Nonfinancial Rewards in Times of Change

ABSTRACT This study examines whether nonfinancial rewards are used to facilitate organizational change during outsider leadership transitions. Outsider leaders frequently introduce significant change, risking disruptions to the psychological contract between employees and their organization. Using data from surveys and an archival database, we first present evidence that the appointment of outsider leaders brings about a period of significant change. Next, we find that outsider leaders are more likely to use nonfinancial rewards than insiders to recognize employees who perform below their expectations. When examining the broader employee population, we also find that outsider leaders make greater use of nonfinancial rewards compared to insiders. Finally, we find that the use of nonfinancial rewards by outsider leaders to reward employees who performed below expectations has an inverted U-shaped relationship with employee perceptions of their leader’s ability to manage change. These results highlight the value and limits of nonfinancial rewards in facilitating organizational change. Data Availability: Proprietary data. JEL Classifications: M41; M50; H75.