Managing Loyalty in Hierarchical Organisations

Abstract

In hierarchical organizations, middle managers communicate decision-relevant information to the headquarters and motivate their subordinates to take initiatives to further the organization’s goals. We analyze how a middle manager’s loyalty to the top affects his ability to play this dual role. The manager remains effective only if his loyalty lies in a moderate range, which expands in the manager’s skill to evaluate his subordinates’ initiatives. When excessive loyalty renders the manager ineffective, relational incentive contracts may be used to sustain nuanced communication and decision-making protocols that restore his effectiveness. The optimal contract either has the manager mediate between subordinates and top management, with the latter always following recommendations, or allows the top to occasionally intervene while ignoring the manager’s input. Our findings highlight how the middle manager’s loyalty to the organization interacts with his loyalty to the top management, and how his personnel characteristics, i.e., loyalty and skill, drive the management style within the organization.