Lecture 8 + 9 - Research & innovation + Incentive & compensation systems Flashcards
(!) Describe performance management of R&D
- Discretionary expense
- Difficult to measure output
- Goal congruent decisions
- Over several periods
- Uncertainty
- Relevance
- Innovative activities
- Basic research, development & engineering
- Products, processes & markets
- Ref. Self-determination
(?) Describe the organization of R&D activities
Levels of activities:
- R&D Strategy
- R&D Department
- R&D Projects
Organisation:
- Individuals: Often in co-creation
- Multi-functional teams
- Core competences vs. M&A
Performance management:
- Integrated part of action DM
- Start & continue/kill a project
(!) Describe the creativity model / Amabile
General:
- Motivating creativity
- Social environment –> intrinsic motivation –> Creativity
- Creativity not just specialists
- Expertise: Prof. knowledge
- Task motivation: Persons capability. Not same as want to do
- Feed innovation
Creative thinking:
- Personal characteristic
- Independence, tolerance & lack concern for social approval
- Demand personnel control
(!) Describe how to enhance creativity & a good work environment
Major role:
- Firm encouragement: Reward & recognition
- Work group support: Diverse skilled work group & communication
- Intrinsic motivation
- Three phychological needs
- Good work environment
- Cultural controls
- Challenging work
Moderate role:
- Freedom & sense of control
Minor role:
- Ress. available
- Workload pressure
(!) Describe the two kind of MCS´s
General:
- Implementation depend on market
- (Mest fra text)
__________
Directional systems:
- Set boundaries
- Structure creative space for team
- Tell team degree of freedom
- Tell rules of the game
- Inform on ress. available
- Inform expectations
- Some are accounting based
- Balance creative freedom & business needs
- Ref. Boundary system
- Ref. Diagnostic. Yet not monitoring
- Ref. Enabling
Important tools:
- Meetings
- Collection briefs
- Cost cards
- Calendars
- Gates
__________
Inspirational systems:
- Sense making systems
- Stimulate creativity
- Support consistency in idea generation
- Balance individual creative freedom & need for consistent collection
- Create a new direction
- Focus on collective sense making, not aligning personal & goal mission
- ST not LT
- Local, not TM
(!) Describe the different types of innovation
Incremental innovation:
- Use existing technology
- Low uncertainty
- Focus on improvements in existing process & products
- Improve competitiveness in existing market
Radical innovation:
- Explores new technology
- High uncertainty
- Focus on processes & products w. unprecedented features
- Transforming existing market or industry
(?) Describe performance management of R&D
General:
- All four controls essential
Management practices:
- Reflective & interactive: Support competence, autonomy & relatedness
- Rigid & mechanical: Constrain competence, autonomy, relatedness
- Combination adapted to situ: Advanced knowledge
Implications:
- Human action & objectives
- Human motivation
- Company strategy
- Organisational culture
(!) Describe the different roles of compensation
General:
- Fra tekst
Pay:
- Ensure reasonable pay: Laws
- Differ in non-profit firms
Attract managers & employees:
- More than right people
- Compete by higher fixed pay
- Compete by bonus
- Risk that competitors copy pay
- Risk costs gets to high
Keep managers & employees:
- Since costly to employ & train new personnel
- More than monetary compensation: E.g Interesting work tasks & work environment
Credit:
- Recognize good performance
- Compare & compete w. peers
- Often change when figures public
- CEO can compare their salary with competitor CEO´s
Effort:
- May conflict w. inspiration: Pressure = Less inspiring
- Important in agency theory
Inspiration:
- May increase by incentives
- Inspired, creative & smart managers = Better DM, ideas & innovation
- May conflict w. effort: No pressure = More inspiring
Goal congruence:
- Align individual, division & firm goals
- In line w. mission, goals & strategies
- Working towards the same
- Difficult: Especially if large firm
- Often by incentive system
- Poss. w. input controls: Shared values & common culture
Flexible remuneration (aflønning):
- Variable pay: Pay for performance
- Risk losing personnel in bad years
- Risk shared btw. owner & managers
(!) Describe the different types of incentives and motivators
General:
- Fra tekst
Basic salary:
- Not performance dependent
- Fixed for certain period
- Increase > Decrease when revised
- How revision is done has negative or positive effects on motivation
Good basic salary:
- Employees feel appreciated & valued
- Can lead to motivation
Not good basic salary:
- Negative effects on motivation
____________
Short-term variable pay:
General:
- Depend on performance measures
- Often limit & upper ceiling
Pay % of profit:
- Often after specified return: Low profit = Still bonus
- Often based on equity or capital employed
Pay on EPS:
- After predetermined level
Pay on profitability relative to industry:
- Benchmark
____________
Deferred pay:
- Bonus paid over period: Eg. 5 years
- Encourage LT DM
- Encourage staying if bonus taken away if quitting
- Risk weaker incentive
____________
Stock options:
- Manager in shareholder position
- Right to buy shares in future for price agreed when granted
Advantages:
- Encourage LT value creation
- Attract talented employees
- Reduce other pay components
Critiques:
- Controllability problem
- High risk
- Uncertainty
____________
Intrinsic incentives:
- Non-financial aspects to employee satisfaction
- Interesting, meaningful & challenging tasks
- Work task, environment & colleagues
- Sometimes more important than financial incentives
