When Do Group Incentives for Retail Store Managers Work?

Production and Operations Management, May 2022

Hyun Seok (Huck) Lee,Saravanan Kesavan,Camelia Kuhnen

As retail stores are geographically dispersed, 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. Using 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 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 documents how firms can design more effective incentive schemes for managers by considering stores’ geographical networks and their past performance.

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