Explicit Incentives Research Articles

ACCT3323: Strategic Management Accounting

These notes discuss four different accounting tools to manage an organisation’s strategy: budgets, incentive contracts, cost accounting, and the balanced scorecard. The first one, budgets, are a quantitative expression of a business plan for a specific period of time (p.184 in Horngren et al. 2012 or p.387 in Langfield- Smith et al. 2008). Budgets typically permeate the entire organisation and most employees collect information to put in the budget or they might even be directly responsible for managing a subset of the budget. Cost accounting is the domain of the accountants. Product cost calculations are a large input into the budgeting process but these cost calculations are also directly used to evaluate the viability and efficiency of investments, production lines, outsourcing decisions. When employees manage part of the budget and make decisions on how to implement the firm’s strategy, the headquarters will want to make sure that employees work in the best interest of the firm. Firms will introduce explicit and implicit incentive contracts to reward good behaviour and punish bad behaviour. Budgeting and costing aims to quantify all the information that goes into strategic decision making and strategy implementation. That does not mean that all business decisions are only driven by these figures. Managers often use their own experience and intuition to augment the quantitative information. The balanced scorecard tries to formalise the interplay between objective information and subjective knowledge by summarising the firm strategy in a limited set of causally linked financial and non-financial measures. While budgeting and costing are often seen as merely strategy implementation tools, the balanced scorecard also serves as a way to form and evaluate an organisation’s strategy. Nevertheless, a full balanced scorecard implementation requires careful planning. While the balanced scorecard for top management should be concise, more complexity is introduced when each lower level department needs its own balanced scorecard to aid in fulfilling its part of the overall strategy.

Organizational Enablers for NPD Portfolio Selection

Despite substantial research that advocates the “right” portfolio of new product development initiatives for the firm, one important aspect has been overlooked: Creating a portfolio of new product development initiatives is not equivalent to choosing from a menu of initiatives. Rather, these initiatives are defined by and within the organization. Thus, portfolio selection rests upon two challenges: 1) the cross-functional nature of collaborative tasks; and 2) the role of explicit and implicit incentives on innovative outcomes. This paper explores how these factors ultimately determine the initiatives an organization pursues. We abstract a new product development organization as two functional managers who report to senior management and analyze the strategic interactions between all three stakeholders. Senior management decides whether to empower the functional managers to define the initiative and how to reward them contingent on the outcome. We evaluate how the asymmetry of information regarding each function's capability, and the explicit and implicit rewards and penalties imposed on the functional managers affect the upfront resource allocation. We find a profound effect of the information asymmetry: the set of initiatives the firm deems profitable is reduced, thus impeding the organization's potential to innovate. To counter such a shortcoming, senior management may optimally misalign the objectives of the stakeholders.

Media pressures on Welsh language preservation

ABSTRACTDespite compulsory school instruction in the Welsh language and strong cultural incentives to acquire the language, the most recent UK Census showed a downward trend in the number of speakers. The asymmetry in explicit language acquisition incentives is here considered to be offset by the media dominance of the English language. This dominance is modeled by the introduction of time-dependent connectivity and infectivity among English speakers into an adapted epidemiological model. Extrapolations up to 2050 are made, this being the announced date of a Welsh Assembly language-planning target of one million Welsh speakers.

Do White-Collar Employee Incentives Improve Firm Profitability?

ABSTRACT We use proprietary archival compensation panel data from Finnish white-collar employees (WCEs) over the period of 2002 to 2011 in order to examine the relationship between performance-based incentives for WCEs and the future profitability of the firm as well as to determine whether this association is moderated by task complexity. While many studies examine the determinants and performance effects of CEO compensation, virtually no evidence has been presented to indicate that explicit financial incentives for WCEs improve the profitability of the firm. Our empirical results show that performance-based incentives for WCEs are significantly positively related to the future return-on-assets, return-on-equity, and profit margin ratios of the firm. We also find that this effect comes from the performance-based incentives for low-level WCEs, corroborating the importance of implementing performance-based incentives also to low-task complexity jobs. JEL Classifications: M40.

