The Downside of Internal Competition: Risky Behavior

Competition among employees of the same organization can be a good thing. It can promote a culture of friendly competition that might increase productivity and performance.

But new research also shows internal competition's downside: risky behavior.

According to University of Maryland researchers at its Robert H. Smith School of Business, being outperformed by peer employees is more likely to lead other employees to partake in risky behavior to improve their own performance. While getting outperformed by external employees — say, those of a similar position with a competitor — still influences performance, change inspired this way is less likely to lead to risky behavior, the study showed.

The reasons for this distinction are aplenty. “Those people [internal peers] are physically and socially proximate,” Christine M. Beckman, a co-author of the study, said in a press release. “They are the people your managers compare you to.”

Beckman's co-authors on the study are Aleksandra Kacperczyk of MIT’s Sloan School and Thomas P. Moliterno of the University of Massachusetts at Amherst.

To confirm this notion, the researchers looked at the performance of 3,225 actively managed equity funds — financial accounts in which managers act as stock and bond pickers on behalf of individual investors — from 1980 to 2006. Firms like The Vanguard Group, T. Rowe Price and Janus Funds often have many funds that overlap in both goals and assets, the study said, so managers are measured not just against rival fund companies but with others internally.

The researchers then tracked what happened as the funds fell behind their internal and external rivals, the study's press release said. They first looked at if and how fund managers changed investment tactics. Risky change meant increasing holdings of assets that are more volatile; other change may not be as risky, like changing the concentration of stocks or by raising fees paid by investors.

Even though both kinds of competition led to behavior change, internal competition was more likely to lead to risk taking, the study showed. What's more, people were more likely to make risky changes when they were outperformed by peers who were close to them in age or had other similar traits — such as going to the same college.

An interesting explanation for this finding is when employees are outperformed by an external rival, the problem is more likely to be attributed to overall corporate failings on behalf of the company. On the other hand, when beat by a peer employee, that rational is less likely.

Read the full study here.