Redesigning Teams and Incentives in a Merger: An Experiment with Managers and Students

After a merger, company officials face the challenge of making compensation schemesuniform and of redesigning teams with managers from companies with different incentives,work habits and recruiting methods. In this paper, we investigate the relationship betweenexecutive pay and performance after a merger by dissociating the respective influence ofshifts, which occur in both compensation incentives and team composition. The results of areal effort experiment conducted with managers within a large pharmaceutical company notonly show that changes in compensation incentives affect performance but also suggest thatthe sorting effect of incentives in the previous companies impact cooperation and efficiencyafter the merger. Replicating this experiment with students showed differences in strategyrather than in substance between the two groups of subjects with managers appearingperformance driven while students are more cost driven.