战略经济学206790课件ch_10.pdf

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1、 Instructors Manual to accompany Economics of Strategy,Fifth Edition Copyright 2010 John Wiley&Sons,Inc.CHAPTER 16:Performance Measurement and Incentives in Firms CHAPTER OUTLINE 1)Introduction 2)Economics of Performance Measurement Risk Aversion and Risk Sharing Preferences over Risky Outcomes Risk

2、 Sharing Risk and Incentives Example 16.1:Pay and Performance at Yakima Valley Orchards Performance Measures That Fail to Reflect All Desired Actions Example 16.2:Cardiovascular Surgery Report Cards 3)Selecting Performance Measures:Managing Tradeoffs Between Costs 4)Do Pay-for-Performance Incentives

3、 Work?Example 16.3:Herding,Relative Performance Evaluation,and the 20072008 Credit Crisis 5)Incentives in Firms Implicit Incentive Contracts o Subjective Performance Evaluation o Promotion Tournaments o Efficiency Wages and the Threat of Termination Example 16.4:Promotion Tournaments at General Elec

4、tric Incentives in Teams Example 16.5:Stock Options for Middle-Level Employees Example 16.6:Teams and Communication in Steel Mills 6)Chapter Summary 7)Questions 8)Endnotes CHAPTER SUMMARY Performance measurement is a tool that can help mitigate agency problems arising from hidden action and hidden i

5、nformation.There are two major costs associated with tying pay to performance.The first problem is that there are factors out of the control of employees.The other problem is that measurements may not capture all aspects of desired performance.Preference for risky outcomes is one aspect that should

6、be considered.Most people are relatively risk adverse,which means they will prefer a certain outcome to an uncertain outcome.Added to that is variability.Even with the same expected value,risks with lower probability are more.These principles have provided a foundation for the creation of insurance.

7、These factors can be used to determine an employees wage.Stronger incentives are typically called for if the employee is less risk adverse,the Instructors Manual Economics of Strategy,Fifth Edition 16-2 Copyright 2010 John Wiley&Sons,Inc.variance of measured performance is lower,the employees margin

8、al cost of effort is lower,or the marginal return to effort is higher.Regardless of contracts created,monitoring and subjective evaluation will play a role in measurement.According to researchers,pay-for-performance incentives do improve performance along measured dimensions,and reduce performance o

9、n those that are unmeasured.Implicit and explicit contracts are used by employers to incentivize employees.In addition,employees are rated using different performance review systems.The costs associated with these systems are that supervisors may give all employees the same ratings.When employees ar

10、e competing in a promotion tournament,the following can be seen:(1)employee effort level will increase as the difference between salaries is increased,(2)if competitors are added,incentive levels can be maintained by increasing the size of the prize,and(3)if there are successive rounds,each round mu

11、st have a larger increase than the last.This method also circumvents supervisors who are not willing to make distinctions between employees,but may cause employees to take actions that hamper the performance of other employees.At the same time,the threat of termination will play a role in effort exe

12、rted.In addition,firms often find asking employees to work in groups is an effective means of production.Personal benefits must match the benefit to the team in order to prevent issues with this structure.Limiting the size of teams and having groups that work together over long periods help to mitig

13、ate these issues.The chapter concludes with some empirical observations about incentive-based pay.There is ample evidence suggesting that employees do appear to consider the effects on the compensation when making decisions.The effect of incentive-based pay on profits is less clear,as pay-for-perfor

14、mance compensations plans can have destructive effects.APPROACHES TO TEACHING THIS CHAPTER As far as structuring a discussion,this chapter is an opportunity for the instructor to rely heavily on the work experience of the students:What jobs have you had?How was pay determined?If pay was tied explici

15、tly to performance,what performance measures were used?How much of the variation in measured performance was under the control of the employee,and how much was random?Were there any value-creating activities that did not affect the performance measure?Were there any non-value-creating activities tha

16、t did affect the performance measure?If pay was not tied explicitly to performance,why not?Were any performance measures available to the firm?If so,what would have happened if these measures had been used?Were the available measures risky?Would the wrong activities have been rewarded?Economics of S

