1 / 13

Compensation & Incentives

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

ljeanette
Download Presentation

Compensation & Incentives

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Compensation & Incentives

  2. Brief Overviewof Compensation • Directly related to all org. policy goals • investment • matching • motivation • 3 basic elements • level • composition ($ v. benefits) • pay for performance

  3. 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

  4. 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

  5. Shape: Examples

  6. 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

  7. 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)

  8. 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

  9. 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 ...

  10. Defining Jobsby Measurement Characteristics • Bundling tasks into measures • automatic weights / coordination across tasks • complementary tasks • Task Identity • Bundling measures into jobs • similar measurement error

  11. 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

  12. 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

  13. 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

More Related