Free Essay

Premium Incentive

In: Science

Submitted By randykelvianto
Words 5213
Pages 21
Tournaments and Piece Rates Revisited:
A Theoretical and Experimental Study of Premium Incentives
Werner Guth Rene Levnsky Kerstin Pully Ori Weiselz
June 22, 2010
Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on xed-prize tournaments, i.e., on tournaments where the prize or prize sum to be awarded is set in advance, we introduce a new type of tournament into the literature: premium incentives. While premium incentives, just like xed-prize tournaments, are based on relative performance, the prize to be awarded is not set in advance but is a function of the rm's success: the prize is high if the rm is successful and low if it is not successful. Relying on a simple model of cost minimization, we are able to show that premium incentives outperform xed-prize tournaments as well as piece rates. Our theoretical result is qualitatively con rmed by a controlled laboratory experiment and has important practical implications for the design of organizational incentive systems.
JEL Classi cation: C72, C91, J33
Keywords: Tournaments, Incentives, Economic experiments
Max Planck Institute for Economics, Kahlaische Strasse 10, 07745 Jena, Germany. yEberhard Karls Universitat Tubingen, Faculty of Economics and Business Administration, Nauklerstrasse
47, 72074 Tubingen, Germany. zThe Hebrew University, Center for the Study of Rationality, Giv'at Ram, Jerusalem 91904, Israel.
1 Introduction and Motivation
As documented by Orrison et al. (2004) or Bothner et al. (2007), tournament incentives have developed into an increasingly important component of compensation systems; they are `pervasive in organizations' (Casas-Arce and Martnez-Jerez, 2009). Unlike piece rates, which are awarded according to absolute performance, tournament incentives are awarded according to relative performance. While the most prominent examples of tournament incentives in the organizational practice are standard promotion tournaments, any organizational incentive system awarding a (typically predetermined) prize to a prede ned number of top performing employees actually quali es as a tournament compensation system. Unlike Ryvkin and Ortmann (2008), we focus on the incentive properties of tournament compensation systems and not on their predictive power. Starting with Lazear and Rosen
(1981), the incentive properties of tournament compensation systems have repeatedly been analyzed in the literature (e.g., O'Kee e et al., 1984; McLaughlin, 1988). However, the literature has so far principally focused on ` xed-prize' tournament incentives in the sense that the prizes to be awarded are set in advance such that their actual size is not in uenced by employee performance or rm success. A prominent exception to this are
Japanese bonus tournaments (so-called J-tournaments; see Krakel, 2003), where the size of the prize to be awarded to a single contestant depends on his/her relative performance
(see, e.g., Endo, 1984). But as the size of the total wage sum or bonus bill is xed in advance (e.g., Kanemoto and MacLeod, 1984), even in the J-tournament, the prize sum in a given year is predetermined and independent of the rm's success in that year.
As long as rm performance can be easily assessed in advance, a system of prede ned tournament prizes that have to be paid out even if the company does badly may not pose a severe problem. However, if rm performance cannot be assessed in advance (e.g., because the rm nds itself in an uncertain economic environment), a predetermined tournament prize sum may well exceed what the rm can actually a ord to pay. Accordingly, in the
organizational practice, one should expect that the tournament prize sum depends on rm performance (as is, e.g., the case in any system of gain sharing). Besides the lack of ability to adequately forecast rm pro tability, there is one further argument that speaks in favor of variable instead of predetermined tournament prizes: while xed-prize tournaments carry the risk of horizontal collusion between the contestants, premium incentives clearly do not. If contestants decide for collusive behavior in a variable prize sum tournament, this will reduce the tournament prize and hence the attractiveness of collusive behavior.
In our study, we depart from the existing literature by studying tournaments that award a variable prize whose size is based on rm performance and refer to this incentive scheme as `premium incentives.' Just as in a typical tournament, the premium incentive is only awarded to the top performer(s), but in contrast to the xed prize in a typical tournament, its size is not predetermined but depends on rm performance. In order to study the comparative advantages of premium incentives, we allow for employee compensation to be composed of (a) a piece rate based on absolute performance, (b) a predetermined tournament prize awarded on the basis of relative performance ( xed-prize tournament incentive), and (c) a variable tournament prize awarded on the basis of relative performance, the size of which depends on rm success (variable-prize tournament incentive or
`premium incentive').
Theoretically, we rely on a simple cost-minimization approach in search of the optimal combination of the three incentive types studied. Our analysis shows that premium incentives are more cost-e ective than piece rates and xed-prize tournament incentives, the two types of incentives that have typically been studied in the literature so far.
We also test our theoretical implications by confronting them with data from a controlled laboratory experiment.1 Our data qualitatively supports the theoretical propositions:
1For reasons of data availability, empirical studies on tournaments often rely either on laboratory evidence (see, e.g., Green and Stokey, 1983; Bull et al., 1987; Orrison et al., 2004) or on data from sports
(e.g., Ehrernberg and Bognanno, 1990; Becker and Huselid, 1992; Bothner et al., 2007; Kaplan and Garstka,
3 despite agents not choosing the theoretically predicted e ort level, premium incentives not only theoretically, but also empirically prove to be the pro t maximizing type of incentive
(as compared to the conventional alternatives), and accordingly, most principals decide in favor of premium incentives when designing an incentive system for their subordinates.
In sum, our results suggest to foster the use of variable-prize tournaments or `premium incentives' in the organizational practice as well as to encourage future research on the subject. The remainder of this paper is organized as follows. In Section 2, we specify the model and derive its theoretical result. Section 3 presents the experimental design. The data is analyzed and discussed in Section 4. Section 5 concludes.
2 Theoretical Analysis
Assume two competing agents, 1 and 2; who may represent individual employees or teams in the same rm. Both agents i = 1; 2 must choose an e ort level xi  x with x  0 :
Each e ort xi generates output yi = xi + "i subject to some noise term "i 2 ["; "] with
" < " ; x+"  0 ; and density '() with all probability mass at interval ["; "] : According to such an iid-case, the noise levels "1 and "2 are stochastically independent and identically distributed and ensure the nonnegativity of the agents' output. With ci(xi) denoting the e ort costs of the agents, the payo s of i = 1; 2 with competitor j 6= i can be de ned as ui(xi; xj ; "i; "j) =
8< :
!yi ci(xi) if yi = xi + "i  yj = xj + "j
!yi + + (xi + "i + xj + "j) c(xi) otherwise,
where ! 2 R+ is a piece rate, 2 R+ is a xed premium, and 2 R+ determines how sensitively the premium (xi +"i +xj +"j) depends on rm performance (represented by the sum of the two agents' output levels xi + "i + xj + "j ). After agents independently choose their e ort levels, x1 and x2, and nature has determined "1 and "2 (according to
the density '()), the ranking of the individual (observable) output levels y1 = x1+"1 and y2 = x2 + "2 determines which agent receives + (y1 + y2):
To test the model experimentally we restrict ourselves to a speci c form of '() and ci() :
In particular, we assume the noise terms "i to be uniformly distributed2 on [0; "] and e ort costs ci(xi) =

