Annual Incentive Research Articles

Primary care providers’ preferences for pay-for-performance programs: a discrete choice experiment study in Shandong China

BackgroundPay-for-performance (P4P) schemes are commonly used to incentivize primary healthcare (PHC) providers to improve the quality of care they deliver. However, the effectiveness of P4P schemes can vary depending on their design. In this study, we aimed to investigate the preferences of PHC providers for participating in P4P programs in a city in Shandong province, China.MethodWe conducted a discrete choice experiment (DCE) with 882 PHC providers, using six attributes: type of incentive, whom to incentivize, frequency of incentive, size of incentive, the domain of performance measurement, and release of performance results. Mixed logit models and latent class models were used for the statistical analyses.ResultsOur results showed that PHC providers had a strong negative preference for fines compared to bonuses (− 1.91; 95%CI − 2.13 to − 1.69) and for annual incentive payments compared to monthly (− 1.37; 95%CI − 1.59 to − 1.14). Providers also showed negative preferences for incentive size of 60% of monthly income, group incentives, and non-release of performance results. On the other hand, an incentive size of 20% of monthly income and including quality of care in performance measures were preferred. We identified four distinct classes of providers with different preferences for P4P schemes. Class 2 and Class 3 valued most of the attributes differently, while Class 1 and Class 4 had a relatively small influence from most attributes.ConclusionP4P schemes that offer bonuses rather than fines, monthly rather than annual payments, incentive size of 20% of monthly income, paid to individuals, including quality of care in performance measures, and release of performance results are likely to be more effective in improving PHC performance. Our findings also highlight the importance of considering preference heterogeneity when designing P4P schemes.

Earnings Performance Targets in Annual Incentive Plans and Management Earnings Guidance

ABSTRACTWe study how corporate boards set earnings performance targets in CEOs’ annual incentive plans (AIPs) and the implications for strategic management earning guidance. We find that corporate boards rely on management and analyst information in setting the earnings performance targets, and the weight placed on each signal increases with its precision. We also find that management earnings guidance issued before compensation committee meetings (“event-window management forecast (MF)”) is more pessimistic than that issued by the same firm at other times. The pessimism in the event-window MF is more pronounced when the expected managerial benefits of having lower performance targets are greater. Ex post, the event-window MF pessimism is associated with higher bonus payouts to CEOs. We use a theoretical framework to illustrate how the use of earnings performance targets might drive our findings. This study highlights boards’ tradeoffs in designing executive compensation and the resulting managerial strategic disclosure.JEL Classifications: G34; M41; M52.

Designing fair annual bonus formulations for workers: A case study of the state-owned enterprise cement holding in Indonesia.

A bonus is an additional annual incentive for labour, as part of remuneration package systems, that goes hand-in-hand with a tantième for boards of commissioners and directors. This practical business is common in industrial relations for maintaining a spirit of productivity and loyalty. However, practices to distribute bonuses remain undisclosed and unknown, according to the views of labour. Without an earlier mutual agreement between parties, consisting of labour representatives and management, management unilaterally decides a specific bonus formulation that takes effect immediately. The management ignored suggestions and advice from labour as its partner; worse, there were no discussions between parties in advance. There are no equal labour and management rights to build a better industrial relations climate. We employed mixed methods and conducted multidisciplinary studies to determine cluster and bonus pool allocation with relevant peers to investigate how to build a fair bonus formulation. We adopted a target-based method rather than an outcome-based framework after several exercises. The most important finding is that the bonus formulation, configured from the annual bonus, utilised three underpinning percentiles (P): P-25, P-50, and P-75 implying the lowest, medium, and highest total remuneration for labour, respectively. We determine that success indicators in developing fair bonus formulation stand on how high total remuneration has been achieved by labour towards the median level of peers. The higher the value passed over the median line, the higher the success rate. The present findings contribute to building fair annual bonus formulations in the cement sector; however, other industrial sectors can use them with adequate adjustments.

