Compensation & Incentives
description
Transcript of Compensation & Incentives
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) + » measuring effect of effort
» depends on – tradeoff measurement cost v. error
Pay = I[Q(e) + ]» e.g., b0 + b1[Q + ]
– larger b1 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 Measurement
a. Controllability
A random
event
occurs ...
Hold the employee accountable?» e.g., Q + = (a + )·e +
– 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 Measurement
b. 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 j² 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