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After completing this chapter, you will be able to address the following questions: What does economics say about paying for performance? How do real world incentive plans differ from the economic ideal? What sort of results could one expect from a properly designed incentive scheme? Which settings are most appropriate for such schemes? What are the potential pitfalls to avoid in implementing a pay-for-performance system?. | Chapter 10: Rewarding Performance 4/8/2013 Chapter 10: Rewarding Performance How Strong Should Incentives Be? Intuition Selling the Job Taxicab Drivers Securities Traders Wait Staff in Restaurants Outsources Sales Middle Managers Imperfect Evaluations and Optimal Incentives Uncontrollable Risk Controllable Risk Manipulation Distortions and Multitask Incentives Summary: How Strong Should Incentives Be? Value of Employee Effort Importance of Sorting Controllable and Uncontrollable Risk Risk Aversion Trust and Subjectivity Distortion and Multitask Incentives Potential Manipulation Paying for Performance: Common Examples Rewards or Penalties? The Ratchet Effect Lump Sums, Demotions, or Promotions Caps on Rewards Applications Profit Sharing and ESOPs Performance Evaluation Pay-Performance Relationship Counterarguments Organizational Form and Contracting Franchising Cost Plus versus Fixed Fee Motivating Creativity Summary 4/8/2013 Introduction We now think about how to tie that evaluation | Chapter 10: Rewarding Performance 4/8/2013 Chapter 10: Rewarding Performance How Strong Should Incentives Be? Intuition Selling the Job Taxicab Drivers Securities Traders Wait Staff in Restaurants Outsources Sales Middle Managers Imperfect Evaluations and Optimal Incentives Uncontrollable Risk Controllable Risk Manipulation Distortions and Multitask Incentives Summary: How Strong Should Incentives Be? Value of Employee Effort Importance of Sorting Controllable and Uncontrollable Risk Risk Aversion Trust and Subjectivity Distortion and Multitask Incentives Potential Manipulation Paying for Performance: Common Examples Rewards or Penalties? The Ratchet Effect Lump Sums, Demotions, or Promotions Caps on Rewards Applications Profit Sharing and ESOPs Performance Evaluation Pay-Performance Relationship Counterarguments Organizational Form and Contracting Franchising Cost Plus versus Fixed Fee Motivating Creativity Summary 4/8/2013 Introduction We now think about how to tie that evaluation to rewards easier in practice than evaluation Let’s first note what we don’t focus on: the level of pay level of pay = expected value of the whole package, not just salary what does the level depend on? market supply & demand for this type of skills extent of uncontrollable risk in the pay package desire to attract better talent through more at-risk pay We examine 5 common types of reward structures 4/8/2013 Chapter 10 – Rewarding Performance After completing this chapter, you will be able to address the following questions: What does economics say about paying for performance? How do real world incentive plans differ from the economic ideal? What sort of results could one expect from a properly designed incentive scheme? Which settings are most appropriate for such schemes? What are the potential pitfalls to avoid in implementing a pay-for-performance system? What is the difference between gains from sorting and gains from incentives? How can an incentive scheme help with sorting out