2x2i to be quadratic with > 0 for i = 1; 2:
Finally, in our analysis we assume that the participants encounter the tournament repeatedly.
Therefore, it makes sense to rely on common(ly known) risk neutrality, and the corresponding expected payo s of agents i 2 f1; 2g are
Eui = !(xi + "
2 ) + 1
h(xi; xj ; "j) d"j

2 x2i ; where h(xi; xj ; "j) =
0 if xi  xj + "j " ;
[ + (xi + "i + xj + "j )] d"i if xi  xj + "j ;
[ + (xi + "i + xj + "j )] d"i otherwise.
2 there is no nite best reply xi to xj : For the case <
2 the unique equilibrium e orts (in the sense of mutually best replies) are xi =
2 + "(3 + 2!)
" 4 for i 2 f1; 2g: (2)
Since the principal can implement a three-dimensional incentive scheme ( ; ; !) , the natural problem of cost minimization arises, i.e., nding the cheapest incentive scheme
2Some tournament models (e.g., Lazear and Rosen, 1981) rely on normally distributed noise "i for the sake of mathematical convenience. This violation of economic nonnegativity constraints is easily sustainable in theory. However, it is dicult to test such models experimentally without deception.
that yields a given positive (expected) output y = y1 + y2 : Formally, this is equivalent to nding a combination ( ; ; !) that minimizes the linear costs of the principal
C ; ;!(y) = + ( + !)y; with y = 2 +"(3 +2!)

"2 + " :
Considering the linearity of the problem, it suces to compare the costs of the three
`corner' incentive schemes:
( ; ; !) =

2 ; 0; 0

2+3" ; 0

0; 0;


