First Look

August 20, 2013

Quarterly Bonuses Spur Sales Productivity

In Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans, Doug J. Chung, Thomas Steenburgh, and K. Sudhir suggest that quarterly bonuses may be the most effective method for keeping salespeople on track to meet their annual quotas. Compensation plans often consist of several components—salary, commissions, bonuses—but ultimately breaking a large, long-term goal (annual quotas) into frequent, smaller goals (quarterly quotas) garners more effort from employees and greater profits for the business. Adding overachievement compensation to these plans further reduces the chance that employees will slack off as they get closer to achieving their quotas.

Tailoring Tournaments, Optimizing Innovation

Tournaments—in a more white-collar, less Arthurian sense—are a great way to encourage production and innovation, but according to Performance Responses to Competition Across Skill-Levels in Rank Order Tournaments: Field Evidence and Implications for Tournament Design, by Kevin J. Boudreau, Karim R. Lakhani, Constance E. Helfat, and Michael Menietti, they work best if kept to a smaller scale. Through their study of 2,796 contestants in 774 software algorithm design contests, the researchers found that only the most highly skilled contestants were energized by increased competition; the rest viewed long odds as a waste of time.

Waves In Bulk Carrier Profits: Not As Rogue As They Seem

As of 2011, the market value of "bulk carriers" (large cargo ships used to transport dry goods) was roughly $180 billion, yet the rate of return for ship owners and investors is notoriously fickle. In Waves in Ship Prices and Investment, Robin Greenwood and Samuel Hanson explain that earnings, investments, and returns for bulk carriers are predictably inconsistent. Through their analysis of secondhand ship prices and ship lease rates over 35 years, the researchers found that returns on bulk carriers are closely related to industrywide investment patterns, and that high ship earnings are associated with high ship prices, but predict low returns on capital in the near future.

— Anna Secino


  • August 2013
  • Marketing Science

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

By: Chung, Doug J., Thomas Steenburgh, and K. Sudhir

Abstract—We estimate a dynamic structural model of sales force response to a bonus based compensation plan. Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity. We find evidence that: (1) bonuses enhance productivity across all segments; (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas; and (3) quarterly bonuses help improve performance of the weak performers by serving as pacers to keep the sales force on track to achieve their annual sales quotas. The paper also introduces two main methodological innovations to the marketing literature: First, we implement empirically the method proposed by Arcidiacono and Miller (2011) to accommodate unobserved latent class heterogeneity using a computationally light two-step estimator. Second, we illustrate how discount factors can be estimated in a dynamic structural model using field data through a combination of (1) an exclusion restriction separating current and future payoff and (2) a finite horizon model in which there is no forward looking behavior in the last period.

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  • August 2013
  • MIT Press

Beyond Platinum: Making the Case for Titanium Buildings

By: Herron, J., Amy C. Edmondson, and Robert G. Eccles, Jr.

Abstract—Buildings are the nation's greatest energy consumers. Forty percent of all our energy is used for heating, cooling, lighting, and powering machines and devices in buildings. And despite decades of investment in green construction technologies, residential and commercial buildings remain stubbornly energy inefficient. This book looks beyond the technological and material aspects of green construction to examine the cultural, social, and organizational shift that sustainable building requires, examining the fundamental challenge to centuries-long traditions in design and construction that green building represents. The contributors consider the changes associated with green building through a sociological and organizational lens. They discuss shifts in professional expertise created by new social concerns about green building, including evolving boundaries of professional jurisdictions; changing industry strategies and structures, including the roles of ownership, supply firms, and market niches; new operational, organizational, and cultural arrangements, including the mainstreaming of environmental concerns; narratives and frames that influence the perception of green building; and future directions for the theory and practice of sustainable construction. The essays offer uniquely multidisciplinary insights into the transformative potential of green building and the obstacles that must be overcome to make it the norm.

  • August 2013
  • Management Science

Pareto Efficiency in Robust Optimization

By: Iancu, Dan, and Nikolaos Trichakis

Abstract—This paper formalizes and adapts the well-known concept of Pareto efficiency in the context of the popular robust optimization (RO) methodology for linear optimization problems. We argue that the classical RO paradigm need not produce solutions that possess the associated property of Pareto optimality and illustrate via examples how this could lead to inefficiencies and sub-optimal performance in practice. We provide a basic theoretical characterization of Pareto robustly optimal (PRO) solutions, extend the RO framework by proposing practical methods that verify Pareto optimality, and generate solutions that are PRO. Critically important, our methodology involves solving optimization problems that are of the same complexity as the underlying robust problems, hence the potential improvements from our framework come at essentially limited extra computational cost. We perform numerical experiments drawn from three different application areas (portfolio optimization, inventory management, and project management), which demonstrate that PRO solutions have a significant potential upside compared with solutions obtained via classical RO methods.

Working Papers

Abstract—Tournaments are widely used in the economy to organize production and innovation. We study individual contestant-level data from 2,796 contestants in 774 software algorithm design contests with random assignment. Precisely conforming to theory predictions, the performance response to added contestants varies non-monotonically across contestants of different abilities, most respond negatively to competition, and highest-skilled contestants respond positively. In counterfactual simulations, we interpret a number of tournament design policies (number of competitors, prize allocation and structure, divisionalization, open entry) as a means of reconciling non-monotonic incentive responses to competition, effectively manipulating the number and skills distribution of contestants facing one another.

