Research reveals a hidden trade-off in employee-first leadership

In the modern business landscape, the concept of “servant leadership” has gained significant traction. This management style prioritizes the growth and well-being of employees above the leader’s self-interest. Proponents argue that by supporting the team, a leader naturally fosters a better work environment. While the benefits to employee morale and cooperation are well-documented, the impact on the bottom line has remained unclear. Some executives worry that a focus on employee needs might come at the expense of hard financial results.

A research team recently set out to investigate this tension. Their investigation sought to determine if this leadership style creates a trade-off between building a supportive culture and achieving financial targets. The study suggests that servant leadership acts as a double-edged sword. It effectively boosts helping behaviors among staff but can simultaneously drag down financial performance. The findings were published in the Journal of Organizational Behavior.

Defining the Leadership Dilemma

Therese Egeland and Alexander Madsen Sandvik from the NHH Norwegian School of Economics, along with Vidar Schei and Claudia Buengeler, led this investigation. The researchers aimed to address inconsistent findings in previous literature regarding leadership and profitability. Some prior studies suggested servant leadership boosted profits, while others showed no effect or even negative trends. The team posited that the answer lay in the specific psychological “climates” that leaders create within their organizations.

Psychology of Selling

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To understand the study, it is necessary to understand two concepts from Achievement Goal Theory. The first is a “mastery climate.” In this environment, success is defined by learning, collaboration, and effort. Employees focus on developing their skills and working together.

The second concept is a “performance climate.” In this environment, success is defined by social comparison and competition. Employees strive to outperform their colleagues and demonstrate superiority. The researchers hypothesized that servant leaders naturally cultivate the first climate while suppressing the second. They theorized that this suppression of competition might be the missing link explaining why servant leadership sometimes correlates with lower financial returns.

Simulating the Corporate Environment

The investigation began with a controlled experiment designed to establish a causal link between leadership style and organizational climate. The researchers recruited 385 business students to participate in a simulation. The participants were divided into small groups, representing 99 simulated firms. Each group acted as a management team for a fictitious company named SOLMAT.

The teams were tasked with making a strategic product decision. Before beginning the work, each team watched a video message from their “CEO.” This was the experimental manipulation. Half the teams viewed a video where the actor played a servant leader who emphasized employee growth and interests. The other half viewed a video of a directive leader who focused on assigning tasks and maintaining standards.

After viewing the leadership message, the teams engaged in a decision-making task involving hidden profiles of information. Following the task, participants rated the climate within their simulated firm. They assessed the extent to which the group valued cooperation (mastery) versus rivalry (performance).

Experimental Findings

The analysis of the experimental data revealed a clear pattern. The groups exposed to the servant leadership video reported a significantly stronger mastery climate. These participants felt encouraged to exchange thoughts and ideas mutually.

Conversely, the servant leadership condition resulted in a significantly weaker performance climate. The presence of a servant leader reduced the sense of rivalry among the “employees.” This initial phase of the research confirmed that this leadership style actively shapes how a team views success. It promotes collaboration while dampening the competitive drive to outperform others.

Moving to the Real World

To see if these effects held true in actual business settings, the researchers designed a second study. They focused on the accounting industry in Norway. This sector was chosen because it is comprised largely of small firms where a leader’s behavior has a direct impact on the entire staff. Additionally, the industry is undergoing changes that require both standard compliance work and more complex analytical services.

The team recruited 120 small accounting firms. This sample included 120 leaders and 505 employees. To ensure the data was robust and to avoid bias, the researchers collected information from different sources at three separate points in time.

Collecting Field Data

At the first time point, employees completed surveys rating their leader’s behavior. They also assessed the motivational climate within their firm, reporting on the levels of mastery and performance orientation. Six months later, the firm leaders provided their own data. They rated the “helping behavior” of their firm, which included actions like employees assisting others with heavy workloads or personal problems.

At this second time point, employees also rated their level of autonomy. They reported how much freedom they had to schedule their work and determine their own procedures. Finally, the researchers accessed objective financial data from a public registry. They calculated the Return on Assets (ROA) for each firm one year after the initial surveys. They also controlled for the firms’ previous financial performance to ensure they were measuring change rather than existing success.

Tracing the Chain of Events

The analysis of the field data uncovered two distinct pathways. The first pathway confirmed the benefits of servant leadership. Employees who rated their bosses as servant leaders reported a higher mastery climate in their workplace. This focus on learning and cooperation was linked to a subsequent increase in helping behaviors reported by the leaders. In this chain of events, the leadership style successfully created a more supportive and collaborative workforce.

The second pathway revealed the financial cost. Servant leadership was linked to a lower performance climate. In these firms, employees felt less pressure to compete with one another. The data showed that a performance climate is generally linked to higher financial returns, likely because competition drives speed and efficiency. By suppressing this competitive climate, servant leadership was linked to lower Return on Assets.

The Role of Autonomy

The researchers then added a layer of complexity to their analysis by examining employee autonomy. They wanted to know if giving employees freedom changed the relationship between the office climate and financial results. The data revealed a significant interaction.

In firms where employees had low autonomy, a performance climate was strong predictor of financial success. In these rigid environments, competition seemed necessary to drive profitability. However, in firms where employees enjoyed high autonomy, the link between performance climate and money disappeared.

This meant that when employees had the freedom to make their own decisions, the lack of a competitive performance climate did not hurt the firm financially. The negative financial impact of servant leadership was neutralized in high-autonomy environments. The researchers explained that autonomy allows employees to perform well through intrinsic motivation rather than external competition.

Actionable Insights for Management

These findings offer specific guidance for business leaders. The study indicates that servant leadership is highly effective for fostering a cooperative, helpful workforce. However, leaders must be aware that discouragement of competition can dampen short-term financial performance.

To mitigate this risk, the research suggests that managers should not rely solely on servant leadership behaviors without considering work design. If a leader wishes to adopt a servant-oriented style, they should simultaneously increase employee autonomy. By granting staff the freedom to decide how they work, leaders can offset the potential financial downsides of a low-competition environment.

The study implies that a balance is required. Firms might consider management systems that encourage a productive interplay between cooperation and competition. Over-emphasizing a performance climate can lead to burnout and unethical behavior, but eliminating it entirely without providing autonomy can hurt profitability.

Scope and Limitations

The researchers noted the boundaries of their work. The experimental section relied on students and short-term interactions, which differ from long-standing employment relationships. The field study focused specifically on small accounting firms in Norway. The dynamics might differ in large multinational corporations or industries with different competitive pressures.

Additionally, the study observed financial performance over a specific lag period. It is possible that the relational benefits of servant leadership, such as retention and reputation, could yield financial returns over a much longer timeline than the study captured.

Future Directions for Inquiry

This research opens several new avenues for investigation. Future studies could examine how these dynamics play out in different cultural contexts where views on authority and competition differ. Researchers might also investigate if other factors besides autonomy can buffer the negative financial effects of servant leadership.

Another question raised by the study is how these climates coexist. The data showed that mastery and performance climates are not mutually exclusive. Future work could explore how leaders can actively cultivate both climates simultaneously to maximize both helping behavior and financial returns. The researchers concluded that their work “contributes to a more nuanced understanding of when and how servant leadership is advantageous for organizational success.”