How Firms Use Performance Pay to Mitigate “Promotion Risk” | Newsletter January 2025

In this issue:

• Compensating workers based on the company’s performance can act as a safety net, cushioning the financial impact of missed promotions – New research
• Navigating Corporate Insolvency – Video interview
• AI Investment: Driving Market Upswings, Innovation and Market Share Distribution – Video interview
• Could Lowering Labor Protections Spur Entrepreneurship? – Interview

RESEARCH IN THE SPOTLIGHT

How Firms Use Performance Pay to Mitigate “Promotion Risk”

In today’s complex work environment shaped by AI, remote work, and shifting demographics, career advancement has become more uncertain. A recent study introduces the idea of “promotion risk”—the chance of employees being passed over for promotion even when they perform well. Research by Alvin Chen reveals how companies can use firm performance pay as a form of insurance that mitigates the uncertainty of career advancement.

Key Findings:

• Promotion risk: Employees may be passed over for promotion despite strong individual performance
• Promotion paradox: Stronger company performance is often associated with more intense competition for promotion
• Firm performance pay as insurance: Incentive bonuses that increase with firm performance offset declines in promotion prospects
• Strategic application: Not all companies benefit equally from firm performance pay; its effectiveness depends on organizational structure and talent dynamics

VIDEO INTERVIEWS

Navigating Corporate Insolvency: Lessons from Northvolt's Bankruptcy

Bo Becker (SHoF/SSE) discusses Chapter 11, European Insolvency Systems and the broader implications for corporate finance and policy in a filmed interview.

AI Investment: Driving Market Upswings, Innovation and Market Share Distribution

Assistant Professor Anastassia Fedyk ( UC Berkeley School of Information ) shares insights on what this means for firm performance and markets in an interview during her visit to Stockholm.

Could Lowering Labor Protections Spur Entrepreneurship?

A recent study reveals that unemployment risk can drive entrepreneurship, showing how changes to Sweden's strict "last-in-first-out" (LIFO) dismissal rules reshaped the labor market. These changes encouraged employees to start their own businesses without compromising quality. What lessons can policymakers draw from this? Read our interview with Ai Jun Hou ( Stockholm Business School, Stockholm University ), one of the researchers behind the study.

IN THE PRESS

Bo Becker (SHoF/SSE) discusses how major banks will remain committed to lending to renewable energy projects as long as they are profitable.

Alvin Chen (SHoF/SSE) explains: while dividends are viewed as a commitment to shareholders, buybacks provide companies with greater flexibility and send a strong signal when shares are perceived as undervalued.

Per Str?mberg ?(SHoF/SSE), Christian Thomann ?(SHoF/ Kungliga Tekniska h?gskolan ) and Gustav Martinsson ? (SHoF/ 瑞典斯德哥尔摩大学 ) conducts academic research with impact and were recently "highly commended" by the Financial Times Responsible Business Education Awards for their study on carbon pricing and firm emissions.