17、trategy,Fifth Edition Instructors Manual Copyright 2010 John Wiley&Sons,Inc.16-3 STUDENT ASSIGNMENTS Have Students Audit their Own Work Contracts Most students will have had a wide variety of jobs and work contracts of their own.It might be useful for them to detail the compensation schemes(protecti

18、ng salary information of course)and analyze whether the contracts represented the most efficient ones possible.For example,does the reliance of waiters on tips align the workers incentives with that of management?Have students reflect on examples of shirking from their own experiences and the ways m

19、anagement could have reduced it.Can students recognize selection theory in practice?Executive Salaries and Downsizing “Downsizing”has become very common at many of the worlds largest companies.Workers who thought they were under implicit contracts based on the traditional wage/tenure profile were fi

20、red in the middle of their career.There are no“above market”wages waiting as reward for their many years of service at“below market”rates.At the same time the salaries of CEOs have skyrocketed,as their stock options shoot up in value.The popular press has identified a severe backlash to Wall Street

21、profits and Main Street instability,including the Presidential candidacy of Pat Buchanan.What are the true effects of the destruction of the wage/tenure profile when combined with massive blue and white collar layoffs,record corporate profits,and skyrocketing CEO salaries?If you were a CEO and you w

22、ere“forced”to lay off 10,000 employees,would you cut your own salary?Would you cut the salaries of the“tournament”losers?What are the short-term benefits and costs?What are the long-term benefits and costs?What are the costs to businesses if everyone from employees,leadership,and stockholders is thi

23、nking short-term?Rogue Traders on Wall Street There has been a rash of uncontrolled securities traders who have lost millions and even billions in bad bets.The most famous example is Nick Leeson who,in 1995,brought down the venerable Barings Bank with a cocktail of derivatives in the Asian markets.D

24、o students think that actions of these agents represent a breakdown of the agent/principal relationship?If so,how would students change the incentive systems to reward successes but not lead to tremendous losses?There are also plenty of more common situations in which incentive systems can create pr

25、incipal/agent problems.What examples can students identify in business situations,at school,with their families,or in their communities?The Technology Revolution and Observability The agent/principal relationship is supposed to improve as the observability of actions increases.Massive changes in tec

26、hnology have enabled managers to monitor almost as much information as they want.What are the boundaries of this observability?How would non-shirkers respond to increased observability?Do workers deserve any privacy or do only shirkers ask for privacy?How do privacy issues differ in public versus pr

27、ivate worlds?What role does worker choice or lack of it play in this debate?Instructors Manual Economics of Strategy,Fifth Edition 16-4 Copyright 2010 John Wiley&Sons,Inc.Team-Based Structures and Incentives Much of the work in the business world and at business schools is done in a group setting:se

28、veral individuals contribute to a single product.When are team structures appropriate?If the process and contributions of each individual member are obscured by this structure,what happens to the incentive system?What rules could you put in place to help judge the performance of individual team memb

29、ers?Performance Standards in a Rapidly Changing Environment Many contracts are based on industry or company standards for individual performancehow many widgets produced per hour,for example.Some industries and processes are so new or have such ill-defined technologies that no accepted performance s

30、tandards exist.How would you as a principal negotiate a performance standard for such a process or industry?What is the role of trust?What is the role of observability?Big Picture Discussion Questions Should a firm tie an employees pay to his or her on-the-job performance?Why or why not?Do pay-for-p

31、erformance incentives work?What do we mean by“work”in this sentence?Why do people dislike random variation in their wealth?If a firm is to tie pay to employee performance,then how should performance be measured?What factors make one performance measure“better”than another?What are the pros and cons

32、of basing pay on relative comparisons of employees performances?The key point to bring out in discussion is tying pay to performance has costs and benefits.Benefits:Helps with problems relating to hidden action and hidden information.Costs:All depends on the quality of the performance measure.There

33、are three ways a performance measure can be bad:(1)it exposes employee to risk,(2)it includes an activity that does not create value,and(3)it excludes an activity that does create value.The question of whether,and if so to what extent,to tie pay to performance depends on this cost/benefit balance.Ot

34、her examples to illustrate chapter concepts:(1)Sorting:How does the high tuition for a MBA education help sorting out the“right”students?(2)The venture capital industry as an example,where contracts between investors and venture capitalist,and between venture capitalists and issuers,as well as the s

35、tructure of the limited partnerships,are driven by the principal-agent problem.Economics of Strategy,Fifth Edition Instructors Manual Copyright 2010 John Wiley&Sons,Inc.16-5 DEFINITIONS 360-Degree Peer Reviews:Evaluations in which an employees supervisor,coworkers,and subordinates are all asked to p

36、rovide information regarding that employees performance over a period of time.Efficiency Wage:The wage high enough to motivate effort.Free-Rider Problem:Situation that may arise when team benefits do not match the personal benefits in determining amount of work done or choices made by an individual.

