Organizations: Compensation

35 Results


Your CEO’s Salary May Turn Off Customers

Customers care about the way companies distribute wages -- and they prefer to buy products from retailers with low CEO-to-worker pay ratios, according to new research by Bhavya Mohan, Michael Norton, and Rohit Deshpandé. Open for comment; 0 Comments posted.

Money and Quotas Motivate the Sales Force Best

Bonus programs are effective for motivating sales people, but also costly for companies to maintain. Doug Chung and Das Narayandas study several compensation schemes to see which work best. Open for comment; 11 Comments posted.

Paying Up for Fair Pay: Consumers Prefer Firms with Lower CEO-to-Worker Pay Ratios

The pay ratio of CEOs to average workers has long been a question of interest to both employees and investors. It also matters to consumers, as shown by new research conducted by the authors of this paper. A firm with a high (1000 to 1) ratio needs to offer a 50 percent discount in order to garner as favorable consumer impressions as a firm with a low (5 to 1) pay ratio. Even if pay ratio disclosure does not become legally mandated, these results suggest that firms with low pay ratios relative to competitors may wish to begin to disclose this information voluntarily. Read More

Are the Most Talented Employees the Highest Paid? Yes—If They’re Bankers

A recent study by Claire Célérier and Boris Vallée finds that the French finance industry compensates employees largely according to how talented they are. Other high-paying industries? Not so much. Closed for comment; 17 Comments posted.

From Crowds to Collaborators: Initiating Effort and Catalyzing Interactions Among Online Creative Workers

Online "organizations" are becoming a major engine for knowledge development in a variety of domains such as Wikipedia and open source software development. Many online platforms involve collaboration and coordination among members to reach common goals. In this sense, they are collaborative communities. This paper asks: What factors most inspire online teams to begin to collaborate and to do so creatively and effectively? The authors analyze a data set of 260 individuals randomly assigned to 52 teams tasked with developing working solutions to a complex innovation problem over 10 days, with varying cash incentives. Findings showed that although cash incentives stimulated a significant boost of effort per se, cash incentives did not transform the nature of the work process or affect the level of collaboration. In addition, at a basic yet striking level, the likelihood that an individual chooses to participate depended on whether teammates were themselves active. Moreover, communications among teammates led to more communications, and communications among teammates also stimulated greater continuous levels of effort. Overall, the study sheds light on how perspectives on incentives, predominant in economics, and perspectives on social processes and interactions, predominant in research on organizational behavior and teams, can be better understood. Read More

Do Employees Work Harder for Higher Pay?

In a recent field study, Duncan Gilchrist, Michael Luca, and Deepak Malhotra set out to answer a basic question: "Do employees work harder when they are paid more?" Closed for comment; 17 Comments posted.

When $3+$1 > $4: The Effect of Gift Salience on Employee Effort in an Online Labor Market

Do employees work harder when they are paid more? This study shows that paying above-market wages, per se, does not have an effect on effort. The authors offered an experiment in a field setting that allowed them to test for the conditions under which higher wages elicit higher effort. They hired three groups of workers for a data entry task on the online labor market, telling them all that this was a one-time job. Group one ("3") was hired at $3 per hour. Group two ("3+1") was also hired at $3 per hour, but before starting work, people in group two were told that there was unexpectedly extra money in the budget and they would instead be paid $4 per hour. Group three ("4") was hired directly at $4 per hour, so that the "extra" money would not signal a salient "gift" from the employer. Our findings show that higher wages in which the gift was salient (3+1) led to higher and more persistent effort. However, higher wages by themselves (4) had no effect on effort compared to the lower wage (3) condition. Moreover, higher effort in the 3+1 group was strongest for employees with the most experience on oDesk, and those who had worked most recently on oDesk-exactly the kind of workers for whom our $1 additional payment was likely to be most salient (e.g., because it is not common in this labor market). Read More

