The two faces of control – Martin Gargiulo Martin Gargiulo INSEAD The Two Faces of Control Network Closure and Bonuses among Investment Bankers

The two faces of control – Martin Gargiulo Why people cooperate (or not)? Network research has often assumed that actors are willing to cooperate but may refrain from doing so due to concerns with opportunism This assumption is grounded on a (naïve?) image of the market: barriers to exchange do exist and may prevent the exchange, but the motivation to cooperate exists If questionable in a market context, the assumption is truly inadequate in an intra-organizational context Employees cannot overtly refuse to help colleagues, but the amount of time and energy they actually devote to it can vary widely across colleaguesand so does the quality of the help these colleagues receive

The two faces of control – Martin Gargiulo Network closure and cooperation Information Reputation Trust VOLUNTARY COOPERATION Reputation (Normative control) Two-step (Indirect control) FACILITATING Cooperation INDUCING Cooperation Reduce uncertainty of cooperation Raise the cost of non-cooperative behavior INDUCED COOPERATION Repeated games DRIVERS PROCESSES MECHANISMS OUTCOMES Catalyzed Imposed NETWORKCLOSURE Where do Interorganizational networks come from? (Gulati & Gargiulo 1999, AJS)

The two faces of control – Martin Gargiulo The two faces of control CONTROL IS GOOD Direct influence less likely in conflict dependency Indirect influence more likely in conflict dependency Direct: A builds a tie with B Indirect: A builds a tie with C but not with B Both: A builds a tie with B and C None:A does not build a tie with either B or C B CA A B Actors embedded in a dense network are less likely to build ties with their new sources of dependence P (A) < P (B) Two-Step Leverage (Gargiulo 1993, ASQ) (Bae & Gargiulo 2004, AMJ) Trapped in Your Own Net (Gargiulo & Benassi 2000, OS) CONTROL IS BAD Dependency Cooptation

The two faces of control – Martin Gargiulo Networks, mechanisms, outcomes EGO CONTROL Concerns for reputation and dependence enhance egos ability to obtain help from alter AUTONOMY Disconnected alters less able to impose constraints on how ego operates TRUST Common third parties facilitate the emergence of trust between ego and alter BROKERAGE Disconnected alters more likely to have different information, creating brokerage opportunities

The two faces of control – Martin Gargiulo Three questions Are some of these mechanisms more relevant than others in explaining individual outcomes? Does the effectiveness of these mechanisms vary with the role ego plays towards alter? How do informal structures interact with formal structures in shaping outcomes?

The two faces of control – Martin Gargiulo Bringing dependence asymmetry back in ACQUIRER Ego seeks information from alter PROVIDER Alter seeks information from ego EGO Arrows indicate the direction of the dependence for information The effects of network structure on egos performance may vary with the role ego plays towards alter in the relationship

The two faces of control – Martin Gargiulo The contingent effects of control Concerns for reputation enhance egos ability to obtain help from alter Communication enhances control but it also undermines brokerage opportunities Lack of communication reduces information redundancy - ? + + EGO ACQUIRER Ego seeks information from alter PROVIDER Alter seeks information from ego Communication reduces autonomy and increases role strain Reciprocity creates incentives to help but may restrict the scope of the help ?

The two faces of control – Martin Gargiulo The context: knowledge intensive firms AS ACQUIRER Access to high-quality information in a timely and efficient fashion AS PROVIDER Control on the allocation of time and energy to the demands of their role KNOWLEDGE WORKERS AS INFORMATION BROKERS They acquire, process, and provide information to help define and address complex problems in the organization How to secure the attention of colleagues who can provide that information? How to maintain freedom to allocate attention to each of the demands on thier time? Formal hierarchy Mutual dependence Network closure Formal hierarchy Uniqueness Structural holes PREDICAMENTSLEVERSNEEDS

The two faces of control – Martin Gargiulo Networks in a global investment bank Americas Asia-Pacific EMEA Switzerland UK Ties represent strong mutual collaboration between MDs

The two faces of control – Martin Gargiulo Investment bankers networks Bonus-eligible officers in the Equities division of a global investment bank identify colleagues with whom they had substantial business interaction in the past year and rate the value these colleagues added to their own work: When ranking your colleagues it is important to assign the ranks in terms of usefulness to you and not your perception of their contribution to the bank in general Colleague evaluations are consequential for bonus decisions. Holding sex, rank, tenure, and work group constant, a 10 % increase in mean rating is worth 3 % increase in relative bonus (9.08 t-test). Data consists of a square matrix of 2,000 employees working in 41 groups worldwide (e.g., Sales Japan, Sales Derivatives Europe). Entries in this matrix are 1 if banker i rated banker j and 0 otherwise Ties are directional, albeit they are reciprocated in 31% of the cases Controls for sex, age, tenure, work group, and rank

