Organization Design, Proximity, and Productivity Responses to Upward Social Comparison

We investigate the mechanisms that shape social comparison in organizations and generate social comparison costs. In particular, we focus on heterogeneity in the strength and type of incentives and argue that, from an efficient design perspective, such variance in rewards is a double‐edged sword. While the sorting and incentive effects that result may increase productivity, the social comparison processes that arise may dampen it. We posit that the mechanisms underlying these behavioral costs are shaped not only by the magnitude of reward variance, but by the formal and informal design elements shaping the distance of advantaged peers. In other words, the more proximate socially, structurally, or geographically are those to whom one socially compares, the larger the behavioral response. Empirically, we use an unanticipated event during which outlets of a bank, previously operating under essentially homogenous incentives, were assigned to tournament groups with differing ex ante probabilities of winning a prize–an event that increases variance in awards and hence generates an impetus for social comparison. We find that units with more socially, geographically, and structurally proximate peers assigned to ‘advantaged’ tournament groups decreased their productivity. We discuss implications of these results for organizational design and boundaries. The online appendix is available at https://doi.org/10.1287/orsc.2016.1103.