Double Bonus? Implicit Incentives for Money Managers with Explicit Incentives

We use a unique dataset of European performance-fee mutual funds to examine the interaction between explicit incentives (performance fees) and implicit incentives (fund flows) of asset managers. Funds with performance fees face substantially steeper implicit incentives compared to non-performance-fee funds. Among performance-fee funds, investors’ flows depend on the performance fee level and attenuate the asymmetry in the total pay for performance of higher-fee funds. Thus, the investor preferences that we elicit favor performance-sensitive but not necessarily asymmetric compensation schedules for fund companies. Our results shed new light on several aspects of the contracting problem in asset delegation.

Do golden parachutes matter? Evidence from firms that ultimately filed for bankruptcy

Abstract We study bankruptcy outcomes of 275 firms and find that hiring CEOs with golden parachutes (GPs) during financial distress is associated with a lower probability of liquidation. In contrast, firms led by incumbent CEOs with GPs are more likely to be liquidated, as are firms led by new CEOs without GPs. Since GPs are nullified during bankruptcy, the observed relationship cannot be attributed to an explicit incentive effect. Rather, we contend that during financial distress GPs help recruit reputable CEOs who, even without explicit incentives, continue to maximize shareholder value due to implicit reputational and career concerns.

CEO Career Concerns And Voluntary Disclosure

This paper investigates the relation between Chief Executive Officers (CEO) career concerns and voluntary disclosures using listed firm (KOSPI) data in Korea. Prior research suggests that explicit incentives in the form of CEO stock-based compensation or CEO’s equity ownership mitigate the agency problems of reluctance to make voluntary disclosure. In addition, implicit incentives arising from CEO career concerns are as important as explicit incentives for mitigating agency problems.The labor market assesses CEOs ability and CEO reputation in the market is a valuable asset that is associated with many long-term benefits, such as better future compensation, reappointment in the position, and greater managerial autonomy. CEOs are concerned about such an assessment and these concerns are referred to as career concerns. However, the market has incomplete information about CEOs’ ability especially when the CEOs have short tenures as a CEO position. Hence, CEOs with short tenures have more strong incentives to signal their ability to the labor market so that they can build proper reputation.Implicit incentives arising from CEO career concerns are measured by CEO tenure. I assume that short-tenured CEOs are more career-concerned than long-tenured CEOs. I find that CEOs with short tenures tend to more likely disclose management forecasts. I interpret this result that more career-concerned CEOs have strong incentives to signal their ability to the labor market in order to build their reputations which affect their future payoffs such as compensations and reappointment. In addition, management forecasts, means of voluntary disclosure, are used as effective mechanism. I also find that CEOs with short tenures tend to disclose more accurate management forecasts. This result implies that CEOs with more career concerns have more pressure to provide accurate forecasts because of their reliability in the labor market. Based on these empirical results, I infer that CEOs’ implicit incentives affect their voluntary disclosure decision.This study will contribute to academics and disclosure-related practitioners by documenting about CEOs’ career concerns and their voluntary disclosure decisions.

Neophilia Ranking of Scientific Journals.

The ranking of scientific journals is important because of the signal it sends to scientists about what is considered most vital for scientific progress. Existing ranking systems focus on measuring the influence of a scientific paper (citations)-these rankings do not reward journals for publishing innovative work that builds on new ideas. We propose an alternative ranking based on the proclivity of journals to publish papers that build on new ideas, and we implement this ranking via a text-based analysis of all published biomedical papers dating back to 1946. In addition, we compare our neophilia ranking to citation-based (impact factor) rankings; this comparison shows that the two ranking approaches are distinct. Prior theoretical work suggests an active role for our neophilia index in science policy. Absent an explicit incentive to pursue novel science, scientists underinvest in innovative work because of a coordination problem: for work on a new idea to flourish, many scientists must decide to adopt it in their work. Rankings that are based purely on influence thus do not provide sufficient incentives for publishing innovative work. By contrast, adoption of the neophilia index as part of journal-ranking procedures by funding agencies and university administrators would provide an explicit incentive for journals to publish innovative work and thus help solve the coordination problem by increasing scientists' incentives to pursue innovative work.