The two faces of control – Martin Gargiulo An example of a bankers network Banker act as acquirer Banker act as provider Banker engages in reciprocated exchanges

The two faces of control – Martin Gargiulo Types of network structure Sparse (Density = 0) Dense (Density = 100) Centralized (Density = 30) Provider Relationships Acquirer Relationships Acquirer Relationships Effect decreases with rank Effect increases with rank

The two faces of control – Martin Gargiulo Measuring network structure Network Density Max (d i = 100)Min (d i = 0) In a network with 6 alters j, q there may be up to 30 directed ties between alters, N(N-1) Network Hierarchy The extent to which one alter concentrates all the connections in egos network (Burt 1992)

The two faces of control – Martin Gargiulo Variable description EGO ACQUIRER PROVIDER

The two faces of control – Martin Gargiulo Baseline results The quality of the people providing information and help to the banker increases her bonus Leverage advantages of supply-demand ties are offset by brokerage losses Closure among people using information from ego increase her role strain, hurting compensation Closure among people providing information to ego enhance egos ability to obtain their attention and help, increasing performance Hanging around doesnt pay. Holding rank constant, tenure has a significant negative effect on bonus The size of a bankers network has a strong positive effect Restricted reciprocity may be cozy, but it doesnt pay Central players can provide indirect leverage on alters N = 2,000 p <.05; p <.01; p <.001 Fixed effects for work unit included EGO ACQUIRER PROVIDER

The two faces of control – Martin Gargiulo Comparing alternatives All three models have similar predictive power Size matters. Results using the constraint measure are driven fundamentally by network size in these data When measured as a proportion of existing ties over all of egos contacts–that is, without distinguishing role relationships density does not have a significant effect on bonus (β =-.014, t test) Failing to distinguish between acquirer and provider role relationships may lead to erroneous identification of the mechanisms linking network structures to outcomes N = 2,000 p <.05; p <.01; p <.001 Other controls and fixed effects for work unit included EGO ACQUIRER PROVIDER

The two faces of control – Martin Gargiulo Are these effects the same for everybody? What we know: Networks matter more as your job is more unique (Burt 1997 in ASQ) An alternative view The type of network that matters depends on the role you play in the informal structure and your rank in the formal hierarchy Control effects should be more apparent as we move down in the hierarchy, as lower ranks lack alternative mechanism to induce others cooperation Autonomy (lack of control) effects should be more apparent as we move up in the hierarchy, as higher ranks do jobs that are more ambiguous and require more freedom to recombine resources

The two faces of control – Martin Gargiulo Density effects vary by role and rank N = 2,000 p <.05; p <.01; p <.001 Other controls and fixed effects for work unit included The positive effect of density in the information supply network weakens as we move up in the formal hierarchy and reverts to negative for managing directors The negative effect of density in the information demand network is negligible for associate directors and becomes stronger as we move up in the hierarchy

The two faces of control – Martin Gargiulo Density effects by network and rank N = 2,000 – Log-log specification Controls and fixed effects for work unit included

The two faces of control – Martin Gargiulo Closure, norms, and survival Years of service is negatively associated with bonus when rank is held constant … But old-timers with a dense network do better than those with sparse networks do Two implications The mechanism through which dense acquirer networks affect bonuses seems more consistent with normative control than with the acceleration of trust Dense networks help foster cooperative norms, but they may also allow poor performers to survive

The two faces of control – Martin Gargiulo The two faces of control The normative control associated with dense networks is good to get other people to do things for you and you lack other means to induce their help Yet, this same normative control takes away your freedom to decide which people and projects to allocate time and energy The trade-off is not the same for everybody in the organization: the more formal authority you have, the more you need a sparse provider network, and the less you benefit from a close acquirer network Closure is the strength of the weak

The two faces of control – Martin Gargiulo APPENDIX

The two faces of control – Martin Gargiulo Types of network structure Sparse (Brokerage) Dense (Closure) Centralized Network Density Max (d i = 0)Max (d i = 100) NETWORK DENSITY The density of a network is the proportion of possible ties that are present If you have 6 people in your network, they can have a maximum of 15 ties Possible ties = N(N-1)/2, where N is the # of people in the (symmetric) network

The two faces of control – Martin Gargiulo Footnote # 1: Information diversity and network density Information diversity measured as the mean Euclidian distance among all alters in the demand network. It assumes that diversity increase with the difference in communication patterns between actors Information diversity increases with network size and decreases with network density The effect of size is stronger and significant below mean density The negative effect of density on information diversity is almost three times stronger above mean density than below the mean Conclusive evidence would come from data in which knowledge diversity and networks are directly measured

The two faces of control – Martin Gargiulo Footnote #2: Centralization can substitute for density There are a number of bankers with sparse but centralized (hierarchical) networks. These bankers can have leverage on their alters through the central players in their networks, despite having a relatively sparse acquirer network