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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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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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