Incentive Paper Case Analysis: Managerial Accounting April 17, Hostetler Lewis Panutsos Yang Zhao

Transcription

1 Incentive Paper Case Analysis: Managerial Accounting April 17, 2012 Hostetler Lewis Panutsos Yang Zhao

2 Analysis Agenda: 1. Question 2. Theory 3. Experiment 4. Results 5. Significance

3 Selected Paper: The Effects of Disseminating Relative Performance Feedback in Tournament and Individual Performance Compensation Plans Authors: R. L. Hannan R. Krishnan A. H. Newman Source: The Accounting Review, Vol. 83, 4,

4 Research Question: How can the implementation & design of performance feedback be optimized to maximize the efficiency and output of employees in a given incentive scheme?

5 Research Areas: Two Pure Types of Incentive Schemes Studied: Individual vs. Tournament Three Types of Relative Performance Feedback: None Course Fine

6 Research Importance: Provides valid knowledge Helps supervisors understand employee motivation Helps superiors manage employee performance Aids in the understanding of workforce

7 Practical Applications: Help managers design compensation & make best use of resources Help with monitoring & evaluating employee performance effectively Increase efficiency & performance Save time & money [sustainable] Help motivate & energize employees

8 Analysis Agenda: 1. Question 2. Theory 3. Experiment 4. Results 5. Significance

9 Individual Incentive Scheme: Economic theory: Feedback has no effect Psychology theory: Social Comparison Theory: People compare themselves to others Loss of self identity when not up to par Feedback motivates us to avoid loss of self identity by boosting performance

10 Tournament Incentive Scheme: Economic & Psychological Theory: Feedback effectiveness based on recipient s ability to assess probability of winning Higher chance of winning More effective effort & strategy Lower chance of winning Less effective effort & strategy Decreased effort [supporting research]

11 Individual vs. Tournament: Lazear & Rosen s Model of Rank-order Tournaments: Performance is a function of: Effort Random error Idiosyncratic: specific to individual Systematic: shared by all participants

12 Hypotheses: Performance in Individual Incentive Schemes: Improves with coarse & fine feedback Performance in Tournament Incentive Schemes: Highest with no feedback Unaffected by coarse feedback, hurt by fine Individual vs. Tournament Schemes: No feedback: tournament schemes With feedback: no prediction made

13 Analysis Agenda: 1. Question 2. Theory 3. Experiment 4. Results 5. Significance

14 Experimental Variables: Independent Variables Relative performance feedback systems Types of incentive schemes Precision & content of relative feedback Dependent Variables Participants performance Changes in participant performance

15 Experimental Design: 134 business students from public university Computer-based testing conducted in 1 hr sessions Participants required to achieve a perfect score on a pre-experimental exam Experiment involved making output quantity decisions for a product

16 States of Nature: 20 randomly selected states of nature combined with earned profit points Participants unaware of selected state of nature Were provided with example of scoring model (Hannan, Krishnan, Newman 2008)

17 Experimental Construct: Participants made output decisions for 60 periods [12 trials x 5 periods] State of nature: same for each participant & each trial Profit point potential: same for all participants Awarded time points for early trial completion Can view history after each period [takes time]

18 Provided Feedback: Feedback provided at 4 points per session Course Feedback: placed participants above or below 50 th percentile Fine Feedback: placed participants in deciles [10 percentile ranges]

19 Compensation: Individual Incentive Scheme: $5 for participation $1 for every 400 profit points $0.25 for every 400 time points Tournament Incentive Scheme: $5 for participation $46 bonus if performance is in top 10% Bonus in tournament equals average profit awarded in individual

20 Experimental Limitations: Assumes students decisions represent managers Assumes real world performance is as objective and easily verified Assumes rewards earned by students have same economic value as real-world rewards

21 Analysis Agenda: 1. Question 2. Theory 3. Experiment 4. Results 5. Significance

22 Results: Performance in Performance Individual Tournament ANOVA test Feedback improves performance in individual scheme Feedback decreases performance in tournament schemes No feedback: Tournament scheme is better option (Hannan, Krishnan, Newman 2008)

23 Supplemental Analysis: Does viewing feedback allow participants to extract information, and gain an advantage? Number of times viewed has no influence Individual System All deciles increased performance by the same amount

24 Supplemental Analysis: In the tournament system with fine feedback: Top 20% increase performance Lower 80% decrease performance Decreased effort? Total time spent x times feedback viewed No difference among high & low performers Post-test surveys indicate inefficient strategies

25 Supplemental Analysis: Tournament system with fine feedback Low performers: Made bad choices more often Slower to adjust strategies using feedback Answers had 2x standard deviation of high performers [continued search for strategy] Spent more time thinking about rank Were more nervous about rank

26 Analysis Agenda: 1. Question 2. Theory 3. Experiment 4. Results 5. Significance

27 Research Significance: Individual & tournament schemes are widely used [currently reevaluating] Important to design system to make best use of resources Restructuring feedback to fit better with incentive system can improve employee performance

28 Practical Implications: When implementing a new incentive scheme: Consider organizational structure of dept Select best combination: No feedback: Tournament Scheme Fine feedback: Individual Scheme In a pre-existing system: Weigh viability of altering feedback system to achieve heightened performance

29 Opportunities for Further Study: Most firms use hybrid systems No prior research This study doesn t extend to hybrid systems Research can progress here or with tournament schemes using graduated payments

30 Thank you for your attention! Any Questions?