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Compensation & Incentives. Brief Overview of Compensation. Directly related to all org. policy goals investment matching motivation 3 basic elements level composition ($ v. benefits) pay for performance. Incentives: The Simple Model. Perf. measure = Q(e) + e measuring effect of effort

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Presentation Transcript

Brief overview of compensation
Brief Overviewof Compensation

  • Directly related to all org. policy goals

    • investment

    • matching

    • motivation

  • 3 basic elements

    • level

    • composition ($ v. benefits)

    • pay for performance


Incentives the simple model
Incentives:The Simple Model

  • Perf. measure = Q(e) + e

    • measuring effect of effort

    • depends on e

      • tradeoff measurement cost v. error

  • Pay = I[Q(e) + e]

    • e.g., b0 + b1[Q + e]

      • larger b1Þ more pay risk

  • Extrinsic motivation driven by

    • PFP = shape of pay function


Shape of pay performance relation
Shape of Pay-Performance Relation

  • b0 = level of pay ·b1 = slope

    • no incentive » incentive intensity

      except firing threat » also determines risk

  • Tradeoff incentives v. risk



Performance measurement a controllability
Performance Measurementa. Controllability

  • A random

    event

    occurs ...

  • Hold the employee accountable?

    • e.g., Q + e = (a + a)·e + e

      • a known by worker ex ante

      • known by firm ex post

    • if employee affects response to event, yes

    • if relevant decision rights are given to another employee, no

    • need for ex post subjectivity in evaluating performance


Performance measurement b distortions
Performance Measurementb. Distortions

  • Lensing metaphor

    • broader measures include more ...

      • effects of actions (controllables)

      • uncontrollables

    • key perf. measurement tradeoff

      • narrower measures reduce risk but induce distortions

      • most perf. meas. issues are about distortions

        • teams

        • relative evaluation

        • quantity v. quality

        • maintenance

        • short / long term (alienability)


Incentives the multitask model
Incentives:The Multitask Model

  • For each task j ...

    • Qj = perf. measure

    • PFPj = shape of pay

      • relative weights PFPj balance incentives across tasks

        • relative price system

        • coordination mechanism


Weights measures
Weights & Measures

  • How to set weights across performance measures?

    • difficulty of task (MDj)

    • value of task (MPj)

    • error sj² in measure

    • set some to zero

      • implicit/ subjective weight ...


Defining jobs by measurement characteristics
Defining Jobsby Measurement Characteristics

  • Bundling tasks into measures

    • automatic weights / coordination across tasks

      • complementary tasks

    • Task Identity

  • Bundling measures into jobs

    • similar measurement error


Incentives fit w other org policies
Incentives: Fit w/ other Org. Policies

  • Careers

    • incentives for skill acq., firm specific human capital

    • promotions may be incentives

  • Job / org. design

    • allocation of decision rights

  • Voice

    • info. for decision making

    • feedback perf. measures

    • implicit contracting when there

      is subjectivity


Subjectivity incentives
Subjectivity & Incentives

  • Subjective ...

    • ... measures

    • ... weights on objective measures

    • why?

      • ‘lensing’ adjustment of uncontrollables

      • dynamically adapt weights

      • abstract, complex, knowledge work

      • necessary in nearly all jobs

    • problem of trust

      • implicit contracting

      • supervisor incentives

      • process issues


Some summary points
SomeSummary Points

  • You get what you pay for

    • incentives work; that’s the problem!

      • Texas chain saw of motivation

      • does not imply that extrinsic motivation should be ignored

  • To mitigate distortions, use ...

    • overlapping incentives

    • controls

  • Incentives v. intrinsic motivation

    • creativity


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