Unintended consequences of promotions: Importance of annual incentives for performance management systems

AbstractWith increased globalization, multinational enterprises (MNEs) have become pervasive in emerging economies such as India. Given that employee performance is multidimensional and culture‐bound, the management of performance in MNEs is very critical for the successful implementation of their business strategy. We focus on promotions and incentives as they are considered the two crucial aspects of any performance management system. Based on a multisource, temporal study spanning over 19 months, we tested the interaction effect of promotion and annual incentive on employee outcomes. We conducted interviews of 15 senior officers in phase 2 to understand the inconsistencies in our findings. The contribution of the study to industry and academia are discussed.

The Complementarity Between CSR Disclosures and the Use of CSR-Based Performance Measures in CEO Annual Incentive Contracts

Given the increasing attention that society pays to a more sustainable lifestyle, also businesses are pressured more and more into demonstrating socially responsible business conduct, and feel the need to communicate their CSR-related efforts to their stakeholders. Firms can do so by voluntarily disclosing their CSR-related activities in CSR reports or by incorporating CSR-related performance measures in executives’ compensation contracts. In this study, we examine the relationship between these two mechanisms, and argue that CSR disclosures and the use of CSR-based performance measures are complements. We further argue that the proposed complementarity is not uniform, but varies with the context. In particular, we hypothesize that firms in industries with relatively high competition and firms facing higher credibility issues (i.e., firms in industries that are often blamed to be “green-washing”) show stronger complementarity between the two mechanisms. Using hand-collected data to capture disclosure intensity in CSR reports and the use of CSR-related performance measures in CEO contracts, we find evidence that is largely consistent with our predictions.

A Tale of Leadership in Value Creation

In this prologue to his new book, Curing Corporate Short‐Termism, the founder and CEO of Fortuna Advisors presents a fictional account of a corporate turnaround—a “composite” reflection of the author's many years of consulting experience that dramatizes the pressure to meet near‐term earnings targets and other kinds of “agency” problems facing a public company called Blue Dynamics Corp. The tale begins with the puzzlement of the incoming CEO, Betty Manning, at finding the company's highest‐return business unit starved for investment, even as the low‐return units continue to receive and spend capital with little success. At the core of the company's capital allocation and “underinvestment” problems, she finds a corporate‐wide performance measurement and reward system focused on setting and beating budgets and growth in EPS and ROE.Manning's solution is to divorce the performance and reward system entirely from the budgeting process and implement new annual incentives and target‐setting practices that result in both more reliable budgeting and forecasting and a longer‐term view of value creation. The new measure of economic profit, called BDVA (short for Blue Dynamics Value Added), is based on a customized measure of EBITDA less a capital charge. The adoption of the new measure has the effect of encouraging her team to take a number of decisive steps: make an objective, “fact‐based” case for a strategic acquisition whose price appears to be too high (at least using conventional measures like EPS accretion); pull the trigger on a divestment that appears to have been adding value, but is more valuable outside the firm; and, more generally and most important, guide operating managers toward an ideal balance of overall growth and return on capital.

Policies and practices that promote faculty retention at AUSOM- a Pilot Study

This article was migrated. The article was not marked as recommended. ObjectiveFaculty satisfaction and retention are one of the key areas that most of the educational institutions are focused. The faculty turnover can hamper the teaching and research goals of the higher educational institutions. A lot of resources involved in the recruitment of faculty including time, it is imperative that higher educational institutions try to keep and retain the faculty members. The attrition rate and turnover of the faculty at Avalon University School of Medicine (AUSOM) are minimal. The objective of this pilot study is aimed at exploring the policies and procedures that are practiced at AUSOM which foster the faculty retention at Avalon.MethodsThe research study conducted is a quantitative method. The survey form was used to perform the survey, and the questionnaire developed on the Likert scale of one to five. The survey form also included the qualitative questions like to mention the most important factor in retaining the teachers in higher education and open-ended question for further comments.ResultsFaculty perceived that faculty development activities, student feedback and satisfaction, promotional policies and tenure procedures, research opportunities, attractive salary packages, annual incentives and hikes, working environment, living conditions, and quality of life play a role in retaining the faculty members at higher educational institutions. Faculties are satisfied with these factors, policies, and procedures at AUSOM.ConclusionThe policies and procedures that are practiced at AUSOM is the reason for the high retention of faculty members at Avalon.