Prosocial Bonuses Increase Employee Satisfaction and Team Performance

Designing effective incentive schemes is a central challenge for a wide range of organizations, from multinational corporations to academic departments. In pursuit of identifying the most effective strategies, organizations have devised an impressive variety of such bonuses, from fixed salaries to pay-per-performance, from commissions to end-of-year bonuses. In this paper, the authors suggest that the wide variety in such schemes masks a shared assumption: That the best way to motivate employees is to reward them with money that they then spend on themselves. The authors—Lalin Anik, Lara B. Aknin, Michael I. Norton, Elizabeth W. Dunn, and Jordi Quoidbach—propose an alternative means of incentivizing employees—what they term "prosocial bonuses"—in which organizations provide employees with bonuses used to engage in positive actions towards charities and coworkers, from donating money to remote countries to taking a coworker to lunch. The authors examine the impact of these prosocial bonuses on employee satisfaction and team performance, by reporting results from field experiments in settings ranging from bank employees in Australia to pharmaceutical sales representatives in Belgium to dodgeball teams in Canada. Overall, results suggest that a minor adjustment to employee bonuses—shifting the focus from the self to others—can produce measurable benefits for employees and organizations. Read More

How to Demotivate Your Best Employees

Many companies hand out awards such as "employee of the month," but do they work to motivate performance? Not really, says professor Ian Larkin. In fact, they may turn off your best employees altogether. Closed for comment; 62 Comments posted.

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans

Personal selling is a primary marketing mix tool for most B2B firms to generate sales. Yet there is little research on how the compensation plan motivates a sales force and affects performance. This paper develops and estimates a dynamic structural model of sales force response to a compensation plan with various components: salary, commissions, lump-sum bonus for achieving quotas, and different commission rates beyond achieving quotas. Overall, the analysis helps assess the impact of (1) different components of compensation and (2) the differential importance of periodic bonuses on performance on different segments of sales people. Read More

Should Pay-for-Performance Compensation be Replaced?

Summing up: In spite of its naysayers, pay for performance compensation still makes sense to most of us, according to those responding to Jim Heskett's column on the subject. But there is a difference of opinion of about when and how it works and how it should be structured. Closed for comment; 24 Comments posted.

No Margin, No Mission? A Field Experiment on Incentives for Pro-Social Tasks

Organizations from large corporations to NGOs use a range of nonfinancial performance rewards to motivate their employees, and these rewards are highly valued. While theory has suggested mechanisms through which nonfinancial incentives can elicit employee effort, evidence on the mechanisms, and on their effectiveness relative to financial incentives, remains scarce. This paper helps to fill this gap by providing evidence from a collaboration with a public health organization based in Lusaka, Zambia, that recruits and trains hairdressers and barbers to sell condoms in their shops. This setting is representative of many health delivery programs in developing countries where embedded community agents are called upon to deliver services and products, but finding an effective way to motivate them remains a significant challenge. Findings show the effectiveness of financial and nonfinancial rewards for increasing sales of condoms. Agents who are offered nonfinancial rewards ("stars" in this setting) exert more effort than either those offered financial margins or those offered volunteer contracts. Read More

Pay Harmony: Peer Comparison and Executive Compensation

This paper demonstrates how horizontal wage comparisons within firms and concerns for "pay harmony" affect firm policies in setting pay for executives. Using a rich dataset of pay practices for the senior-most executives within divisions, Gartenberg and Wulf ask whether horizontal comparisons between managers in similar jobs affect pay. The authors also evaluate evidence in support of a tradeoff between pay harmony and performance pay. Findings are consistent with the presence of peer effects in influencing pay policies for executives inside firms. These results contribute to the ongoing policy debate on the consequences of transparency and mandatory information disclosure and potential ratchet-effects in executive pay. For practitioners involved in designing the structure of executive compensation and pay disclosure policies for firms -- including compensation committee directors, senior human resource executives, and compensation consultants -- it is important to recognize the tradeoff between the incentive effects of performance-based pay and costs of peer comparison that arise from unequal pay when designing executive wage contracts. The research also raises questions on the costs of pay disclosure and on labor markets more generally. Read More

Pay Workers More So They Steal Less

New research by professor Tatiana Sandino confirms what many top companies have long believed: Good wages and benefits are linked to a company's low turnover and to happier, more honest workers. Closed for comment; 15 Comments posted.

Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers

Recent research presents convincing evidence that incentives rewarding loan origination may cause severe agency problems and increase credit risk, either by inducing lax screening standards or by tempting loan officers to game approval cutoffs even when such cutoffs are based on hard information. Yet to date there has been no evidence on whether performance-based compensation can remedy these problems. In this paper, the authors analyze the underwriting process of small-business loans in an emerging market, using a series of experiments with experienced loan officers from commercial banks. Comparing three commonly implemented classes of incentive schemes, they find a strong and economically significant impact of monetary incentives on screening effort, risk-assessment, and the profitability of originated loans. The experiments in this paper represent the first step of an ambitious agenda to fully understand the loan underwriting process. Read More

When Good Incentives Lead to Bad Decisions

New research by Associate Professor Shawn A. Cole, Martin Kanz, and Leora Klapper explores how various compensation incentives affect lending decisions among bank loan officers. They find that incentives have the power to change not only how we make decisions, but how we perceive reality. Closed for comment; 10 Comments posted.

