revised version published in: Management Science, 2004, 50 (10), 1379-1389.
After a merger, company officials face the challenge of making compensation schemes
uniform and of redesigning teams with managers from companies with different incentives,
work habits and recruiting methods. In this paper, we investigate the relationship between
executive pay and performance after a merger by dissociating the respective influence of
shifts, which occur in both compensation incentives and team composition. The results of a
real effort experiment conducted with managers within a large pharmaceutical company not
only show that changes in compensation incentives affect performance but also suggest that
the sorting effect of incentives in the previous companies impact cooperation and efficiency
after the merger. Replicating this experiment with students showed differences in strategy
rather than in substance between the two groups of subjects with managers appearing
performance driven while students are more cost driven.
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