On Multitasking and Job Design in Relational Contracts

We investigate the optimal job design in a repeated principal-agent relationship with multiple tasks where the performance measurement is distorted, aggregated, and nonverifiable. We compare task bundling, where all the tasks are assigned to a single agent, with task separation, where the tasks are split and assigned to two agents. Compared to task bundling, task separation mitigates misallocation of effort among the tasks but tightens the self-enforcing constraint due to dispersion of informal bonuses to multiple agents. Consequently, task separation is better than task bundling if and only if the discount factor of the parties is high. We also consider an extended model in which the principal combines explicit incentive pays based on a verifiable and distorted signal. In such cases, task separation is optimal if the discount factor is sufficiently high or sufficiently low.

Financial incentives for a healthy life style and disease prevention among older people: a systematic literature review.

BackgroundTo motivate people to lead a healthier life and to engage in disease prevention, explicit financial incentives, such as monetary rewards for attaining health-related targets (e.g. smoking cessation, weight loss or increased physical activity) or disincentives for reverting to unhealthy habits, are applied. A review focused on financial incentives for health promotion among older people is lacking. Attention to this group is necessary because older people may respond differently to financial incentives, e.g. because of differences in opportunity costs and health perceptions. To outline how explicit financial incentives for healthy lifestyle and disease prevention work among older persons, this study reviews the recent evidence on this topic.MethodsWe applied the method of systematic literature review and we searched in PUBMED, ECONLIT and COCHRANE LIBRARY for studies focused on explicit financial incentives targeted at older adults to promote health and stimulate primary prevention as well as screening. The publications selected as relevant were analyzed based on directed (relational) content analysis. The results are presented in a narrative manner complemented with an appendix table that describes the study details. We assessed the design of the studies reported in the publications in a qualitative manner. We also checked the quality of our review using the PRISMA 2009 checklist.ResultsWe identified 15 studies on the role of explicit financial incentives in changing health-related behavior of older people. They include both, quantitative studies on the effectiveness of financial rewards as well as qualitative studies on the acceptability of financial incentives. The quantitative studies are characterized by a great diversity of designs and provide mixed results on the effects of explicit financial incentives. The results of the qualitative studies indicate limited trust of older people in the use of explicit financial incentives for health promotion and prevention.ConclusionsMore research is needed on the effects of explicit financial incentives for prevention and promotion among older people before their broader use can be recommended. Overall, the design of the financial incentive system may be a crucial element in their acceptability.Electronic supplementary materialThe online version of this article (doi:10.1186/s12913-016-1517-0) contains supplementary material, which is available to authorized users.

The Impact of Forward-Looking Metrics on Employee Decision-Making: The Case of Customer Lifetime Value

ABSTRACT This paper analyzes the effects of forward-looking metrics on employee decision-making. We use data from a bank that started providing branch managers with the customer lifetime value (CLV)—an estimate of the future value of the customer relationship—of mortgage applicants. The data allow us to gauge the effects of enriching the employees' information set in an environment where explicit incentives and decision rights remained unchanged. On average, customer value increased 5 percent after the metric's introduction. The metric's availability resulted in a significant shift in attention toward more profitable client segments and some improvement in cross-selling. However, the use of CLV did not negatively impact pricing or default risk, as the literature predicts. Finally, branch managers with shorter tenure displayed a stronger response, consistent with information substituting for experience.

Impact of a Sequential Intervention on Albumin Utilization in Critical Care.

