Week 6 | Structuring reward system and incentives

Question 1

Are incentives and reward the same thing?

Answer 1

Incentive is something that motivates someone to do something

Reward is something given to someone to recognise them for their achievement

Question 2

How can organisation incentives influence behaviour?

Answer 2

Organisation incentives can influence behaviour by giving employees motivation to reach a goal. However, if the employees cannot reach that goal they often might manipulate performance data to reach that incentive.

Question 3

What is relative performance (how does it work)

Answer 3

Relative system = competitive pay systems
For example:
You can only do exam if you achieve 90% on test

Question 4

Describe how firms go wrong with incentives

Answer 4

1. Choose poor performance measures
   - Map to firm value
   - Manipulation
2. Ignore multitasking
   E.g., Cost > Quality
3. Internal competition > collaboration
   - sabotage? Collusion?
4. Promote excessive risk taking
   - playing with house’s money
   - shielded from long-term outcomes
5. Too high stakes

Question 5

How do firms determine performance related pay?

Answer 5

Firms commonly use a combination of fixed and performance-based pay:

1. Fixed pay acts as a (low cost) shield against uncontrollable risk
2. Performance component is increasing in seniority (broader decision rights, more responsibility)
3. Some jobs only pay a fixed salary - and people still exert effort

Question 6

What is a real life example of how firms base performance pay

Answer 6

• explain weighting between managers or teams
• bonus pool - how this works

Question 7

What are some considerations that need to be included when including incentives in reward systems?

Answer 7

1. Who the incentives applies to (senior execs, divisional and unit managers etc)
2. Whether performance is measured at divisional, individual and corporate level or some combination.
   What weighting is applied if combination is used?
3. Whether distinction between short and long term incentives will be made and if so what proportion of total reward should relate to short vs long term performance
4. Can we establish and articulate pay performance link
5. Whether to use concepts of relative performance eval i.e., performance relative to other division, companies or employees etc
6. what metrics will be used?
7. what targets will be set