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Waves in Ship Prices and Investment

By: Greenwood, Robin, and Samuel Hanson

Abstract—We study the returns to owning dry bulk cargo ships. Ship earnings exhibit a high degree of mean reversion, driven by industry participants' competitive investment responses to shifts in demand. Ship prices are far too volatile given the mean reversion in earnings. We show that high current ship earnings are associated with high secondhand ship prices and heightened industry investment in fleet capacity but forecast low future returns. We propose and estimate a behavioral model that can account for the evidence. In our model, firms over-extrapolate exogenous demand shocks and partially neglect the endogenous investment responses of their competitors. Formal estimation of the model confirms that both types of expectational errors are needed to account for our findings.

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Cases & Course Materials

  • Harvard Business School Case 513-703

Tyra Banks: Personal Branding

No abstract available.

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  • Harvard Business School Case 213-142

Buffett's Bid for Media General's Newspapers

On May 12, 2012, BH Media Group, a subsidiary of Warren Buffett's Berkshire Hathaway, announced an offer to buy Media General's (MEG) newspaper division for $142 million in cash and provide debt financing to the struggling firm. Reactions from investors and industry analysts varied greatly: one called it a "great surprise," another wondered if Buffett was investing with his heart rather than his head (he was a paperboy as a child), and a third said it was a "feat of financial engineering." Virtually all of them wondered what the "Oracle of Omaha" saw in the declining U.S. newspaper industry that others did not. The question facing Media General's CEO Marshall Morton was whether to accept the offer or not. As the head of a highly leveraged company whose revenues had fallen 31% in the past four years, whose stock price was down more than 90% off its high, and whose falling profitability left it perilously close to violating key debt covenants, he had to move quickly.

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  • Harvard Business School Note 413-122

Crafting a Career Narrative for New Professionals

This note suggests an approach for developing an effective "career narrative"―a tool for packaging and sharing a professional's past achievements, long-term goals, and forward-looking needs through a compelling story. It focuses mostly on the ways junior professionals can leverage their career story, but also considers what role more senior mentors can―and should―play in cultivating and sharing juniors' career narratives.

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  • Harvard Business School Case 313-111

Venture Philanthropy: Its Evolution and Its Future

This note explores the current state of venture philanthropy in the U.S. and its future. Based on interviews with 28 practitioners in the field of philanthropy and a review of the literature since the publication of the article introducing the concept of venture philanthropy (Virtuous Capital: What Foundations Can Learn from Venture Capitalists) sixteen years ago, the note discusses the significant impact venture philanthropy has had on the nonprofit sector despite its small size relative to total philanthropic giving. Venture philanthropists make large, multi-year, unrestricted grants coupled with significant non-financial capacity building support and rigorous performance measurement with the goal of increasing a nonprofit's ability to serve more people more effectively. This note discusses the full set of venture philanthropy practices and their impact on grantees. It also explores what could be done to increase this type of results-driven philanthropy in the U.S. and poses questions regarding the future trajectory of the field, including venture philanthropy's role in driving societal-level scaling of impact. This note is aimed at both the philanthropic sector overall as well as venture philanthropy practitioners.

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  • Harvard Business School Case 613-100

Open Innovation at Siemens

The case describes Siemens, a worldwide innovator in the Energy, Healthcare, Industry, and Infrastructure & Cities sectors, and its efforts to develop and commercialize new R&D through open innovation, including internal and external crowdsourcing contests. Emphasis is placed on exploring actual open innovation initiatives within Siemens and their outcomes. These include creating internal social- and knowledge-sharing networks and utilizing third-party platforms to host internal and external contests. Industries discussed include energy, green technology, infrastructure and cities, and sustainability. In addition, the importance of fostering a collaborative online environment and protecting intellectual property is explored.

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  • Harvard Business School Case 413-126

"Hess Corporation

On January 29, 2013, Elliott Management, a hedge fund run by Paul E. Singer, which owned 4.5% of Hess Corporation stock, put forward a slate of five independent directors it wanted elected to improve the company's performance. Elliott argued that Hess lacked focus and was distracted by ventures outside its core exploration and production business. Further it argued that John Hess, CEO and son of the founder, was more interested in "maintaining a family dynasty than instilling accountability and addressing chronic underperformance."

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  • Harvard Business School Case 403-127

Procter & Gamble

On July 12, 2012, Bill Ackman's Pershing Square Capital Management announced publicly that it had purchased about $2 billion of Procter & Gamble (P&G) stock. Shares in the company closed up 3.75% the day the disclosure was made public. Ackman told the New York Times that Pershing would be a major P&G shareholder. "We think it's an underrated stock," he said. "We think there is a lot of great opportunity there." During the next several months there was little or no public discussion of the matter although people familiar with the situation reported that Ackman held conversations with P&G directors individually. Then, on April 24, 2013, P&G announced that its 3rd quarter earnings had risen 6%. However its 4th quarter forecast fell short of Wall Street's expectations. Shares fell 5% based on this outlook. P&G results were lagging its peers by 4% in 2012 and 2% in the first quarter of 2013. Then, abruptly in late May, CEO Robert A. McDonald, who was 59, resigned. The board selected A.J. Lafley (65), who had been McDonald's predecessor to return to lead the company. There was speculation about how long Lafley would stay and in what direction he would take the company. On June 6th, P&G announced that Lafley had appointed four senior executives to lead the company's major businesses, reporting directly to him.

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  • Harvard Business School Exercise 713-804

Competition Simulator Exercise

In the "Competition Simulator Exercise," students explore through trial and error some important economic foundations of competitive strategy and managerial economics. In particular, the simulator let students explore horizontal differentiation with and without price setting, strategic complements and substitutes and their implications for commitment and for first-mover advantage, the effect of the number of competitors on the competitiveness of a market, capacity limitations and judo economics, natural monopoly and the effect of market size, technology choice as entry deterrence, endogenous economies of scale, and capacity limitation in commodity markets.

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