The Centre Cannot Know: Decision Rights, Specific Knowledge, and the Ratings Pull in Corporate Well-Being Investment

Most people assume that when a large company fails to look after its employees, it is because the people in charge do not care enough. They imagine that shareholders are too greedy, or that managers are too distracted by short-term profits, or that the board of directors simply ignores the human cost of doing business. This view suggests that if we could just change the hearts of the decision-makers or force them to care more, the problem would be solved. But there is a different way to look at the problem, one that has nothing to do with motivation and everything to do with where the decision is actually made. In the world of economics, there is a long-standing idea that knowledge is not evenly distributed. The people who know the most about a specific problem are often the ones closest to it, while the people with the power to spend money are often far away, sitting in a headquarters office. If the person who knows exactly what a factory floor needs to feel happy is not the same person who signs the checks, the company will struggle to make the right choices, no matter how well-intentioned everyone is.

This is the core puzzle that Shay Tsaban, a researcher at the Peres Academic Center, explores in a new study. He asks a simple but profound question: when a company decides how to invest in the well-being of its workers, who should be the one to make that call? Is it the local manager who sees the daily struggles of the team, or the corporate center that oversees the entire organization? The paper argues that the failure to invest wisely is rarely about a lack of desire to do good. Instead, it is a failure of position. The information needed to choose a good well-being program is local, specific, and often impossible to describe in a simple report. When a local manager tries to explain to a distant executive why a specific type of break room or a particular shift pattern is needed, that detailed understanding gets lost in translation. By the time the request reaches the top, it has been reduced to a single number or a generic summary that cannot capture the unique reality of the local workforce.

The study introduces a new concept called the "ratings pull" to explain why this problem is getting worse, not better. In recent years, many companies have started using external ratings to measure how well they treat their employees. These ratings are like report cards given by independent agencies. They are designed to encourage companies to do more for their workers by making their efforts visible and comparable. The logic seems sound: if a company knows it will be graded on its employee well-being, it should spend more money to improve its score. However, Tsaban's research suggests that these ratings have an unintended side effect. Because rating agencies are far away from the actual workplaces, they can only verify things that are easy to see, document, and standardize. They can easily check if a company has a single, uniform policy that applies to everyone. They cannot easily check if a company has twenty different, highly tailored programs that fit twenty different teams perfectly.

As a result, the ratings create a powerful incentive for companies to move their decision-making power upward, away from the local managers who know the workers and toward the corporate center that can produce the clean, standardized reports the raters want. The paper shows that when a company responds to these ratings, it often ends up spending money on programs that look good on paper and score highly with the raters, but that do not actually fit the needs of the specific people receiving them. The company's rating goes up, but the actual happiness and productivity of the workers may go down. The decision is made at the right altitude to satisfy the rater, but at the wrong altitude to satisfy the worker.

The researcher built a simple model to test this idea, treating the company as a system with two levels: the local units and the corporate center. The model assumes that local managers know exactly what their teams need, while the center only sees a blurry, noisy version of that reality. The model calculates when it makes sense for the center to take control versus when it makes sense to let the locals decide. The findings show that as the importance of the external rating increases, the center is more likely to take over the decision, even if the local managers are better suited to make it. This happens because the rating rewards the center for spending money in a way that is easy to verify, while it offers no such reward for the messy, complex, and highly effective spending that happens locally. The model predicts that this shift happens even if everyone involved is honest and trying to do the right thing. The company is not lying about its spending; it is simply spending on the wrong things because the rules of the game have changed.

This argument challenges a popular belief in the business world that transparency and external grading are always the cure for corporate neglect. The paper suggests that while these ratings might succeed in making companies spend more money, they can fail to make that money do any good. The problem is not that companies are hiding their actions; it is that the actions they are being rewarded for are the ones that are easiest to measure, not the ones that are most effective. The research points out that this issue is particularly acute for companies operating in very different environments, such as those with workers in many different countries or with very different types of jobs. In these cases, the gap between what the center sees and what the local workers need is huge, and the pressure to standardize for the sake of a rating can cause the most damage.

The study also clarifies what this phenomenon is not. It is not a case of managers lying about their spending or faking their results. It is not a case of companies copying each other just to look legitimate, nor is it a case of managers simply wasting money for their own benefit. It is a structural problem where the tool used to measure success—the rating—is designed in a way that pushes decision-making to the wrong place. The paper argues that if we want to fix this, we cannot just ask companies to try harder or to be more honest. We need to change how we measure success. Instead of rewarding uniformity, rating agencies should look for evidence that companies are listening to their local teams and adapting their programs to fit specific needs. Companies, for their part, should separate their budget for rating-friendly, standardized programs from their budget for local, tailored programs, ensuring that the drive for a good score does not crowd out the drive for a good match.

Ultimately, the paper suggests that the solution lies in recognizing that knowledge is local. The people who know what makes a workforce happy are the people who work with them every day. When a company moves the power to decide away from these people to satisfy a distant rating, it loses the very thing that makes well-being investment valuable. The research does not claim to have solved the problem, but it offers a clear explanation for why well-intentioned efforts to improve corporate responsibility can sometimes backfire. It invites a rethink of how we design the systems that hold companies accountable, suggesting that the best way to help workers might be to let the people who know them best make the choices, even if those choices are harder to measure.