Earnings Management from the Bottom Up: An Analysis of Managerial Incentives Below the CEO

Many studies as well as anecdotes document a link between the structure of chief executive officer (CEO) compensation and various measures of earnings manipulation. In this paper, HBS professors Oberholzer-Gee and Wulf analyze all components of compensation packages for CEOs and for managers at lower levels in a large sample of firms over more than 10 years, between 1986 and 1999. Results suggest that the effects of incentive pay on earnings management vary considerably by both type of incentive pay and position. Overall, it appears that the primary focus of compensation committees on equity incentives for CEOs overlooks a critical component in curbing earnings manipulation. If one wanted to weaken incentive pay to get more truthful reporting, diluting bonuses-particularly that of the chief financial officer (CFO)-would be the place to start. This may be the first study to analyze the relationship between CEO, division manager, and CFO compensation and earnings management. Read More

CEO Bonus Plans: And How to Fix Them

Discussions about incentives for CEOs in the United States begin, and often end, with equity-based compensation. After all, stock options and (more recently) grants of restricted stock have comprised the bulk of CEO pay since the mid-1990s, and the changes in CEO wealth due to changes in company stock prices dwarf wealth changes from any other source. Too often overlooked in the discussion, however, is the role of annual and multiyear bonus plans—based on accounting or other non-equity-based performance measures—in rewarding and directing the activities of CEOs and other executives. In this paper, Kevin J. Murphy and Michael C. Jensen describe many of the problems associated with traditional executive bonus plans, and offer suggestions for how these plans can be vastly improved. The paper includes recommendations and guidelines for improving both the governance and design of executive bonus plans and, more broadly, executive compensation policies, processes, and practices. The paper is a draft of a chapter in Jensen, Murphy, and Wruck (2012), CEO Pay and What to Do About it: Restoring Integrity to both Executive Compensation and Capital-Market Relations, forthcoming from Harvard Business School Press. Read More

Do US Market Interactions Affect CEO Pay? Evidence from UK Companies

CEOs of UK firms receive higher total compensation if their companies have interactions with US product, capital, and labor markets. Moreover, the compensation package is often adopted from American-style arrangements, such as the use of incentive-based pay. Researchers Joseph J. Gerakos (University of Chicago), Joseph D. Piotroski (Stanford), and Suraj Srinivasan (Harvard Business School) analyzed data on the compensation practices of 416 publicly traded UK firms over the period 2002 to 2007. Read More

The Psychological Costs of Pay-for-Performance: Implications for Strategic Compensation

In studying pay-for-performance-based compensation systems, economic scholars often adhere to agency theory, which hypothesizes that firms should prominently use performance-based compensation—it alleviates the problems of employee "shirking" and ensures highly skilled employees' desire to work for the company. However, firms use performance-based pay far less frequently than agency theory predicts. This paper posits that the psychological costs of pay-for-performance systems often dominate their benefits to firms, and proposes an integrated theory of strategic compensation that takes into account the economic and psychological benefits and costs of pay-for-performance. Research was conducted by Harvard Business School professors Francesca Gino and Ian Larkin, and Lamar Pierce of Washington University. Read More

Why Do Firms Use Non-Linear Incentive Schemes? Experimental Evidence on Sorting and Overconfidence

The use of "non-linear" performance-based incentive contracts is very common in many business environments. The most well-known example is salesperson compensation, though many other types of performance-based pay, including stock options, bonus systems based on defined metrics, and pay based on subjective performance, often exhibit non-linear characteristics. Research has demonstrated that non-linear incentives are highly distortionary because employees manipulate their work in order to maximize their pay. While some scholars have recommended that companies stop using non-linear incentives, little research has been done to investigate the possible benefits of non-linear schemes. In this paper, HBS professor Ian Larkin and Ross School of Business professor Stephen Leider (HBS PhD '09) explore the role that the behavioral bias of overconfidence may play in explaining the prevalence of non-linear incentive schemes. They conclude that the linearity or non-linearity of an incentive system could play an important role in sorting employees according to their level of confidence; in addition, there may be three possible benefits to having overconfident employees. Read More