37、Herding:When individuals ignore their own information about the best course of action and instead do what everyone else is doing.Management-by-Objective System:Evaluation system in which an employee and supervisor work together to construct a set of goals.Merit-Rating System:System in which employee

38、s are given numerical scores,often with a fixed pool of points to be allocated among a supervisors employees.Multitask Principle:When allocating effort among a variety of tasks,employees will tend to exert more effort toward the tasks that are rewarded.Promotion Tournament:When a set of employees co

39、mpete to win a promotion.Rating Compression:A situation which arises when a supervisor gives all their subordinates a similar average grade Relative Performance:Performance measure that uses relative comparisons,often these are measurements taken from a competitors performance results Risk Averse:A

40、risk-averse person prefers a safe outcome to a risky outcome with the same expected value.Risk Neutral:A risk-neutral decision maker is indifferent between a same outcome and a risky outcome with the same expect payoff.Risk Seeking:A risk-seeking decision maker is one who prefers a risky outcome to

41、a safe one with the same expect payoff.Sorting:The level of wages or structure of the incentive contract can systematically influence the characteristics of the agents a principal can hire.In general,more able workers and risk takers prefer pay-for-performance arrangements,while workers with low mob

42、ility prefer compensation schemes based on job tenure.Agents with limited liability are more willing to take highly risky ventures.SUGGESTED HARVARD CASE STUDIES1 Nordstrom:Dissension in the Ranks(HBS 9-191-002).Nordstrom pays salespeople on commissions.Illustrates selection and incentive effect of

43、pay-for-performance.Lincoln Electric Company(HBS 9-376-028).Lincoln is famous for paying piece rates to factory workers.Discuss Page 1potential drawbacks of piece rate based pay.Discussion the“system”Lincoln puts in place to mitigate the effects of piece rates.1 These descriptions have been adapted

44、from Harvard Business School 19951996 Catalog of Teaching Materials.Instructors Manual Economics of Strategy,Fifth Edition 16-6 Copyright 2010 John Wiley&Sons,Inc.Putnam Investments:WorkHome(HBS 9-803-011).Putnam allows some employees to telecommute.Discuss effects on productivity and importance of

45、availability of good performance measures for these employees.Family Feud:Andersen vs.Andersen(HBS 9-800-064).Andersen worldwide split into Arthur Andersen(the public accounting firm)and Accenture(the consultancy)in 2000.At the heart of their dispute was a performance measurement issue:Should partne

46、rs be compensated on the basis of firm-wide performance(in which case,the consulting partners would be subsidizing the accounting partners)or the performance of their own business unit(which would leave the accounting partners no incentive to pass potential consulting opportunities to the consultant

47、s)?There is an A and B case.House of Tata HBS(9-792-065).This case traces the evolution of the largest business group in India.Its primary focus is on the organizational structure of the group and how it changed in response to internal and external forces.The instructor can link the absence of infra

48、structure as well as governmental policies to firm activities and overall performance.This chapter is useful for illustrating some of the concepts in the following chapters:2,4,7,17,and 18.Ingvar Komprad and IKEA(HBS 9-390-132).Traces the development of a Swedish furniture retailer under the leaders

49、hip of an innovative and unconventional entrepreneur whose approaches redefine the nature and structure of the industry.Traces IKEAs growth from a tiny mail order business to the worlds largest furniture dealership.Describes the innovative strategic and organizational changes Kamprad made to achieve

50、 success.In particular,focuses on his unique vision and values and the way they have become institutionalized as IKEAs binding corporate culture.The trigger issue revolves around whether this vital corporate glue can survive massive expansion into the United States and the Eastern Bloc and Kamprads