The Complementarity between CSR Disclosures and the Use of CSR-Based Performance Measures in CEO Annual Incentive Contracts

The Complementarity between CSR Disclosures and the Use of CSR-Based Performance Measures in CEO Annual Incentive Contracts

Pessimistic Earnings Guidance Before Annual Incentive Plan Approval

We study how compensation committees set CEOs’ earnings performance goals in annual incentive plans (AIPs) and their implications for managers’ strategic earning guidance behavior. We find corporate boards rely on earnings forecasts provided by both financial analysts and managers in setting performance goals. Also, the weight boards place on a manager’s earnings forecasts increases with managers’ information advantage over analysts. We next examine the implications of this process for management earnings guidance. We find that the forecasts issued by management ahead of compensation committee meetings (“event-window guidance”) are more pessimistic than those issued at other times. This pessimism in event-window earnings guidance is present when performance goals are linked to earnings-based measures such as Earnings-Per-Share (EPS), but not when they are linked to revenue, suggesting that pessimistic event-window guidance is likely motivated by a desire to depress earnings performance goals. Furthermore, pessimism in event-window guidance is associated with higher bonus payouts as well as total payouts to CEOs. Lastly, meeting or beating performance goals significantly reduces the likelihood of forced CEO turnover. Overall, this study provides insights into the process of setting managerial performance goals and management’s strategic disclosure behavior arising from this process.

One System’s Approach to a Consistent Patient Experience

The mission of the nonprofit Carolinas HealthCare System, based in Charlotte, North Carolina, is improve Health, elevate Hope, and advance Healing-for all. To fulfill this mission, 60,000 teammates and 3,000 providers must create a consistent experience for our consumers through 11.5 million encounters annually at more than 900 care locations.In early 2013, as our corporate patient experience department structure was being developed, patient perception metrics indicated an inconsistent experience across care locations. At the same time, the organization's brand was being repositioned: The word was introduced in organizational internal messaging to drive unity of purpose, strengthen teamwork, and promote inclusion among our diverse teammates and patients. Using The Beryl Institute's (2016) definition as the foundation and playing on the concept of One, Carolinas HealthCare System adopted the following definition of patient experience:The sum of all interactions, shaped by the One culture of Carolinas HealthCare System, that influences patient perceptions across and at each point of the continuum of care.With an organizational definition in place, we created an organizational framework for supporting patient experience concepts and tactics. Many Carolinas HealthCare System locations had adopted an established care delivery or customer service model (e.g., Studer, Planetree, Magnet, patient-centered care), resulting in wide variations in practice and culture. To create One culture, the patient experience department team, in collaboration with internal corporate support departments, operations, and clinical partners, created the One Experience model with four components. Each component comprises concepts and tactical tools to drive improvement:1.Foundations of Caring-using consistent, evidence-based methods to enhance the experience (e.g., purposeful rounding, starting and ending each interaction with empathy, clearly completing patient handoffs)2. Teammate Engagement-demonstrating that we respect, value, and recognize each other as our system's greatest assets3. Healing Environments-offering nurturing and therapeutic spaces that reduce stress and foster well-being4. VOICE (Values, Opinions, Information, Compassion, Engagement)-inviting, listening, and responding to patient and family voices for continuous improvementIMPLEMENTATION STRATEGIESusing the one Experience model to drive one culture, four key strategies guide our patient experience efforts:1. Set common goals. An annual quality and patient experience goal-setting session allows both administrative and physician leaders from each location to vote on priorities for the coming year. This all-in approach affirms the connections among experience, quality, safety, and outcomes.Patient experience goals are cascaded across the organization annually via a series of physician-led calls with each hospital's administrative team, including quality and patient experience representatives. Facilities are given their goals for each reported area, and each site is aware of its contribution to the overall performance goals for the coming year. Annual incentives for all teammates are determined by common metrics.2. Deploy standard work. Specific tactical components of the one Experience model are defined as nonnegotiable standard work. The patient experience team works with leaders, providers, and other teammates to confirm that these tactics are in place consistently. For example, the tactical nonnegotiables in the Foundations of caring component of the model include deploying established standards of behavior and executing purposeful rounding, and they are continually validated and reinforced at every level. Another Foundations of Caring tactic-providing health-literate patient education-is supported via a corporate structure to ensure patient educational documents meet basic health literacy requirements. …

