Hierarchical Organizational Design: A Contest Design Perspective

This paper presents a dynamic two-stage tournament model that incorporates heterogeneous contestants and a hierarchical career ladder with accelerated promotion. The firm can use accelerated promotion—which enables fast-tracked employees to enter into the finale with certainty—to motivate employees' effort incentives. Our study explores the optimal job ladder design and hierarchical organizational structure for accelerated promotion. The results indicate that the optimal policy depends on the organization's objective and the distribution of employees' abilities. When organizations aim to maximize the aggregate effort from all employees, an accelerated promotion mechanism is less likely to be adopted when employees' abilities are on par. However, when there is a substantial disparity in employees' ability, organizations should prioritize promotion of lower-ability individuals to foster competition—which echoes the traditional wisdom of "leveling the playing field" in the contest literature. When organizations aim to maximize selection efficiency—i.e., to select employees with higher innate abilities—we show that promoting high-ability employees should be prioritized in order to reduce uncertainty throughout the selection process. Our findings generate practical and policy implications for organization design and provide novel insights into organization's optimal promotion policies. Our results shed light on the importance of manipulating the competitive balance among employees in the promotion process, especially in situations where there is a significant variance in employees' abilities. Our paper contributes to the literature on organizational design and human resource management, offering guidance for designing effective promotion policies that align with organizational objectives and foster a fair and competitive environment.