Literature generally finds no advantages in mortality risk for albumin over cheaper alternatives in many settings. Few studies have combined financial and nonfinancial strategies to reduce albumin overuse. We evaluated the effect of a sequential multifaceted intervention on decreasing albumin use in ICU and explore the effects of different strategies. Prospective prepost cohort study. Eight ICUs at two hospitals in an academic healthcare system. Adult patients admitted to study ICUs from September 2011 to August 2014 (n = 22,004). Over 2 years, providers in study ICUs participated in an intervention to reduce albumin use involving monthly feedback and explicit financial incentives in the first year and internal guidelines and order process changes in the second year. Outcomes measured were albumin orders per ICU admission, direct albumin costs, and mortality. Mean (SD) utilization decreased 37% from 2.7 orders (6.8) per admission during the baseline to 1.7 orders (4.6) during the intervention (p < 0.001). Regression analysis revealed that the intervention was independently associated with 0.9 fewer orders per admission, a 42% relative decrease. This adjusted effect consisted of an 18% reduction in the probability of using any albumin (p < 0.001) and a 29% reduction in the number of orders per admission among patients receiving any (p < 0.001). Secondary analysis revealed that probability reductions were concurrent with internal guidelines and order process modification while reductions in quantity occurred largely during the financial incentives and feedback period. Estimated cost savings totaled $2.5M during the 2-year intervention. There was no significant difference in ICU or hospital mortality between baseline and intervention. A sequential intervention achieved significant reductions in ICU albumin use and cost savings without changes in patient outcomes, supporting the combination of financial and nonfinancial strategies to align providers with evidence-based practices.

The Impact of Forward-Looking Metrics on Employee Decision-Making: The Case of Customer Lifetime Value

This paper analyzes the effects of forward-looking metrics on employee decision-making. We use data from a bank that started providing branch managers with the customer lifetime value (CLV) — an estimate of the future value of the customer relationship — of mortgage applicants. The data allows us to gauge the effects of enriching the employees’ information set in an environment where explicit incentives and decision rights remained unchanged. On average, customer value increased 5 percent after the metric’s introduction. The metric’s availability resulted in a significant shift in attention toward more profitable client segments and some improvement in cross-selling. However, the use of CLV did not negatively impact pricing or default risk, as the literature predicts. Finally, branch managers with shorter tenure displayed a stronger response, consistent with information substituting for experience.

Career Concerns and Product Market Competition

This paper studies the effect of increased competition in the product market on managerial incentives. I propose a simple model of career concerns where firms are willing to pay for managerial talent to reduce production costs, but also to subtract talented CEOs from competitors. This second effect is privately valuable to firms, but is socially wasteful. As a result, equilibrium pay for talent can be inefficiently high and career concerns too strong. Explicit incentive contracts do not solve the problem, but equilibrium pay is reduced if managerial skills have firm-specific components, or if firms are heterogeneous. In this second case, managers are efficiently assigned to firms, but equilibrium pay reflects the profitability of talent outside the efficient allocation. The effect of increased competition is ambiguous in general, and depends on the profit sensitivity to cost reductions. This ambiguity is illustrated in two examples of commonly used models of imperfect competition.

INCENTIVE ROOTS OF MANAGERIAL (EXCESSIVE) RISK TAKING AND AN ASSESMENT OF POLICY RESPONSES

There are many incentive factors affecting managers’ risk appetite. This study reviews the incentive literature and analyses arguments highlighting the impact of implicit and explicit incentives on managerial risk taking and the results of empirical studies on the issue. The paper also assesses main policy responses against excessive risk taking and concludes that current policies centered on fixing contractual schemes are not adequate to fix these incentive problems.

Corporate credit-risk evaluation system: Integrating explicit and implicit financial performances

Traditional credit-risk evaluation methods focus mainly on static credit evaluation and rarely consider incentive factors. This paper proposes a comprehensive method of credit-risk evaluation based on dynamic incentives. First, an “explicit incentive” model is constructed based on the firm's current financial standing, and an “implicit incentive” model is subsequently developed focusing on the trend of the firm's past performance. Geometric (or arithmetic) procedures are applied to integrate the two models. To validate the proposed approach, we apply it to 12 publicly traded companies, each with 24 quarters and 20 indicators. We find the proposed integrated evaluation model outperforms the conventional models by better reflecting the key credit-risk management concept of “motivation and guidance”.

