations of the Profit Share Rates in the Case of One-Sided Rivalry .................................................................................................11 3.2.1. Analysis of the First Department’s Share Rates with Rivalry .................11 3.2.2. Analysis of the Second Department’s Share Rates with Rivalry ...........13 3.3. Functions and Interrelations of the Profit Share Rates in the Case of One-Sided Altruism ...............................................................................................14 3.3.1. Analysis of the First Department’s Share Rates with Altruism ...............14 3.3.2. Analysis of the Second Department’s Share Rates with Altruism .........15 3.4. Combined Effects in the Case of Two-Sided Social Preferences..................16 4. The Influence of Social Preferences on the Profitability of the Firm ...................18 4.1. The Profitability of One-Sided Rivalry..........................................................18 4.2. The Profitability of One-Sided Altruism ..............................................................21 4.3. The Influence of Two-Sided Homogeneous Social Preferences on Firm Profits .............................................................................................................23 4.4. The Profitability of Two-Sided Heterogeneous Social Preferences for the Firm ...................................................................................................................27 5. Implications and Further Research.....................................................................30