RCB - The Effect of Incentive Scheme Choices on Strategy...

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The Effect of Incentive Scheme Choices on Strategy Development Timothy C. Miller Kent State University College of Business Administration P.O. Box 5190 Kent, OH 44242-0001 Phone: (513) 310-1059 Email: [email protected] W. Timothy Mitchell Georgia State University J. Mack Robinson College of Business P.O. Box 3989 Atlanta, GA 30302-3989 Phone: (404) 413-7216 E-mail: [email protected] Sean A. Peffer University of Kentucky Gatton College of Business and Economics 355E Gatton College of Business and Economics Lexington, KY 40506 Phone: (859) 257-3149 E-mail: [email protected] October 6, 2010 KEYWORDS: Strategy development, learning, comparative feedback, goals, rank-order tournaments
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The Effect of Incentive Scheme Choices on Strategy Development ABSTRACT The common practice of basing employee incentives on current performance discourages strategy development and, thus, affects future performance. This paper looks at the effect on strategy development of three characteristics that differ between two common types of short- term incentive schemes: (1) providing ex post comparative rank feedback, (2) providing ex ante output goals, and (3) basing incentives on the ex post rank vs. ex ante output goals. The results of our laboratory experiment show that giving comparative feedback to employees with incentives based on output goals hinders both strategy development and performance. Providing output goals to employees with incentives based on rank increases performance without affecting strategy development. Basing incentive payouts on rank instead of output goals increases both strategy development and performance. This study supplements past research by looking at the choice to direct effort toward strategy development in a setting where incentive schemes reward current performance. It informs practice by demonstrating the effects of incentive scheme characteristics on strategy development.
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1 INTRODUCTION Employees have opportunities to choose between directing their effort towards current performance or towards strategy development (Bonner and Sprinkle 2002). 1 The advantage to employees of directing effort towards strategy development is its potential to improve performance over multiple future periods. The disadvantage to employees is that strategy development occurs at the expense of current period performance. Organizations often design employee incentive schemes that focus on current period performance. Basing incentive payouts on current period performance discourages strategy development (Bergeron 2007; Milgrom and Roberts 1995). Therefore, long-term performance is likely to suffer when employees face complex task where performance benefits from strategy development and their organizations use short-term incentives to motivate their performance. Performance on complex tasks is less sensitive to increases in effort directed toward current performance (i.e., investing more effort in a task one does not understand is unlikely to increase performance) and more sensitive to strategy development (i.e., a better understanding of the task is likely to improve effort allocation and performance). Therefore, the cost of employees
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This note was uploaded on 01/23/2011 for the course BUSA 3000 taught by Professor Beach during the Spring '08 term at Georgia State.

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RCB - The Effect of Incentive Scheme Choices on Strategy...

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