Matching Firms, Managers, and Incentives

Do different kinds of firm ownership drive the adoption of different managerial practices? HBS professor Raffaella Sadun and coauthors focus on the difference between the two most common ownership modes, family firms and firms that are widely held, namely that have no dominant owner. They find that the greater weight attached by family firms to benefits from control induces a conflict of interest between family-firm owners and high-ability, risk-tolerant managers. Read More

Shareholders Need a Say on Pay

"Say on pay" legislation now under debate Washington D.C. can be a useful tool for shareholders to strengthen the link between CEO pay and performance when it comes to golden parachutes, says Harvard Business School professor Fabrizio Ferri. Here's a look at how the collective involvement of multiple stakeholders could shape the future of executive compensation. Read More

Excessive Executive Pay: What’s the Solution?

Now that the worst fears about economic meltdown are receding, what should be done about lingering issues such as over-the-top executive compensation? Does government have a role? Is it time we rethink corporate governance? HBS faculty weigh in. From the HBS Alumni Bulletin. Read More

Are Retention Bonuses Worth the Investment?

There is a time and place for retention bonuses but they should be used sparingly, wrote many respondents to this month's column, says Professor Jim Heskett. Others challenged the value of bonuses, and suggested compelling alternatives. (Online forum now closed; next forum begins October 2.) Closed for comment; 42 Comments posted.

CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts

(Previous title: "CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks.") This paper investigates whether the failure to meet quarterly earnings benchmarks such as the analysts' consensus forecast matters to CEO and CFO careers, after controlling for both operating and stock return performance and the magnitude of the earnings "surprise" revealed at the earnings announcement. In particular, it evaluates a comprehensive set of career consequences such as the impact on compensation, in the form of bonus and equity grants, and the dismissal of both the CEO and the CFO, conditioned on the failure to meet quarterly earnings benchmarks. Read More

How Should Pay Be Linked to Performance?

Online forum now CLOSED. Professor Jim Heskett sums up 98 reader responses from around the world. As he concludes, is there another subject as important as this one about which we assume so much and know so little? Closed for comment; 98 Comments posted.

Fixing Executive Options: The Veil of Ignorance

Who says you can't rewrite history? Dozens of companies have been caught in the practice of backdating options for top executives. But this is only part of the problem with C-level compensation packages, which often motivate top executives to act in their own best interests rather than those of shareholders. Professors Mihir Desai and Joshua Margolis turn to philosopher John Rawls for a solution: Reward the execs, but don't give them the details. Read More

Rising CEO Pay: What Directors Should Do

Compensation committees are under pressure to keep CEO pay high, even as shareholders and the media agitate for moderation. The solution? Boards of directors need better competitive information and an ear to what shareholders are saying, says Jay Lorsch. Read More

The Compensation Game

Do CEOs deserve "star" compensation? The idea that CEO pay is driven by the invisible hand of market forces is a myth from which chief executives have long benefited, say Harvard professors Lucian Bebchuk and Rakesh Khurana. Read More

Is There an “Efficient Market” in CEO Compensation?

There appears to be little or no relationship between the size of American CEO compensation awards and actual corporate performance. Will change come from the increased level of competition among global companies with significantly different approaches to the compensation of senior managers? Closed for comment; 12 Comments posted.

Improving Corporate Governance with the Balanced Scorecard

The authors review the key roles of corporate boards and recommend a Balanced Scorecard approach to help boards work smarter, not harder. Kaplan and Nagel recommend a three-part Balanced Scorecard program: Part 1: An Enterprise Scorecard that includes enterprise-wide strategic objectives, performance measures, targets, and initiatives; Part 2: A Board Scorecard that defines and clarifies the strategic contributions and requirements of the board, and provides a tool to manage the board's performance; Part 3: Executive Scorecards, which define strategic contributions of top management and are used to select, evaluate, and reward senior executives. Read More

Why Corporate Budgeting Needs To Be Fixed

Not to mince words, but corporate budgeting is a joke, argues HBS professor emeritus Michael C. Jensen in this Harvard Business Review excerpt. The problem isn't with the budget process—it's when budget targets are used to determine compensation. Read More