; where  = y " : The corresponding costs are
C =

; C =
( + ")
2 + 3"
; and C! =

( + ")
One can easily see that for all nonnegative , ", and
, it holds that C  C  C! : Thus, from the principal's point of view, the premium incentive is superior to both the piece rate ! and the xed-prize tournament :
Proposition 1 The premium incentive is more cost-e ective than the xed prize which, in turn, is more cost-e ective than the piece rate ! :
The result is by no means obvious. When individual output yi = xi + "i is assumed to be readily observable and agents are assumed to be risk neutral, one would typically expect piece rate incentives only, which would avoid strategic interaction of agents. Our analysis shows, however, that an employer can gain by implementing tournament competition, and most preferably by using premium incentives { even in those cases where there is no potential for economizing on measurement costs (output is readily observable) and where there is no bene t to eliminating common shocks (risk neutral agents).
While our theoretical analysis neglects the potential of collusive behavior by agents (collusion is most likely for incentives as agents can share even when investing very little e ort) as well as the fact that competition may endanger feelings of corporate identity
(which would seem to be least endangered by ! as agents do not strategically interact at all), both e ects may play a role in the experiment.
3 Experimental Design
The experiment was run at the computer laboratory of the Max Planck Institute of Economics with 112 participants, mostly undergraduates of the University of Jena, enrolled in di erent elds. Each of the four computerized experimental sessions (28 participants per session) lasted about 100 minutes. Earnings, including a show-up fee of €2.50, ranged from €4.60 to €17.44. Upon arrival, each participant was seated in a visually isolated cubicle.
Detailed written and oral instructions (to establish common knowledge) explained the rules and payo s of the game and were followed by a control questionnaire. After the experiment, participants were paid individually and left the laboratory separately. In each session the 28 participants were randomly partitioned into four 7-person groups. In each group, one participant was assigned the role of `principal' and 6 were assigned to be `agents'. The 7-person groups remained constant throughout the experiment, and this was made known to the participants. However, they did not know which of the other participants was in their group. Each session was divided into three phases with 10 rounds each. Each of the three phases began with principals selecting one of 15 available combinations of the three incentives ; ; and ! (displayed in Table 1). This choice set the stage for the interactions of `their' three pairs of agents in the following ten rounds (phase). The principal's payo from each agent-pair-interaction was up(x1; x2; "1; "2) = (20! )(x1+
"1+x2+"2) ; based on the interpretation that principals can sell whatever `their' agents produce at a constant price of 20 per unit and that they must reward the agents according
Contract Equilibrium Empirical ! A-e ort P-pro t A-pro t Frequency A-e ort P-pro t
0 8 0 20 960 320 16 18.08 910
200 6 0 20 920 340 7 18.95 877
400 4 0 20 880 360 5 19.20 872
600 2 0 20 840 380 1 16.27 784
800 0 0 20 800 400 1 16.05 656
0 6 5 20 720 440 6 18.16 690
200 4 5 20 680 460 4 21.44 696
400 2 5 20 640 480 1 19.18 606
600 0 5 20 600 500 0 { {
0 4 10 20 480 560 3 21.66 500
200 2 10 20 440 580 3 21.80 489
400 0 10 20 400 600 0 { {
0 2 15 20 240 680 1 23.35 273
200 0 15 20 200 700 0 { {
0 0 20 20 0 800 0 { {
Table 1: Available contracts { equilibrium predictions and empirical results to the chosen contract.
After learning which incentive scheme ( , , !) had been implemented by the principal, each agent was randomly paired, in each round, with one of the other ve agents in the same group. Agents were not told with whom they were randomly paired. Agent i 2 f1; 2g could choose the e ort level xi 2 [0; 30]; knowing that the random variable "i takes values
"i 2 [0; 40] according to the constant density having all probability mass at interval [0; 40] and that both cost functions ci(xi); i 2 f1; 2g are given by x2i
2 ; i.e., = 1.
After each round, principals were informed about the production (yi) of each agent, the joint revenue (20(y1 + y2)), their cost ((! + )(yi + y2) + ), and their pro t (up). This information remained on the principal's screen, and information from the next round was appended to it. Thus, after each phase of 10 successive rounds, the principal had information about all tournaments (three pairs of agents in ten rounds). Additionally, after
each of the three phases, principals received feedback information on average production, revenues, costs, and pro ts across all thirty tournaments that took place in the phase.
To capture the fact that the organizational structure of a rm is rarely re-designed, and that such changes, when they are made, are mostly made in the light of much experience with a status quo structure, the principals in the experiment could change the incentive scheme only twice. In both cases they completed thirty tournaments before they were allowed to re-structure the incentive scheme.
After each round, agents were informed about both production levels (y1, y2) and the , and ! components of their earnings before they were randomly rematched with another agent of the same group except for the last round of the phase when they knew that the principal could change the incentive scheme.
All fteen available contracts yield the same individual equilibrium e ort of twenty. If both agents play optimally, i.e., both choose twenty, they su er when the principal switches to a superior contract from her point of view. In view of such con icting interests agents may be inclined to collude rather than to compete. Obviously, the strongest incentive for collusion by agents is o ered by the pure -scheme: since the -component does not depend at all on output, agents can collect even when e ort levels are very low. Such collusion, however, is rather unlikely, since agents are randomly rematched with one out of ve possible partners in each period. Similarly, one may ask whether a group consisting of one principal and six agents, rematched to three work teams in each period, might develop something like a `corporate identity' and aim at group eciency. Such potential eciency seeking, however, is unproblematic since equilibrium e orts are also ecient due to rent dissipation (Tullock, 1980).3
3In the sense of symmetric e orts maximizing the rm's expected surplus p(y1 + y2)

