do incentives work? busting myths and bringing evidence to ......shaw & gupta (2015): financial...
TRANSCRIPT
5/15/2018
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Do Incentives Work? Busting Myths and Bringing Evidence to Pay for Performance
Fermin Diez, PhDSingapore Management University
Fermin Diez, PhD
QUESTIONWhich Pay for Performance Scheme Yields the Best Business Results for Your Company?
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Answer 1: Annual Bonus
Answer 3: High Base Pay
Answer 2: Long-Term Incentives
Answer 4: Team Incentives
Answer 5: Our Pay Programs Don’t Drive Performance Very Well…
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Fermin Diez, PhD
QUESTIONWhat Is the Most Important Criteria You Use in Setting Pay for Performance Programs?
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Answer 1: Market Competitiveness
Answer 3: Retention of Key Staff
Answer 2: Defensible to Shareholders and Oher External Stakeholders
Answer 4: Alignment with Market/Industry Practice
Answer 5: Driving Business Results
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Fermin Diez, PhD
LTI Pay Mix
IndividualVs. Team
Pay Models
CONTEXT
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Fermin Diez, PhD
RESEARCH BASED VS. BEST PRACTICES
FINDINGS
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Fermin Diez, PhD
Pay Mix: Equal, Balanced, Short-term, Long-term
Pay Models: Membership, Bonding, Tournament
Team: Shared, Not shared, 50/50, 75/25, 25/75
LTI: Stock options, Stock grants, Performance shares
THEEXPERIMENT
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THE HYPOTHESES
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RESULTS
TINKERING TEAM VS.INDIVIDUAL
CULTURE
PROSPECTTHEORY
LTI’s
Pay Models
IndividualVs. Team
Pay Mix
Fermin Diez, PhD
PROSPECT THEORY
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PROSPECT THEORY
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RESULTS
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Not Statistically Significant
100 120 140 160
StockOptions
Stock Grant
PerformanceShares
Profit @P20
LTI
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RESULTS
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Not Statistically Significant
Pay Mix
100 120 140 160
33/33/33
50/25/25
50/50/0
50/0/50
Profit @P20
Fermin Diez, PhD
RESULTS
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Not Statistically Significant
Pay Models
100 120 140 160
Membership
Bonding
Tournament
Profit @P20
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THE RESULTS
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Not Statistically Significant
Team Incentives
100 120 140 160
Individual Goals
Shared Goals
50/50
75/25
Profit @P20
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RESULTS
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**SIGNIFICANT**
Team vs. Individual
100 120 140 160
Avg All Individual
Avg All Team
Profit @P20
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RESULTS
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Culture
No Difference
Fermin Diez, PhD
RESULTS
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Prospect Theory
0 20 40 60 80
Stop When Ahead
Risk When Behind
Both
% Using this Strategy
It Depends
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RESULTS
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RoR
Return on Rewards (RoR); Must choose approach
carefully
LTI: better RoR at end;lowest RoR on average result
Individual Incentives higher RoR
Fermin Diez, PhD
ADDITIONAL RESEARCH
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100 120 140 160
Base Case (SO)
Framing (>100)
Avg (136; No Pay)
Goal (200; No Pay)
Cap ($15)
Profit @P20
**SIGNIFICANT**
Different Conditions
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ADDITIONAL RESEARCH
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Scenario Profit @P20 Significance
SO (Base Case) 124.88 ---
>100 (Prospect Theory)
148.35 .096* (.957)
AVG (136 – No Pay)
138.77 .240 (1.000)
GOAL (200 – No Pay)
155.80 .011** (1.114)
CAP ($15) 148.21 .033** (.330)
Fermin Diez, PhD
ADDITIONAL RESEARCH
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Target setting has a greater impact on results than plan design
Stretch targets yield better results than average targets
Caps may be useful when forecasting or budgeting is suspect
Targets frame expected results
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Fermin Diez, PhD
SUPPORTING EVIDENCE
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Shaw & Gupta (2015): financial incentives work; we can move to questions such as the best combinations of intrinsic and extrinsic rewards
Cerasoli et al (2014): intrinsic motivation less important when incentives directly tied to performance and better predicted quality, whereas incentives better predicted
quantity
Aaron et al. (2014:) When an executive's total compensation package is based more on firm performance there is often a level of higher returns, but to a point of
diminishing returns
Ederer (2013): performance is highest when subjects receive a mix of individual and group incentives that reward long-term joint success
Shaw & Mitra (2017): There is no extrinsic vs. intrinsic motivation tradeoff
Fermin Diez, PhD
TARGET SETTING
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TARGET SETTING
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Fermin Diez, PhD
QUESTIONWhat Will You Consider Doing Differently After This Presentation?
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Answer 1: Emphasize Team Incentives
Answer 3: Change Pay Mix
Answer 2: Stretch Targets
Answer 4: Change to One of the Three Base Pay Models
Answer 5: No Change: My Plan Already Drives Business Results
Click Here for Poll Results
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Fermin Diez, PhD
TAKEAWAYS
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Team Incentives Work
Worry Less About the
Rest
Targets Frame Expected Results
Fermin Diez, [email protected]
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