Human Resources →
- 30 Aug 2012
- Working Paper Summaries
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. Key concepts include: High-powered incentives that penalize the origination of non-performing loans while rewarding profitable lending decisions cause loan officers to exert greater screening effort, approve fewer loans, and increase the profits per originated loan. In line with predictions, these effects are weakened when deferred compensation is introduced. More surprisingly, they find that incentives actually have the power to distort loan officers' perceptions of how a loan will perform. More permissive incentive schemes lead loan officers to rate loans as significantly less risky than the same loans evaluated under pay-for-performance. Closed for comment; 0 Comments.
- 27 Aug 2012
- Research & Ideas
Employee-Suggestion Programs That Work
The key to operating a successful employee-suggestion program is to stop spending so much time on big-bang projects and focus on solving "low-hanging-fruit" problems. Research by Anita L. Tucker and Sara J. Singer. Closed for comment; 0 Comments.
- 13 Aug 2012
- Research & Ideas
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; 0 Comments.
- 23 Jul 2012
- Research & Ideas
The Power of Conversational Leadership
Communication is always a challenge, especially in multinational corporations. Boris Groysberg and Michael Slind discuss why it makes sense to adopt the principles of face-to-face conversation in organizational communication. Closed for comment; 0 Comments.
- 18 Jun 2012
- Research & Ideas
Better by the Bunch: Evaluating Job Candidates in Groups
The key to avoiding gender stereotyping in the hiring process lies in evaluating job candidates as a group, rather than one at a time. So says new research by Iris Bohnet, Alexandra van Geen, and Max H. Bazerman. Open for comment; 0 Comments.
- 07 Feb 2012
- Working Paper Summaries
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. Key concepts include: It is important to look at positions below the CEO because it is unclear if all or even most financial misreporting is decided at the top. In addition to division managers, the importance of the CFO's role in financial reporting and the numerous recent corporate fraud cases suggest that CFOs can significantly affect accounting quality. Companies report significantly higher discretionary accruals and excess sales and have a higher incidence of future lawsuits when CFOs are paid larger bonuses. Importantly, the magnitudes of these effects are much larger for CFOs in comparison to both CEOs and division managers. Since the quality of financial reporting is difficult to assess, the researchers have used various measures of earnings manipulation in this study, including discretionary accounting accruals, end-of-year excess sales, and class action litigation. Closed for comment; 0 Comments.
- 21 Nov 2011
- Lessons from the Classroom
The New Challenge of Leading Financial Firms
Running a financial organization, never easy to begin with, has quickly become one of the most difficult leadership challenges that an executive can undertake, requiring mastery of talent management, change management, and ethics. An interview with Professor Boris Groysberg, who teaches a new HBS Executive Education program on the subject with Professor Paul M. Healy. Key concepts include: Leading a financial firm is very different from leading any other kind of institution, requiring deep skills in a multitude of areas. Financial firms make expensive bets on top talent, but often make hiring decisions without enough deliberation. Risk management, strategy for growth, and competing in emerging markets are especially critical for financial firms to get right. Open for comment; 0 Comments.
- 09 Nov 2011
- Working Paper Summaries
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. Key concepts include: While compensation committees know how much they pay in bonuses and are generally aware of performance measures used in CEO bonus plans, relatively little attention is paid to the design of the bonus plan or the unintended consequences associated with common design flaws. These recommendations for improving executive bonus plans focus on choosing the right performance measure; determining how performance thresholds, targets, or benchmarks are set; and defining the pay-performance relation and how the relation changes over time. In the absence of "clawback" provisions, boards are rewarding and therefore providing incentives for CEOs and other executives to lie and game the system. Any compensation committee and board that fails to provide for the recovery of ill-gained rewards to its CEO and executives is breaching another of its important fiduciary duties to the firm. Closed for comment; 0 Comments.
- 31 Oct 2011
- Research & Ideas
The Most Powerful Workplace Motivator
When evaluating compensation issues, economists often assume that both an employer and an employee make rational, albeit self-interested choices while working toward a goal. The problem, says Assistant Professor Ian Larkin, is that the most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others. Open for comment; 0 Comments.
- 27 Oct 2011
- Research & Ideas
Horrible Boss Workarounds
Bad bosses are generally more inept than evil, and often aren't purposefully bad, says Professor Rosabeth Moss Kanter. She discusses common bad-boss behaviors, and how good colleagues can mobilize to overcome the roadblocks. Key concepts include: Common traits of bad bosses include a failure to communicate goals effectively, if at all; a failure to realize that employees have more to offer than their job descriptions dictate, and a tendency to get caught up in the details to the detriment of the big picture. Employees can work around bad-boss roadblocks by proactively mobilizing their peers toward a common goal. Closed for comment; 0 Comments.
- 17 Oct 2011
- Research & Ideas
How ‘Hybrid’ Nonprofits Can Stay on Mission
As nonprofits add more for-profit elements to their business models, they can suffer mission drift. Associate Professor Julie Battilana says hybrid organizations can stay on target if they focus on two factors: the employees they hire and the way they socialize those employees. Key concepts include: In order to avoid mission drift, hybrid organizations need to focus on whom they hire and whether their employees are open to socialization. Because early socialization is so important, hybrid firms may be better off hiring new college graduates with no work background rather than a mix of seasoned bankers and social workers. The longer their tenure in a hybrid organization, the more likely top managers may be to hire junior people. Closed for comment; 0 Comments.