2 (x21
+ x22
) :
4 Results
4.1 Agents' Choice of E ort
The rst part of our analysis examines agents' e orts whose dynamics of group averages are graphically illustrated in Figure 1 of the Appendix. Since the equilibrium e ort is always twenty, regardless of the contract installed by the principal, we rst check whether agents' e orts are indeed identical across all chosen contracts. For this we check whether the contract, characterized by the principals' equilibrium pro t, or by the level 4 of each contract component ( ; ; !) associated with it, is a good predictor of the e ort invested by agents. We use Tobit regressions, taking into account that only observations across groups are independent, with the agents' e orts as a dependent censored variable.5
The result is that agents systematically deviate from their equilibrium e ort of twenty; when we use the principals' theoretical pro t as a predictor, the coecient is 0:00744
(Z = 4:05; p < 0:0005). The small value of the coecient is somewhat misleading and results from the di erence in scales between the theoretical payo s (0 to 960) and the e ort level intervals agents could choose from (0 to 30). The interpretation of the coe- cient is straightforward; the more pro table a contract is for the principal, the lower the e ort invested by agents. Speci cally, an increase of 100 points in the principal's theoretical payo results in a decrease of 0.744 in the agents' e ort. Considering the 960-point di erence between the minimal and maximal theoretical payo s, the e ect on the agents'
4For the purpose of the this and the following analyses we use the level of each contract component rather than the absolute value. For example, while the possible values of the component are 0, 200, 400,
600, and 800, the variable included in the analyses has corresponding possible values of 0, 1, 2, 3, and 4.
The same holds for the and ! components.
5Each of these Tobit regressions uses only one explanatory variable (the principal's equilibrium pro t, the level of the component, the level of the component, or the level of the ! component). It is not possible to include all of these as explanatory variables in the same regression model because they are not really distinct from each other; the level of each contract component can be determined by the other two, and it follows that the principals' equilibrium pro t can also be determined by the levels of any pair of components. 10 e orts could be substantial.
When we use the level of each of the contract components, rather than the principal's theoretical pro t, as explanatory variables, additional Tobit regressions reveal that agents react di erently to each component. Figure 2 in the Appendix, which should be selfexplanatory, visualizes the dependency of mean e ort separately on , , ! and the equilibrium pro t of the principal, depending on contract choice. The coecient on the level of the ! component is 1.78 (Z = 3:83; p < 0:0005), indicating a rather strong and positive relation between the level of ! and the agents' e orts. For the component the coecient is 0:78 and only marginally signi cant (Z = 1:57; p = 0:116), indicating that agents possibly exert less e ort the higher the level of the component. Most strikingly, agents were not sensitive at all to the component of the contracts (coecient:
0:18; Z = 0:30; p = 0:763), the main incentive component in nearly all the tournament literature. Given the negative relation between the principal's equilibrium pro t and the agents' e ort, principals' (empirical) pro ts are clearly higher than the equilibrium pro t for the relatively inferior (from the principals' point of view) contracts and lower for the relatively superior contracts. Possibly, such a pattern could lead to a situation, where theoretically superior contracts are empirically inferior (and vice versa). However, this is not the case; using principals' theoretical pro t to predict their actual pro t in a linear regression (taking into account that only observations across groups are independent) reveals a very strong and positive relation. The coecient of the theoretical pro t is 0.67
(t = 5:47; p < 0:0005), indicating that an increase of 1 point in the theoretical pro t was accompanied by an increase of 0.67 points in the actual pro t. The data in Table 1 also makes it clear that the principal's theoretical and actual pro ts are closely linked and that, despite the pattern of agents' deviations from their equilibrium e ort of twenty, principals enjoyed higher pro ts when they chose the theoretically superior contracts.
Agents' e orts may, of course, adjust during the ten rounds of each phase. However, including the period number as an explanatory variable along with the principals' equilibrium
pro t in a Tobit regression yields an insigni cant coecient of 0:10 (Z = 0:94; p =
0:345). To exclude e ects of experience from previous phases we ran the same regression for rst-phase decisions only, which also yielded an insigni cant result (coecient:
0:014; Z = 0:07; p = 0:940), leading us to conclude that e ort choices do not reveal any systematic dynamics during phases with constant contracts.
Result 1 Agents systematically deviate from the equilibrium e ort of twenty; the better a contract is for the principal (in equilibrium), the less e ort agents choose to invest.
E orts are positively related with !, negatively with , and are not related at all with .
However, agents' actual e orts do not question the theoretical ranking of contracts from the principal's point of view. E ort choices during all ten-period phases are rather stable.
4.2 Principals' Choice of Incentive Scheme
The second part of our analysis examines the contract choice by principals. In Figure 3 in the Appendix, we visualize separately for , , !, and the principal's equilibrium pro t how the frequency of contract choices depends on each of them. Since the contracts are clearly ranked in terms of the equilibrium pro t of the principal, and especially since the empirical pro ts closely preserve this ranking, we checked if principals indeed chose contracts that were more pro table to them, namely, contracts with a high (and ) component and a low ! component. The data in Table 1 makes it clear that this is mostly the case. Both the contracts' theoretical and empirical pro ts are highly correlated with the frequency with which they were chosen (r = 0:61; p = 0:0161; r = 0:60; p = 0:049; respectively). Principals display a very strong tendency to choose contracts with high levels (r = 0:90; p < 0:0001), and a weaker tendency to rely on contracts with low ! levels
(r = 0:50; p < 0:0594). The correlation between the level of the component and the contracts' frequency is negative and marginally signi cant (r = 0:4056; p < 0:1337).
Do principals change their contract choices in a systematic way during the experiment?
Although principals have only two opportunities to adapt the contract { once after the rst
Equilibrium pro t Empirical pro t
Comparison S p S p
Phase one { phase two -14.5 0.2622 -5 0.8209
Phase one { phase three -6.0 0.6338 -11 0.5966
Phase two { phase three 10.5 0.4033 5 0.8209