The Complementarity between CSR Disclosures and the Use of CSR-Based Performance Measures in CEO Annual Incentive Contracts

The Complementarity between CSR Disclosures and the Use of CSR-Based Performance Measures in CEO Annual Incentive Contracts

Beating the Target: Performance Management Around the Annual Incentive Target

We document the propensity of Standard & Poor’s 500 index companies to just meet, rather than overshoot or just miss, performance targets in CEOs’ annual incentive plans to boost cash bonuses. The statistical anomaly occurs only in the 4th quarter and is robust to alternative assumptions of performance distribution, but disappears when we substitute historical trends or previous year’s performance targets for the targets. Moreover, boards of directors sometimes make further discretionary adjustments for the purpose of awarding incentive pay. We support Murphy and Jensen’s (2011) call to remove non-linearity in pay-performance relation and urge better disclosure to shareholders.

Will Tax Credit Increase Housing Supply? Experience from U.S. and Prospect for Australia

While the world went through rapid urbanization in the last half century, house prices in many densely populated metropolitan regions are becoming increasingly unaffordable. As a result, many families turn to rental housing. However, the high rents in some markets also place significant burdens on low-income households. Thus, a lot of housing policies and strategies have been introduced by national and local governments to subsidize low-income families to improve their rental housing affordability. The low-income housing tax credit program (LIHTC) in the USA and the national rental affordability scheme (NRAS) in Australia are such examples. Both policies aim to increase supply of affordable rental housing for low-income families. LIHTC finances the development of affordable rental housing through a tax credit system, whereas NRAS provides an annual tax-free incentive for investors to purchase new affordable dwellings and rent them at 20% below market rents to low-income families. LIHTC has been implemented in US for more than a quarter century since 1986, while NARS has relatively short history since 2008. However, whether these programs will increase the long-term housing supply, or will they simply “crowd out” other type of affordable rental housing remains an open question.This paper first studies the long-term impact of LIHTC on housing supply, using the property level LIHTC data from 1986 to 2011, as well as other housing subsidy and housing supply data, including non-LIHTC rental subsidy programs, housing vouchers, housing permits, etc. An empirical linear OLS model is estimated to find the long-run sensitivity of housing supply to LIHTC program, controlling for other supply/demand variables. We find LIHTC has strong positive effect on overall housing supply.Then we compare LIHTC to NRAS program and try to forecast the effectiveness of implementing NARS for increasing affordable rental housing supply, with limited historical data. Similar results show that NRAS has fully compensated for traditional public rental units decline. The comparative study is important because it makes it possible to evaluate the effectiveness of such different approaches, and would enable decision makers to put the tax payers’ money for better use. The research results will also be useful for national and local governments when designing low-income housing subsidy programs.

How “Competitive Pay” Undermines Pay for Performance (and What Companies Can Do to Avoid That)

Almost all proxy statements say that the company's pay programs are designed to achieve pay for performance and to provide competitive pay. While companies assume that these objectives are perfectly compatible, attempts to provide competitive pay often have the effect of undermining pay for performance. As currently practiced, competitive pay means that the company's target pay levels match the pay levels of its peer companies regardless of past performance. By targeting the dollar value of an equity award each year, competitive pay plans effectively reward poor performance in a given year by increasing equity grant shares in the following year—and, conversely, such plans penalize superior performance in one year by reducing the number of shares in the next. Likewise, the target share of the annual incentive award increases with poor performance and decreases with superior performance. In this fashion, the competitive pay approach distorts incentives and weakens the link between cumulative pay and cumulative performance.The authors show that the focus on competitive pay is a modern development that replaced the sharing formulas that governed executive pay in the first half of the twentieth century. Companies adopt the competitive pay model because they believe it does a better job of achieving the three main objectives of executive pay: strong incentives; retention; and limited shareholder cost. While competitive pay directly addresses retention risk, it can greatly weaken management incentives. Furthermore, boards tends to rely on competitive pay data to set target compensation because they have no meaningful measure of incentive strength and the actual cost to shareholders. Without quantitative measures of incentive strength and shareholder cost, boards run the risk of retaining poor performers and losing superior performers.Using a case study of Dow Chemical, the authors show how companies can measure the incentive strength of their executive pay plans, and how a simple pay plan using annual grants of performance shares can provide “perfect” pay for performance.