- Products & services has larger meaning
- Sustainable company choices can create meaning
- Kinship: Liked team working toward common goals
- Teamwork: Stimulating & rewarding
(!) Describe theory X & Y + Other considerations
General:
- Impact incentive system
- Most used in practice
- Two camps of motivation
- Very different from each other
- Often humans has both
- Combine economy & psychology
Theory X human view:
- Ref. Agency theory
- Work aversion
- Lazy
- Needs forcing
- Needs control
- Avoid responsibility
- Prefers to be led by others
Theory Y human view:
- Ref. Self-determination theory
- Work as natural as rest
- Lead & control own work if purpose
- Desire responsibility if right circumstance
- Often work on auto
- Often inventive
________________
Differences between the two theories:
Simple, repetitive & boring work tasks:
- Extrinsic motivation
- Ref. agency theory
- Motivation: Decentralized responsibility, broader work tasks, team work or job rotation
Complex, changing & challenging work tasks:
- Both in- & extrinsic motivation
- Confusion on theory choice
Type of people:
- Consider people & culture to attract
- Competitive people: Performance based salaries
- Cooperating people: Collective bonuses
- Sometimes financial incentives needed industry standard or competiton
Beliefs:
- Based on different beliefs
(!) Describe the agency theory in general & its critiques
General:
- Directive control mechanisms
- Rooted in economics
- Ref. Theory X
- Since separation of owners & managers
- Popular since simple & clear logic
- Humans rational
- Often influence systems
- Reduced by incentive system
- Contracts & incentives for goal-congruence
- Asymmetric info
- Ref. Result control
- Tight control
Suggestions:
- Reward superior performance
- Punish bad performance
- Let agent own stocks
_____________
Critiques against agency theory:
- Wrong basic assumptions about human rationality
- Wrong basic assumptions about act in self-interest
- No promotion of ethical behavior
- Don’t consider people may act on moral standpoints
- Incentives tend to increase moral hazard
- Modern approaches include moral costs
(!) Describe the principal-agent theory
General:
- Ref. Agency theory
- Info-asymmetry: Effort & contribution not observable
- Different objectives & risk-preference
- Moral hazard: Motivation to misrepresent private info
- Private info: Agent know more about task
- Tradeoff: Incentive vs. Risk
Principal:
- Seek agent act in best interest
- Seek return on investment
- Risk-neutral: Poss. to diversify by owning share in other firms
- Delegate DM to agent
- Imperfect signal: Performance = effort + noise
- Design contracts with incentive to agent
- Eg. Shareholders, owners & CEO
Agent:
- The manager
- Risk-averse: Marginal utility of wealth
- Work averse: Leisure > Effort
- Withhold effort: Shirking
- Seek ST bonus
- Opportunistic
- Needs to be controlled
- Not to be trusted
- Act under contract
- Maximize personal utility = Wage - cost of effort
- Max certainty equivalent = Wage - Effort - Risk
- Seek financial & non-financial compensation: Eg. Reward & flexibility
- Self-interest
- Motivated by rewards
- Monitored & controlled by contract
- Performs services
- No moral burden
- Eg. CEO, managers & subordinates
Describe different suggestions by the agency theory
General:
- Fra tekst
Monitoring & incentives:
General:
- Handle different obj. & info-asymmetry
- Monitoring & incentives not mutually exclusive
- Agency costs: Cons. of moral hazard
- Never complete goal-congruence: Risk preference, info-asymmetry & monitoring cost
Monitoring:
- If task well defined
- If info or signal accurate
- If poss. to design system monitoring agent action
- E.g. Financial statement
Incentive contracting:
- If task not well defined
- If info or signal not accurate
- Try limit different risk preferences
- Performance measures must be goal-congruent
- Performance measure must closely relate to effort
- Less motivation if only basic salary
_____________
CEO compensation & stock ownership plans:
General:
- Preferred to contract if no other incentives
- Add more risk to the already risk-averse agent
- Less agency cost than basic salary
- Contract must increase expected pay to compensate
Negative consequences:
- Risk no high-risk projects since already risky
- Lack controllability: Agent dont control stock price
- Expect higher salary to compensate for risk
_____________
RC managers & accounting-based incentives
General:
- Bonus depend on RC profit
- Less agency cost than basic salary
Negative consequences:
- Agent may inflate profit w. acc. manipulation
- Lack controllability: Competitor strategy & entrants
(!) Describe the self-determination theory in general & the critiques to it
General:
- Rooted in psychology
- Ref. Theory Y
- Less popular than Agency theory
- More complex & hard to understand
- Humans w. bounded rationality
- Both ex- & intrinsic motivation & relation
- Analyze drivers of intrinsic motivation
- Introduce crowding out effects
Critique:
- Not align w. experience: Positive outcomes more obvious
- Findings not so generalizable
(!) Describe crowding in & out
Crowding-out:
- When already strong internal motivation
- If manipulative or controlling external motivation
- Less total motivation if adding extrinsic motivation
- No crowding out if unexpected or no link to behavior
- Less likely if collective reward
- E.g. Manager less motivated to perform if bonus
Reasons:
Impaired self-determination:
- Limit freedom & autonomy
Impaired self-esteem:
- Bonus seen as distrust
- Imply own involvement & motivation is not enough
______________
Crowding in:
- When external motivation seen as supportive
- More total motivation if extrinsic motivation added
- E.g. Manager walks around