Table 2: Principals' contract design dynamics. S { Wilcoxon signed rank sum test statistic; p { signi cance level phase and once after the second { they do receive a great deal of feedback information
(thirty tournaments per phase), making it reasonable to expect that they will choose more favorable contracts as the experiment progresses, e.g., due to the `law of e ect,' as propagated by reinforcement learning.
To check for systematic changes in principals' contract choices across phases, we compared for each principal her theoretical pro ts of the contracts chosen in the rst and second phase. Similarly, we compared ` rst phase { third phase' and `second phase { third phase.'
We conducted equivalent comparisons for the empirical pro ts. Wilcoxon signed rank sum tests, however, do not reveal any systematic di erences (Table 2).
It should be noted that the lack of noticeable dynamics in principals' contract choices may, at least partly, be due to the fact that in many cases principals already started out by relying heavily on premium incentives ( ) and that any contract dynamics therefore would have meant adopting worse contract schemes.
Result 2 Principals chose the superior contracts. They were primarily sensitive to the component of their contract choices.
5 Discussion and Conclusions
Tournaments are often used by rms and organizations to inspire their agents' performance and supplement the usual reward schemes for employees, like salaries or piece rates. The general reward scheme and the speci c rules of such tournaments do not only inspire higher e orts but also have many quite diverse side e ects, e.g., crowding out of intrinsic motivation (e.g., Frey and Jegen, 2001) or fostering of collusive behavior { both of which we excluded from our theoretical and experimental analysis.
Nonetheless, we derived an important and { to the best of our knowledge { new result: tournament compensation systems, especially if they come in the form of premium incentives, outperform piece rates even in cases where individual output is readily observable and agents are risk neutral. In the organizational practice the comparative advantage of premium incentives as opposed to piece rates is further supported by the former's ability to economize on monitoring and measurement costs (a tournament requires only ordinal information on individual performance) and to reduce agents' risk exposure by eliminating common shocks. While the latter two arguments apply to traditional xed-prize tournaments and premium incentives alike, premium incentives have the additional advantage that they bear less potential for the collusion of agents since collusion will result in lower rm performance and hence lower the tournament prize. However, when compared to traditional xed-prize tournaments, premium incentives have the disadvantage of additionally exposing agents to the risks inherent in the production process: not only is the probability of winning the tournament a ected by the amount of idiosyncratic risk but also the size of what is at stake. While in real-life tournaments with risk averse agents this e ect may overcompensate the cost advantage of premium incentives such that traditional xed-prize tournaments are superior, our laboratory ndings for the (usually risk averse) student participants do not suggest that this is the case.
Becker, B. and Huselid, M. (1992). The incentive e ects of tournament compensation systems. Administrative Science, 37:336{350.
Bothner, M., Kang, J., and Stuart, T. (2007). Competitive crowding and risk taking in a tournament: Evidence from nascar racing. Administrativ Science Quarterly, 52(2):208{
Bull, C., Schotter, A., and Weigelt, K. (1987). Tournaments and piece rates: An experimental study. Journal of Political Economy, 95:1{33.
Casas-Arce, P. and Martnez-Jerez, F. A. (2009). Relative performance compensation, contests, and dynamic incentives. Management Science, 55(8):1306{1320.
Ehrernberg, R. and Bognanno, M. (1990). Do tournaments have incentive e ects? The
Journal of Political Economy, 98:1307{1324.
Endo, K. (1984). Satei (personal assessment) and interworker competition in japanese rms. Industrial Relations, 33(1):70{82.
Frey, B. S. and Jegen, R. (2001). Motivation crowding theory. Journal of Economic
Surveys, 15(5):589{611.
Green, J. and Stokey, N. (1983). A comparison of tournaments and contracts. Journal of
Political Economy, 91(3):349{364.
Kanemoto, Y. and MacLeod, W. (1984). The theory of contracts and labor practices in japan and the united states. Managerial and Decision Economics, 12:159{170.
Kaplan, E. and Garstka, S. (2001). March madness and the oce pool. Management
Science, 47(3):369{382.
Krakel, M. (2003). U-type versus j-type tournaments as alternative solutions to the unveri ability problem. Labour Economics, 10(3):359{380.
Lazear, E. and Rosen, S. (1981). Rank-order tournaments as optimum labor contracts.
Journal of Political Economy, 89(5):606{620.
McLaughlin, K. J. (1988). Aspects of tournament models: A survey. Research in labor economics, 9:225{56.
O'Kee e, M., Viscusi, M., and Zeckhasuer, R. (1984). Economic contests: Comparative reward schemes. Journal of Labor Economics, 2(1):27{56.
Orrison, A., Schotter, A., and Weigelt, K. (2004). On the design of optimal organizations using tournaments: An experimental examination. Management Science, 50(2):268{279.
Ryvkin, D. and Ortmann, A. (2008). The predictive power of three prominent tournament formats. Management Science, 54(3):492{504.
Tullock, G. (1980). Ecient rent-seeking. In Buchanan, J., Tollison, R., and Tullock, G., editors, Toward a Theory of the Rent-Seeking Society, pages 97{112. College Station:
Texas A&M University Press.
! "# $ %& ' ( ) * + , -%. / 0 12%3 -%# 4 4
Figure 1: Mean group e orts { all observations. Each of the 48 (16 groups  3 phases) plots describes average e orts for a speci c group in one (10-round) phase. The horizontal axis in each plot is the `round' axis, going from 1 (left) to 10 (right), and the vertical axis is the e ort axis, going from 0 (bottom) to 30 (top). The horizontal line in each plot marks the equilibrium e ort of 20. Each plot is labeled with information regarding the group, phase, and the contract that was in e ect. The group number (1-16) is pre xed by `G', the phase number (1-3) by `S'; the 3 numbers separated by dashes pertain to the , , and ! components of the contract that was chosen by the principal for the phase. For example, the top left graph is labeled `G1 P1 0-6-5'. This means that the data pertains to average e orts of group number one during the rst phase, and that the principal chose = 0, = 6, and ! = 5.
Figure 2: Mean e orts of agents as a function of the level of each contract component and of the theoretical principal payo . Each dot represents the average e orts of members of a single group in one phase.
Figure 3: Frequency of contract choices as a function of the level of each contract component and of the theoretical principal payo . Each small dot represents one of the 15 available contracts. Larger dots indicate that multiple contracts share the same frequency and horizontal-axis value.

