Module 1 - Lecture 5

Question 1

What are 2 control benefits of incentives?

Answer 1

1) Informational - Tells managers when they are going wrong

2) Motivational - If targets are put in place managers will be more motivated (in theory)

Question 2

What’s the difference between positive and negative incentives?

Answer 2

Positive incentives are rewards. Negative incentives are punishments.

Question 3

What are the differences between short and long-term incentive plans?

Answer 3

Short-term is less than a year and is usually things like net profits etc.. Long-term is over a year and is usually based on things like accounting performance (ROE, EPS, ROA) and market-based performance (stock options etc.)

Question 4

Why can group rewards be both useful and not useful?

Answer 4

Useful because they can help to implement personnel/cultural controls.

Not useful because they rarely provide a direct incentive effect.

Question 5

What are there lower and upper cutoffs on compensation?

Answer 5

Lower cut-off because you don’t want to reward mediocre (or worse) performance. Upper cutoff because you don’t want managers to forego long term goals for short-term achievement. Also because you don’t want to reward success rom windfall gain.

Question 6

Name an advantage and a disadvantage if using a strict formula to determine bonuses.

Answer 6

Advantage - No room for bias or favouritism in assessing performance.

Disadvantage - Less attention for performance dimensions which are difficult to quantify

Question 7

Name an advantage and a disadvantage of using subjective assessment for bonus determination.

Answer 7

Advantage - Useful for performance dimensions that are difficult to quantify

Disadvantage - Allows for bias

Question 8

What are the negative incentive effects of compensation?

Answer 8

Informational:
Employees learn what really matters and focus on that

Motivational:
Agency - Effort-averse employees require rewards for effort
Expectancy - Employees choose actions based on which ones provide rewards

Selection:
More able/motivated employees choose employment where they can get higher expected payoffs

Question 9

What evidence shows that pay-performance-systems can manifest themselves more through selection than motivation?

Answer 9

Firms with variable pay exhibit higher pay levels.

Question 10

What is the difference between perverse and productive effort?

Answer 10

Perverse effort increases exponentially with incentive after starting at 0. Productive effort is when the employee already puts in effort but then effort increases with incentive up to a certain point.