- 06 Sep 2011
- Research & Ideas
How Small Wins Unleash Creativity
In their new book, The Progress Principle: Using Small Wins to Ignite Joy, Engagement, and Creativity at Work, authors Teresa M. Amabile and Steven J. Kramer discuss how even seemingly small steps forward on a project can make huge differences in employees' emotional and intellectual well-being. Amabile talks about the main findings of the book. Plus: book excerpt. Key concepts include: Of all the factors that induce creativity, productivity, collegiality, and commitment among employees, the single most important one is a sense of making progress on meaningful work. Seemingly small signs of progress will induce huge positive effects on employees' psyches. On the other hand, seemingly small setbacks will induce huge negative effects. The catalysts that induce progress include setting clear goals; allowing autonomy; providing resources; giving enough time-but not too much; offering help with the work; learning from both problems and successes; and allowing ideas to flow. Closed for comment; 0 Comments.
- 11 Jul 2011
- Research & Ideas
Non-competes Push Talent Away
California is among several states where non-compete agreements are essentially illegal. Is it a coincidence that so many inventors flock to Silicon Valley? New research by Lee Fleming, Matt Marx, and Jasjit Singh investigates whether there is a "brain drain" of talented engineers and scientists who leave states that allow non-competes and move to states that don't. Key concepts include: The research shows that inventors are leaving states that allow non-competes and moving to states that don't. The results are most pronounced among those inventors with the most patent citations—that is, those who are most productive, collaborative, and valuable to their firms. The researchers hope that their study will induce state legislators to consider regional rules regarding non-compete agreements. Open for comment; 0 Comments.
- 25 May 2011
- HBS Case
QuikTrip’s Investment in Retail Employees Pays Off
Instead of treating low-paid staffers as commodities, a new breed of retailers such as QuikTrip assigns them more responsibility and invests in their development, says professor Zeynep Ton. The result? Happy customers and even happier employees. Key concepts include: Unusual for a retailer, QuikTrip offers its operational employees above-average wages, job security, and significant benefits. By using operational efficiencies and standardization, QuikTrip reduces complexity to create higher employee productivity and fewer errors. By investing in employees and giving them more responsibility, QuikTrip enjoys a competitive advantage in service and benefits from continuous process improvement. Closed for comment; 0 Comments.
- 23 Mar 2011
- Working Paper Summaries
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. Key concepts include: The reason to compare similarity with the level and style of US pay is because CEOs of US companies typically are among the highest paid in the world. The UK firms' interactions with US markets were measured on four variables: the relative importance of US sales to the firm, the level of prior US acquisition activity, the presence of a US exchange listing, and the US board experience of the firm's directors. All four US market interaction variables correlated with greater pay, but only US operational activities (sales and acquisitions) were associated with pay similar to US-style contracts. The increased compensation alleviates internal and external pay disparities arising from the presence of US operations and businesses, and compensates CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environments. Closed for comment; 0 Comments.
- 31 Jan 2011
- Research & Ideas
Taking the Fear out of Diversity Policies
Workplace policies regarding race, gender, and sexual orientation often are borne of studies that focus on the problem of discrimination—rather than on the benefits of a diverse workforce. HBS professors Lakshmi Ramarajan and David Thomas argue that focusing on the benefits of a diverse organization will lead to workplace policies that embrace diversity, instead of grudgingly accepting it or dancing around it. Closed for comment; 0 Comments.
- 28 Dec 2010
- Working Paper Summaries
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. Key concepts include: Three psychological factors most prominently influence compensation strategy: social comparison processes, overconfidence, and loss aversion on the part of employees. Social comparison processes imply that employees care not only about their own pay but also about the pay of relevant others. If employees are overconfident about their abilities, which is often the case, they may become unmotivated or even engage in sabotage if they perceive unfair pay gaps between their and others' pay. Loss-averse employees are more motivated by potential failure to meet sometimes arbitrary levels of desired pay than they are by potential gains. This phenomenon implies that employees may work less hard than firms desire even if paid for performance. In response to these psychological factors, firms rely on flat salaries or "scale-based" systems where the pay-for-performance relationship is much less prominent than predicted by agency theory. Closed for comment; 0 Comments.
- 13 Dec 2010
- Research & Ideas
Managing the Support Staff Identity Crisis
Employees not connected directly to profit and loss can suffer from a collective "I-am-not-strategic" identity crisis. Professor Ranjay Gulati suggests that business managers allow so-called support function employees to become catalysts for change. Open for comment; 0 Comments.
- 19 Nov 2010
- Working Paper Summaries
Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans
Companies generally pay their sales staff with some combination of salary, commissions, and bonuses for meeting quotas-with sales force costs averaging about 10 percent of sales revenue in the United States. This paper aims to gain insight into the most effective way to design a compensation plan, concentrating on whether bonuses boost sales productivity and whether they should be awarded quarterly or annually. Research, focusing on the sales force of a large office supply company, was conducted by Harvard Business School professor Thomas Steenburgh and Doug J. Chung and K. Sudhir of the Yale School of Management. Key concepts include: Bonuses do increase productivity. Quarterly bonuses increase sales force productivity more than annual bonuses. Sales people tend to give up when far away from reaching a quota, but they don't slow down once a quota is reached-especially if a firm offers commissions for overachievement. Closed for comment; 0 Comments.
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; 0 Comments.