Similar Documents

Premium Essay

Incentives in Contracting

...contracts are several types of incentives; cost, performance, and delivery that encourage contractors to perform within contract requirements. Burleson states that cost-incentive contracts are the most common and the target profit or fee is established at the start of the contract. “Full profit or fee is paid when the actual cost meets the target cost. A fee reduction results when the actual cost exceeds the target cost, and an increase in profit or fee results from actual cost that is below the target cost” (Burleson & Wilson, 2007). Performance incentives are appropriate when the results of a contract, service or delivery, are considerably important. Performance incentives can be compared with the contractor’s performance on a service contract, or measured against performance data of a delivered system or product. Both cost and performance incentives also may “include positive and negative performance evaluations and a similar fee increase or reduction using a fee adjustment formula” (Burleson & Wilson, 2007). The FAR states, “No incentive contract may provide for other incentives without also providing a cost incentive (or constraint)” (Federal Acquisition Regulation, 2012). If improvement in the contract delivery schedule is the Government’s focus, then it is appropriate to negotiate a delivery incentive contract. “Deliveries can be objectively measured by the delivery data and quantity delivered; as in other incentive structures, delivery incentives may also......

Words: 1533 - Pages: 7

Premium Essay

Bmw: Redefining Premium Brand

...BMW: Redefining Premium Brand Identity BMW: Redefining Premium Brand Identity MGMT 8700 Strategic Management MBA Trimester 2, 2011 |Patrick Gallagher |20805458 | |Sion Karta |20182345 | |Mark Lim |10468237 | |Wei Zhe Poh |20605321 | |Jackie Tran |20597931 | |Janifer Yap |20841177 | BMW: Redefining Premium Brand Identity |Table of Contents | | | List of Tables and |4 | |Figures............................................................................................................... | | | BMW Case Study |5 | |........................................................................................................................... | | | Introduction ...

Words: 13392 - Pages: 54

Premium Essay

Incentives Plan

... Incentive Plans Travis Green MGT 431 Human Resources Management May 26, 2012 Incentive Plans Providing job satisfaction and incentives for employees should be a priority for employers because incentive pay is often related to job satisfaction. Job satisfaction helps retain valuable employees and contributes to a companies continued success. According to Noe, et al, 2007, “An effective performance plan should be linked to an organizations goal and employees should believe they can meet performance standards.” (Noe, Hollenbeck, Gerhart, & Wright, 2007). This paper will examine incentive plans at EMCOR Mechanical Services and how these plans do or do not help the organization achieve its goals and objectives. At EMCOR Mechanical Services, the organizational objectives are to “go above and beyond promoting a profitable and sustainable business that meets the customers’ expectations, while maximizing opportunities.” The organization also places focus on career satisfaction, integrating employee’s values, integrity, teamwork, effective communication, and empowerment to make the job fun. As a nationwide organization, that continues to grow in a down economy, many employees are committed to the organization. These employees care about the quality of work they produce and are more productive because the company seems to care about them. Salary, flexibility, growth, interpersonal relationships, and a since of value should be taken into consideration when...

Words: 832 - Pages: 4

Premium Essay

Management Incentive

...Job-satisfaction • Team work, etc. Incentive: Incentive is an act or promise for greater action. It is also called as a stimulus to greater action. Incentives are something which is given in addition to wagers. It means additional remuneration or benefit to an employee in recognition of achievement or better work. The need of incentives can be many:- 1. To increase productivity, 2. To drive or arouse a stimulus work, 3. To enhance commitment in work performance, 4. To psychologically satisfy a person which leads to job satisfaction, 5. To shape the behavior or outlook of subordinate towards work, 6. To inculcate zeal and enthusiasm towards work. Types of Incentive: management has to offer the following two categories of incentives to motivate employees: 1. Monetary incentives- Those incentives which satisfy the subordinates by providing them rewards in terms of money. Money has been recognized as a chief source of satisfying the needs of people. Money is also helpful to satisfy the social needs by possessing various material items. Therefore, money not only satisfies psychological needs but also the security and social needs. 2. Non-monetary incentives- Besides the monetary incentives, there are certain non-financial incentives which can satisfy the ego and self- actualization needs of employees. Non- financial incentives can be of the following types:- a. Security of service- Job security is an incentive which provides great......

Words: 795 - Pages: 4

Premium Essay

Incentives’s incentive plan, the organization has to have a strategic reason identified. It usually depends on the size of the organization that gives key reasons for establishing incentive plans. The reasons for incentive could include; attracting employees or keeping current ones, reducing absenteeism, or lateness. The organizational objectives should coincide with the incentive to make the company’s better. Citizens has had a problem with employee’s coming in late and have established a disciplinary policy, but also has established a reward incentive for the employees who are always on time. The company gives time off quarterly to one employee per department; they will receive a half day off. The half day off is restricted during the busiest days, but has to be done on other occasions with a supervisor’s approval. The time off incentive is offered to all employee’s part and full time employees and also temporary personnel when permitted. The company also gives one full day off reward incentive to handle the absenteeism that is a reoccurring problem. Giving a day off ensures that employees will come to work and take fewer days off for sick or other various reasons. At the end of the quarter the company throws all the names of employees in a box and one person will have the day off that they want with supervisor’s approval. The employees strive to get that extra day off and get paid for it, this has kept employees from taking too many days off. The incentive plan that......

Words: 552 - Pages: 3

Free Essay

Employee Incentives

...Organizations and companies need employees to manufacture products or work with customers. Successful organizations discuss performance issues and work on strategies to help employees and management meet organizational goals. Employee incentive programs have been a successful way of helping achieve these goals. This paper will discuss performance management and show how apac incentive plans relate to their specific organizational objectives. It will also show if incentive plans help apac achieve its goals and objectives. Performance Management is defined as the process through which managers ensure that employees activities and outputs contribute to the organization’s goals. This process requires knowing what type of activities and outputs are needed in each individual organization, observing whether they occur and providing feedback to help employees meet expectations of the company. While giving feedback, management and employees may find performance issues and think of new ways to resolve issues. Performance Management can be approached in different ways. Performance appraisal is one way companies rate employees and was the way most organizations have previously evaluated employee performance. The evaluation of employee performance by using a scale has many negative results. Performance appraisal measures specific areas of employee performance usually annually or sem-annually. Evaluations usually rate employee performance on a scale and if the evaluation...