Improving performance in quantum mechanics with explicit incentives to correct mistakes

An earlier investigation found that the performance of advanced students in a quantum mechanics course did not automatically improve from midterm to final exam on identical problems even when they were provided the correct solutions and their own graded exams. Here, we describe a study, which extended over four years, in which upper-level undergraduate students in a quantum physics course were given four identical problems in both the midterm exam and final exam. Approximately half of the students were given explicit incentives to correct their mistakes in the midterm exam. In particular, they could get back up to 50\% of the points lost on each midterm exam problem. The solutions to the midterm exam problems were provided to all students in both groups but those who corrected their mistakes were provided the solution after they submitted their corrections to the instructor. The performance on the same problems on the final exam suggests that students who were given incentives to correct their mistakes significantly outperformed those who were not given an incentive. The incentive to correct the mistakes had greater impact on the final exam performance of students who had not performed well on the midterm exam.

White collar incentives

This study analyzes the incentive design structure for a sample of mid-level white collar managers (WCM) in large, technology-oriented U.S. firms whose knowledge-based outputs are difficult to measure objectively. Consistent with the limited availability of objective outcome measures for WCM, we find that the sample firms make significant use of tournament-like implicit promotion incentives to motivate WCM, in addition to using explicit financial incentives. We also find that implicit and explicit incentives are complements rather than substitutes in our setting in which sample firms are generally not constrained in their ability to adjust implicit and explicit incentives. Finally, while both implicit and explicit incentives increase in job level, explicit incentives increase more rapidly than implicit incentives, resulting in an increase in the intensity of explicit incentives relative to implicit incentives. We attribute this finding to WCM at higher job levels exercising greater influence on organization performance, making organization-level performance measures more informative. Overall, the results are consistent with the availability of objective performance measures for WCM influencing the structure of their implicit promotion and explicit financial incentives.

The Hidden Cost of Personal Quantification

Abstract From sleep and energy use to exercise and health, consumers have access to more information about their behavior than ever before. The appeal of personal quantification seems clear. By better understanding our behavior, we can make the necessary changes to live happier, healthier lives. But might the new tools people are using—quantifying life— rob them of some of the benefits of engaging in those activities? Six experiments demonstrate that while measurement increases how much of an activity people do (e.g., walk or read more), it can simultaneously reduce how much people enjoy those activities. This occurs because measurement can undermine intrinsic motivation. By drawing attention to output, measurement can make enjoyable activities feel more like work, which reduces their enjoyment. As a result, measurement can decrease continued engagement in the activity and subjective well-being. Even in the absence of explicit external incentives, measurement itself can thus have similar effects. The findings have implications for measurement’s use, as well as for the psychology of external incentives and intrinsic motivation.

Incentive Mechanism Design Aiming at Deflated Performance Manipulation in Retail Firms: Based on the Ratchet Effect and the Reputation Effect

Store managers in retail firms are often offered a performance-based compensation scheme accompanied with a performance target by the headquarters. The headquarters adjusts the performance target based on store managers’ historical performance and therefore generates the ratchet effect. Consequently, store managers may downward manipulate performance, that is, deflated performance manipulation, so as to weasel out of target growth and smooth performance growth. However, the reputation effect that seeks fame by store managers can restrain deflated performance manipulation. We model a dynamic agency setting in which both the ratchet effect and the reputation effect are related to the store manager’s compensation scheme, and the store manager has to balance her effort and deflated performance manipulation. Our findings reveal that the ratchet effect and environmental volatility jointly determine the existence of deflated performance manipulation, yet the reputation effect can restrain it with increasing environmental volatility. In addition, deflated performance manipulation is inevitable when environmental volatility is large enough, and explicit incentives may promote deflated performance manipulation.