Quản trị kinh doanh - Chapter 11: Career - Based incentives

Chapter 11: Career-Based Incentives4/8/2013Chapter 11: Career-Based IncentivesPromotions and IncentivesShould Promotions Be Used as an Incentive System?Dual Roles That Sometimes ConflictIntentional or Accidental Incentive System?Promotion Rule: Tournament or Standard? Controlling Structure or QualityRelative versus Absolute EvaluationEase and objectivity of evaluationUncontrollable RiskDistortionHow Do Promotions Generate Incentives?Prize Structure and IncentivesLevel of SalaryPrize from PromotionPromotion Probability and IncentivesUncontrollable RiskSumming Up Advanced IssuesHeterogeneity of EmployeesVariation in AbilityVariation in PersonalityIncentives for Losers Outside HiringTurnoverEvidenceCareer ConcernsSeniority Pay and IncentivesPractical ConsiderationsSeniority-Based Pay as an Implicit ContractThe Worker as LenderMandatory RetirementSummary4/8/2013Promotion-Based Incentives4/8/2013Chapter 11 – Promotions & IncentivesAfter completing this chapter, you will be able to address the following questions:What are career-based incentives?How/When can a firm use promotions for maximum incentive benefit? When should a firm be concerned about professional sabotage?When and how can seniority-based incentives work?How to motivate tournament participants when ability varies or certain parties are not in contention?4/8/2013Salary by Hierarchical Level4/8/2013Raise in Salary by Type of Job Change4/8/2013Promotions & IncentivesThese data are evidence of what is often the most important source of incentives: promotionsWhy are promotions so important to incentives?work well with specialization & functional org. structuresproblem: what if the best candidate to promote is not the best performer?e.g., an engineering job ladderIn many cases, they are an “Accidental Incentive System”remember the importance of promotions as credentials on your resume4/8/2013What Promotion Rule Should be Used?One extreme: promote all or none whose performance matches some standardadvantage: quality of promoted employees is better controlleddisadvantage: # promoted is variableThe other extreme: promote a fixed # of the best performers, regardless of performance (a tournament)advantage: # promoted is completely controlleddisadvantage: quality of promoted is variablekey feature: relative performance evaluation (RPE)reward is “all or nothing” so the evaluation is also ordinal – only ranking matters4/8/2013Outside HiringStandards help you control quality of those promoted; tournaments help you control quantityA way to better balance that tradeoff: run a tournament, but in bad years (your best internal candidates are of low quality), hire from the outsidehowever, there’s a cost: external hiring reduces incentives for internal candidates4/8/2013The Incentive TriangleHow are pay, effort and promotion tied to each other? ∆ Pay ∆ Pay ∆PM________ = ________ x ________ ∆ Effort ∆ PM ∆ Effort4/8/2013Incentives from PromotionSince & the reward is largely the immediate raise DW,Note in the figure at the beginning of this section that DW rises with hierarchical level. That is quite typical4/8/2013Effect of Promotion ProbabilityHow does the term affect incentives?if a promotion is guaranteed, there is no incentiveif a promotion is impossible, there is no incentiveImplicationsstrongest incentives generally occur – for any lump-sum reward, not just promotions – when the odds of winning are closer to 50%what is optimal feedback if promotion stakes are high?heterogeneity of competitors tends to reduce incentives in tournamentsDifferent personality types may react to contests differentlygenerally speaking, competition promotes “aggressive” personalities at the expense of “cooperative” personalities4/8/2013Dual Role of PromotionsIs the best performer one level below always the person with the highest potential one level above? N.B., that the job of managing your own output vs. managing the output of others can be very different jobs?Question: What types of jobs would be more likely to have the best performer as manager? 4/8/2013Promotions as IncentivesLazear & Gibbs refers to the accidental incentive system – What is this?Question: Do pay increases lead to promotions? ORDo promotions cause pay increases?What sorts or jobs might fall into one or the other category?4/8/2013Promotion RulesTournaments vs. Performance-Based PromotionNote the built-in differences in how quality can be rewardedRelative vs. Absolute Evaluation CriteriaNote the difference in how quality is assessedTournaments do remove subjectivity4/8/2013Effect of Risk on CBICompare effects of Risk on Relative Performance vs. Standards-based Performance:Analytical result is that Relative Performance Evaluation (RPE) presents lower risk when the variance in RPE is less than the idiosyncratic variance of the standards-based settingQuestion: What is the intuition for this result? 4/8/2013Performance SabotageDoes a Tournament system increase sabotage?Relative performance for employee A (vs. B)RPEA=PMA – PMB =(ePA - ePB) + (eSA – eSB) + (error)Symbols:PM: Performance MeasureeP: Effort toward performanceeS: Effort toward sabotageIntuition?4/8/2013What can be done about Sabotage?Encourage cooperationReward teamworkAdd subjective evaluationsSeparate competing individuals or teams OR Combine performance measureQuestion: Is culture important?4/8/2013Advanced IssuesVariations in ability can affect incentivesOne solution is to adapt standards to the employeeAnother solution is to sort for similar abilityWhat was the third suggestion?Question: Does distortion occur in real life?Motivate losing parties with annual bonusesOutside hiring is based on absolute rather than tournament competition4/8/2013Hawks vs. Doves RevisitedGroup 1Group 2Group 3Group 4CommentH, H, D, D------Sabotage possible; Tournament inappropriateH, DH, D----Disparate skills needed with teamworkH, HD, D----Uniform skills with teamworkHHDDCondensed skills; No teamwork4/8/2013Seniority PayCommon belief is that seniority pay does not motivate and could lead to shirkingModel relies on deferred compensation to demonstrate high output throughout career4/8/2013Seniority PayQuestion: Are there any consequences of paying a higher deferred wage?Question: How does the Chapter consider the Worker as a Lender?4/8/2013Seniority PayQuestions: Can you draw the deferred wage curve?How does it compare with the normal compensation curve? What types of firms might consider having a deferred compensation scheme? 4/8/2013Deferred CompensationQuestions: Can you draw the deferred wage curve?How does it compare with the normal compensation curve? What types of firms might consider having a deferred compensation scheme? 4/8/2013SummaryPromotion incentives are often quite importantif possible, a firm should avoid tying incentives to job slotsbut often promotions generate incentives that are unavoidableThe theory described here helps you understand the incentives implied by your hierarchypromotion rates, pay across hierarchical levelsOther incentive instruments, such as bonuses, can then be optimized conditional on promotion incentives4/8/2013RECAP – Chapter 11Firm must decide explicitly whether it will promote based on a standard or via the outcome of a tournamentMarket wages may make it difficult to run a tournament at intermediate levels of a firmRisk: Other things being equal, the variability of measuring output to a standard is compared against the variability of tournament effortSabotage can be significant in tournament-style evaluation and is mitigated by subjective evaluation of teamwork and/or separating competitorsSorting, distortion, lump sum payments can be used to motivate other tournament participantsSeniority pay can be used as a motivator in certain cases4/8/2013