Would Shareholders in Firms with Japanese Governance Mechanisms Benefit from the Use of Annual Incentive Plans?

Would Shareholders in Firms with Japanese Governance Mechanisms Benefit from the Use of Annual Incentive Plans?

Annual Incentive Plan Formula Considerations

This article describes both deductible and nondeductible bonus formulas, including a review of the economic profit type deductible plans. This is followed with a review of shareholder protection formulas. Following these formulas, desired objectives are set, the number of participants is identified and desired payouts drive creation of a fund formula which will either be a target or no-target plan. The plan is tested based on assumptions about performance factors. Finally, a decision is made as to whether or not there will be divisional funds in addition to a corporate formula and whether carryovers will be allowed.

Beating the Target: A Closer Look at Annual Incentive Plans

This paper documents the performance metrics used in annual incentive (bonus) plans for chief executive officers (CEOs). Our detailed analysis using earnings per share (EPS) shows that at the time of plan approval, in general, EPS growth targets are set lower than earnings expectations such as EPS growth implied by analyst consensus and the historical EPS growth of the firm and that of the firm’s industry over various horizons. A lower EPS target in the annual incentive plan increases the probability of achieving the target and enhances the ex-ante value of the annual incentive payout for the CEO. However, the slack in setting performance targets is small. Moreover, we find that performance targets are more challenging at firms with strong corporate governance and when the performance measure is more important. Interestingly, while not linked to subsequent performance or risk-taking at the firm, an easy performance target increases the amount of the ex-post payout for the CEO.

The Early Experience of a Hospital-Based Pay-for-Performance Program

This study evaluated the effect of a health-plan-sponsored, hospital-based financial incentive program, focused on heart-failure quality indicators, to improve quality. We conducted separate, hour-long, semistructured group interviews with senior managers and cardiologists at ten hospitals involved in the Participating Hospital Agreement (PHA) program implemented by Blue Cross Blue Shield of Michigan (BCBSM). Under PHA, hospitals are eligible for an annual incentive payment of up to 4 percent of BCBSM's diagnosis-related-group-based inpatient claims, depending on their performance in patient safety, community outreach, and selected quality indicators. Interviews focused on knowledge, perceptions, and impact of pay-for-performance (P4P) strategies. We compared BCBSM-provided data on heart-failure quality indicators between 2002 and 2004 with our qualitative findings. Our analyses suggest that pursuit of incentive-based quality targets may be largely dependent on the context of a particular hospital. In settings where performance did not change, incentives did not appear to drive organizational or individual practice changes. Underperforming hospitals with some of the infrastructure necessary for quality improvement had the greatest success when presented with incentives. We concluded that one formula for a successful P4P program is to direct incentive payment to an organized entity capable of supporting process improvement by applying resources and organizational expertise. In this model, the incentive program supports the organization, and the organization in turn may apply resources to facilitate improvement in clinician performance. Consideration of the requirements of organizations to facilitate improvement in relation to existing quality improvement infrastructure may lead to the future success of hospital-based P4P programs.

Executive/Manager Self-Service: State Street Corporation’s Annual Incentive Program

Executive/Manager Self-Service: State Street Corporation’s Annual Incentive Program

Avoiding Performance Measurement Traps:

Performance measures in annual incentive plans have evolved from simply measuring performance to driving it. This makes determining the proper performance measures more important than ever. In addition to traditional accounting measures such as earnings per share and return on net assets, human resources practitioners have a myriad of alternatives including nonfinancial measures and new approaches such as economic value-added and the Balanced Scorecard. Although these performance measures can work quite well if used correctly, they each have unique design and implementation traps that can render them ineffective. By understanding and avoiding these traps, human resources professionals can more easily determine the appropriate performance measures for their organizations and successfully implement motivational incentive programs.