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Incentive Paper Case Analysis:Managerial Accounting

April 17, 2012

Incentive Paper Case Analysis:Managerial Accounting

April 17, 2012

Hostetler | Lewis | Panutsos | Yang | Zhao

Analysis Agenda:Analysis Agenda:

1.Question

2.Theory

3.Experiment

4.Results

5.Significance

“The Effects of Disseminating Relative Performance Feedback in Tournament

and Individual Performance Compensation Plans”

Authors:R. L. Hannan | R. Krishnan | A. H. Newman

Source:The Accounting Review, Vol. 83, 4, 893-913

Selected Paper:Selected Paper:

How can the implementation & design of performance feedback be optimized to maximize the efficiency and output of

employees in a given incentive scheme?

Research Question:Research Question:

Two Pure Types of Incentive Schemes Studied:

Three Types of Relative Performance Feedback:

Individual Tournamentvs.

None Course Fine

Research Areas:Research Areas:

� Provides valid knowledge

� Helps supervisors understand employee motivation

� Helps superiors manage employee performance

� Aids in the understanding of workforce

Research Importance:Research Importance:

� Help managers design compensation & make best use of resources

� Help with monitoring & evaluating employee performance effectively

� Increase efficiency & performance

� Save time & money [sustainable]

� Help motivate & energize employees

Practical Applications:Practical Applications:

1.Question

2.Theory

3.Experiment

4.Results

5.Significance


Economic theory:

� Feedback has no effect

Psychology theory:

� Social Comparison Theory:

� People compare themselves to others

� Loss of self identity when not up to par

� Feedback motivates us to avoid loss of self identity by boosting performance

Individual Incentive Scheme:Individual Incentive Scheme:

Economic & Psychological Theory:

� Feedback effectiveness based on recipient’s ability to assess probability of winning

� Higher chance of winning � More effective effort & strategy

� Lower chance of winning � Less effective effort & strategy� Decreased effort [supporting research]

Tournament Incentive Scheme:Tournament Incentive Scheme:

Lazear & Rosen’s Model of Rank-order

Tournaments:

� Performance is a function of:

� Effort

� Random error

� Idiosyncratic: specific to individual

� Systematic: shared by all participants

Individual vs. Tournament:Individual vs. Tournament:

Performance in Individual Incentive Schemes: � Improves with coarse & fine feedback

Performance in Tournament Incentive Schemes:� Highest with no feedback� Unaffected by coarse feedback, hurt by fine

Individual vs. Tournament Schemes:� No feedback: tournament schemes� With feedback: no prediction made

Hypotheses:Hypotheses:

1.Question

2. Theory

3.Experiment

4.Results

5.Significance


Experimental Variables:Experimental Variables:

� Independent Variables

� Relative performance feedback systems

� Types of incentive schemes

� Precision & content of relative feedback

� Dependent Variables

� Participants’ performance

� Changes in participant performance

Experimental Design:Experimental Design:

� 134 business students from public university

� Computer-based testing conducted in 1 hr sessions

� Participants required to achieve a perfect score on a pre-experimental exam

� Experiment involved making output quantity decisions for a product

� 20 randomly selected states of nature combined with earned profit points

� Participants unaware of selected state of nature

� Were provided with example of scoring model

States of Nature:States of Nature:

(Hannan, Krishnan, Newman 2008)

Experimental Construct:Experimental Construct:

� Participants made output decisions for 60 periods [12 trials x 5 periods]

� State of nature: same for each participant & each trial

� Profit point potential: same for all participants

� Awarded time points for early trial completion

� Can view history after each period [takes time]

Provided Feedback:Provided Feedback:

� Feedback provided at 4 points per session

� Course Feedback: placed participants above or below 50th percentile

� Fine Feedback: placed participants in deciles [10 percentile ranges]

Compensation:Compensation:

� Individual Incentive Scheme:� $5 for participation� $1 for every 400 profit points� $0.25 for every 400 time points

� Tournament Incentive Scheme:� $5 for participation� $46 bonus if performance is in top 10%

� Bonus in tournament equals average profit awarded in individual

Experimental Limitations:Experimental Limitations:

� Assumes students’ decisions represent managers’

� Assumes real world performance is as objective and easily verified

� Assumes rewards earned by students have same economic value as real-world rewards

1.Question

2.Theory

3.Experiment

4.Results

5.Significance


� ANOVA test

� Feedback improves performance in individual scheme

� Feedback decreases performance in tournament schemes

� No feedback: Tournament scheme is better option

Results:Results:Performance

∆in Performance

Individual Tournament

(Hannan, Krishnan, Newman 2008)

� Does viewing feedback allow participants to extract information, and gain an advantage?

� Number of times viewed has no influence

� Individual System

� All deciles increased performance by the same amount

Supplemental Analysis:Supplemental Analysis:

In the tournament system with fine feedback:

�Top 20% increase performance

� Lower 80% decrease performance

�Decreased effort?

� Total time spent x times feedback viewed

� No difference among high & low performers

�Post-test surveys indicate inefficient strategies


Tournament system with fine feedback

�Low performers:

� Made bad choices more often

� Slower to adjust strategies using feedback

� Answers had 2x standard deviation of high performers [continued search for strategy]

� Spent more time thinking about rank

� Were more nervous about rank


1.Question

2.Theory

3.Experiment

4.Results

5.Significance


� Individual & tournament schemes are widely used [currently reevaluating]

� Important to design system to make best use of resources

� Restructuring feedback to fit better with incentive system can improve employee performance

Research Significance:Research Significance:

�When implementing a new incentive scheme:

� Consider organizational structure of dept

� Select best combination:� No feedback: Tournament Scheme

� Fine feedback: Individual Scheme

� In a pre-existing system:

� Weigh viability of altering feedback system to achieve heightened performance

Practical Implications:Practical Implications:

� Most firms use hybrid systems

� No prior research

� This study doesn’t extend to hybrid systems

� Research can progress here or with tournament schemes using graduated payments

Opportunities for Further Study:Opportunities for Further Study:

Thank you for your attention!Thank you for your attention!

Any Questions?

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