Words: 459 - Pages: 2

Premium Essay

Premium Banking

...Executive Summary: This is the internship report based on the three months long internship program that I had experienced in the Head Office of BRAC Bank Ltd. From May 18, 2008 to August 17, 2008 as a requirement of my BBA program under Department of School of Business, North South University. This report is divided into two broad parts: one is the organization part and another is the project part. In the organization part, I introduced the Latest and one of the largest banks of our country— the BRAC Bank Ltd. On the other hand, in the project part, I focused on the findings, graphs and analysis of the research. The topic of my report was “Premium Banking Service to the customers”. My focus of the report will be basically on the functions of Premium Banking only. The specific objective of this study was to explore the relationship between client satisfactions and the degree of consumer service delivery, the degree of CSD in context of the BRAC Bank Ltd. While discussing the different aspects and functions of the bank, priority has been given to depict the real situation as far as appraisal and management system of BRAC Bank Ltd. are concerned by employing the experience gathered during the internship program. Analysis on the findings is basically done to sort out the major aspects of the General banking system and to draw some significant inferences. At the same time for easier understanding of the report, supporting topics and terms are explained in light of textbooks and......

Words: 22347 - Pages: 90

Premium Essay

Benefits of Incentives

...INCENTIVES An incentive is something that motivates an individual to perform an action. The study of incentive structures is central to the study of all economic activities (both in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Economic analysis, then, of the differences between societies (and between different organizations within a society) largely amounts to characterizing the differences in incentive structuresfaced by individuals involved in these collective efforts. Ultimately, incentives aim to provide value for money and contribute to organizational success. Benefits of Incentives Some benefits of incentives are: 1.) Spill-over Effects: The decision to employ incentives will not only influence the immediate behavior of the target, but will also have a "spill-over effect" on relations in general. 2.) Legitimacy: It is generally much easier and less controversial to increase another's prosperity in return for a desired action, than to forcibly deprive them of something if they do not conform. 3.) Market Forces: Eileen Crumm argues that market forces work against sanctions, while incentives can be tailored to maximize their value to the targeted actor. 4.) Addressing Needs: Conflict largely arises out of political, economic or security-related need. Sanctions increase that need; by subtracting from the target's political, economic, or security baseline, they exacerbate the......

Words: 3169 - Pages: 13

Free Essay

Equity Incentive

...51004 An Empirical Study on the Effects of Equity Incentive of the Listed Corporations in the SME Board of China —An Empirical Analysis Based on the View of Earnings Management Lixin Xu, Wenqin Cui School of Management, University of Science and Technology of China, Hefei, China Email: Received October 29, 2013; revised November 29, 2013; accepted December 6, 2013 Copyright © 2014 Lixin Xu, Wenqin Cui. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. In accordance of the Creative Commons Attribution License all Copyrights © 2014 are reserved for SCIRP and the owner of the intellectual property Lixin Xu, Wenqin Cui. All Copyright © 2014 are guarded by law and by SCIRP as a guardian. ABSTRACT Currently, most researches are focusing on Shanghai & Shenzhen exchange, and few researches have been done on the SME board. Besides, while studying the effect of equity incentive, most of the researchers have ignored the earnings management triggered by stock ownership incentive. This paper takes the SME board companies which have implemented stock ownership incentive as the research object. We have used earnings management to modify the company performance and carried out an empirical research to study the effect of stock ownership incentive. Our result shows that without earnings......

Words: 4985 - Pages: 20

Premium Essay

Amul Premium Dahi

...A summer internship report Market development of premium dahi and Amul Pro via market research Prepared by Rupesh Pandey 2014241 Under guidance of Mr. P. S Babra Dr. S Maheswaran Branch Manager Faculty guide Amul (GCMMF) IMT, Nagpur PGDM 2014-16 DECLARATION I, Mr. Rupesh Pandey studying in first year PGDM at IMT, Nagpur hereby declare that I have completed the summer internship project titled “Market development of Amul premium dahi and Amul Pro via market research ” as a part of the course requirement for PGDM. I also declare that the work undertaken by me is original and is not copied from any other place. Rupesh Pandey 2014241 IMT, Nagpur ACKNOWLEDGEMENT I take this opportunity to express my gratitude to Mr. P S Babra (Branch Manager Amul, GCMMF) and Mrs. Kirti Nuval (Marketing Executive Amul, GCMMF), who helped me to select proper title and completing this task through various stages. I also take this opportunity to thanks to thank Mr. Niraj Shukla (Territory Sales Incharge, GCMMF) for his valuable time and insight. He took great efforts to explain us distribution channel of Amul, various problem faced in the market and also logistics and warehouse management. It is only because of him that we got a detailed note on managing...

