Superior firm performance under conditional communication between top hierarchy and the subordinates

The choice of communication protocol in hierarchically structured firms is critical to business success. A new conditional communication structure is proposed where the subordinates are allowed to communicate with the principal only when the unit performs poorly. Under this protocol, the bad manager is not afraid of whistleblowing by a superior subordinate, because by making a good recruitment he ensures that his unit generally performs well. The good manager will also be given a voice when his unit does not perform well to clarify the underlying causes, and thus saves inefficient firing by the principal. Using a game-theoretic analysis, we show that this is a clear improvement over the “chain of command” style management where there is no communication between the top and bottom layers and managers are always fired following bad performance. Conditional communication can thus be adopted by firms to improve the overall profitability.