Do Incentives Work? Busting Myths and Bringing Evidence to ......Shaw & Gupta (2015): financial incentives work; we can move to questions such as the best combinations of intrinsic

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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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Fermin Diez, PhD

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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Fermin Diez, PhD

PROSPECT THEORY

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Fermin Diez, PhD

RESULTS

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Not Statistically Significant

100 120 140 160

StockOptions

Stock Grant

PerformanceShares

Profit @P20

LTI

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Fermin Diez, PhD

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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Fermin Diez, PhD

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

Fermin Diez, PhD

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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Fermin Diez, PhD

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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Fermin Diez, PhD

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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Fermin Diez, PhD

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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