Words: 6068 - Pages: 25

Premium Essay

Incentive Conflicts

...a) What incentive conflicts exist in corporations?  In any corporation one will find conflicts between the managers and shareholders. A major reason behind this fact is that mangers often own very few shares in the company. According to Robert Vishny, who sampled 371 Fortune 500 companies, a firm’s performance is in fact weaker “at low levels of management ownership”. His article goes on to explain that when managers own 5 to 20 percent performance levels are higher when compared with firms where management ownership is only 0 to 5 percent.² Managers, especially those that own very little of the company’s stock, have different goals and motives from those of the shareholders. Manager’s engage in “self-interested behavior”, which is defined as “maximizing their own utility at the expense of corporate shareholders”.³ They very often take fewer risks than shareholders would like in an attempt to increase job security, or they feel they deserve special perks, such as company jets, free lunches, or gym memberships, to name a few. Managers may also shirk on the job instead of work hard and give it their all. While shareholders would like manager’s to maximize value of the firm, managers are more concerned with increasing the size of the firm to make themselves look better. Shareholders are concerned with performance of the company as a whole; mangers are concerned with their own individual performance. Incentives and compensation packages are ways to ease these conflicts...

Words: 576 - Pages: 3

Free Essay


...offering incentives for charitable acts is incredibly common, from tickets to baseball game for cancer research, to school projects to raise funds for a new building. The use of motivation to incentivise donations is undeniably effective, but is it still charitable when it becomes an ethical question? When does the focus diverge from philanthropy to materialism? Randy Cohen of The New York Times Magazine hosts a weekly column called “The Ethicist”, in which people ask ethical questions to which Cohen bears his answer. In April of 2003, a reader of his asked him a similar ethical question: “At my school, various clubs and organizations sponsor charity drives, asking students to bring in money, food, and clothing. Some teachers offer bonus points on tests and final averages as incentives to participate.Some parents believe that this sends a morally wrong message,undermining the value of charity as a selfless act. Is the exchange of donations?” While in many instances, the use of incentives may diminish or mitigate the value of charity, employing their use in charitable acts in an ethical way is entirely circumstantial. The use of incentives to encourage charitable acts exists as a way to spread awareness and maybe lend a hand for a benevolent cause. There are an astounding amount of charities that seek to carry out incredible, benign feats, but receive less than enough funding to arouse an appreciable difference. With that, these charities may utilize incentives to......

Words: 332 - Pages: 2

Free Essay


...processes are undergoing continuous change, forward thinking companies are looking for new incentives to motivate labor. Companies are learning that they can no longer cling only to individual incentive pay plans. Just as an artist relies on a whole pallet of colors, the future success of incentives is having and using many different pay plans, each tailored to achieve a desired effect. There are many incentive plans for you to consider. Some even de-emphasize money and appeal to employees higher needs. I even discussed one plan, Merit Pay, in a previous Industry Advisor article. Now I will compare individual to group incentives – in certain key areas and provide highlights of the differences. Be aware that I am an advocate of group incentives. PERFORMANCE Individual Incentives Since each direct labor employee – who is motivated by money – is theoretically in "business for him/her self" there should be a strong inducement for high performance. A piece work operator could care less about a fellow operator’s performance. The relative productivity of each individual can be readily determined. Likewise, actual time spent on specific jobs is also easily determined and standards set. Individual incentives work best on singularity of product and long runs. They lose their effectiveness and are usually costly to maintain in a high style, fast in-process turnover environment. Group Incentives Groups attempt to empower people and tend to have a leveling effect on labor’s......

Words: 1308 - Pages: 6

Premium Essay

Incentive Compensation

...performance is usually an incentive plan that is based on the performance of each individual as well as the performance of the company. The incentive plan supports the pay-for-performance philosophy by aligning a percentage of total compensation with the attainment of annual business goals and individual performance objectives. The plan is also designed to increase awareness, understanding, and commitment to the business goals, as well as promote employee retention. Moving from a bonus plan to a pay for performance plan will require a lot of work for any organization and union. An effective pay for performance plan will need to be reviewed and negotiated periodically to ensure that the plan works for the organization and for the employees. The incentive plan will need to meet the company’s core objectives while retaining employees. “Too often I have seen organizations lose key people just after they received a substantial bonus or incentive payment. They hung around just long enough to get their "big pay out" and then left for greener pastures.” (Chapman, 2010) So how is the incentive or pay for performance plan determined? Union representatives and management must negotiate all aspects of the incentive plan. The negotiation must include information such as timeframe, production standards, and incentive payments. The timeframe will determine when incentives will be paid on a monthly, quarterly, or yearly basis. The amount or percentage for the incentive payment......

Words: 1100 - Pages: 5

Premium Essay

Incentive Plans

...Incentive Plans Most companies use incentive plans in order to retain their current employees and also help recruit new employees. By offering yearly raises, a bonus structure, and performance reviews, employees can be more motivated to perform better and be a valued asset within the company. RealManage does offer incentive plans for each employee however, they are inconsistent to everyone. Most property management companies offer a 3%-5% annual raise each year to help compensate with inflation. RealManage promotes this plan when recruiting new employees. They promote highly competitive pay and place employees on a career path. The president of the branch informs each employee what the career path might be and a timeline is provided. tresero ( 2009), “No one size fits all incentive plan exists”. There are different plans for each employee when it comes to compensation. All hourly employees are presented with unlimited over-time and the ability to charge back all the mileage that you have while commuting back and forth to anything business related. Salary employees are presented with flex time and have the ability to not only charge back mileage but anything that is out of the scope of the contract between the homeowner’s association and the management company. The only difference is when an employee is hired on with RealManage, the compensation incentive suddenly changes. The hourly employees are not allowed to accrue over time hours once the meeting is over. So if an......

Words: 813 - Pages: 4