We present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm's overall performance, we explore how the effects of social connections vary with the strength of managerial incentives and worker's ability. To do so, we combine panel data on individual worker's productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages to bonuses based on the average productivity of the workers managed. We find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker's ability, but when they are paid performance bonuses, they target their effort toward high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, we find that favoring connected workers is detrimental for the firm's overall performance.
Daily productivity of each worker.
When managers are paid fixed wages, productivity of a given worker is 9% higher when the worker is socially connected to his manager, relative to when he is not. Due to piece rate wages for workers, this translates to a proportionate change in their earnings. When managers are paid performance bonuses, being socially connected to the manager has no effect on workers' productivity. The introduction of managerial performance pay significantly decreases the productivity of low ability workers when they are connected to their manager relative to when they were connected to their manager when he/she was paid a fixed wage. The managerial performance pay increases the productivity of high ability workers, especially when they are not connected to their managers. An increase in the level of social connections between managers and workers has a negative effect on the firms' average productivity when managers are paid fixed wages, and has no effect when managers are paid performance bonuses.