Compensation

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Compensation Incentives
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Brief Overviewof Compensation

• Directly related to all org. policy goals
• investment
• matching
• motivation
• 3 basic elements
• level
• composition ( v. benefits)
• pay for performance

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IncentivesThe Simple Model

• Perf. measure Q(e) e
• measuring effect of effort
• depends on e
• tradeoff measurement cost v. error
• Pay IQ(e) e
• e.g., b0 b1Q e
• larger b1 Þ more pay risk
• Extrinsic motivation driven by
• PFP shape of pay function

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Shape of Pay-Performance Relation

• b0 level of pay b1 slope
• no incentive incentive intensity
• except firing threat also determines risk
• Tradeoff incentives v. risk

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Shape Examples
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Performance Measurementa. Controllability

• A random
• event
• occurs ...
• Hold the employee accountable?
• e.g., Q e (a a)e e
• a known by worker ex ante
• known by firm ex post
• if employee affects response to event, yes
• if relevant decision rights are given to another
  employee, no
• need for ex post subjectivity in evaluating
  performance

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Performance Measurementb. Distortions

• Lensing metaphor
• broader measures include more ...
• effects of actions (controllables)
• uncontrollables
• key perf. measurement tradeoff
• narrower measures reduce risk but induce
  distortions
• most perf. meas. issues are about
  distortions
• teams
• relative evaluation
• quantity v. quality
• maintenance
• short / long term (alienability)

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IncentivesThe Multitask Model

• For each task j ...
• Qj perf. measure
• PFPj shape of pay
• relative weights PFPj balance incentives across
  tasks
• relative price system
• coordination mechanism

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Weights Measures

• How to set weights across performance measures?
• difficulty of task (MDj)
• value of task (MPj)
• error sj² in measure
• set some to zero
• implicit/ subjective weight ...

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Defining Jobsby Measurement Characteristics

• Bundling tasks into measures
• automatic weights / coordination across tasks
• complementary tasks
• Task Identity
• Bundling measures into jobs
• similar measurement error

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Incentives Fit w/ other Org. Policies

• Careers
• incentives for skill acq., firm specific human
  capital
• promotions may be incentives
• Job / org. design
• allocation of decision rights
• Voice
• info. for decision making
• feedback perf. measures
• implicit contracting when there
• is subjectivity

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Subjectivity Incentives

• Subjective ...
• ... measures
• ... weights on objective measures
• why?
• lensing adjustment of uncontrollables
• dynamically adapt weights
• abstract, complex, knowledge work
• necessary in nearly all jobs
• problem of trust
• implicit contracting
• supervisor incentives
• process issues

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SomeSummary Points

• You get what you pay for
• incentives work thats the problem!
• Texas chain saw of motivation
• does not imply that extrinsic motivation should
  be ignored
• To mitigate distortions, use ...
• overlapping incentives
• controls
• Incentives v. intrinsic motivation
• creativity