Summary Articles exam Management Control

What is the motivation of the article "The structure of organizational incentives" ?

Answer: The motivation of this article is to improve understanding and design of organizational incentives by using three alternative models: the tournament model, managerial power model and the agency model.

What is the research question of the article "The structure of organizational incentives"?

Answer: The research question of the article: By examining the applicability of several alternative theories to observe managerial wage structures and the process of designing organizational incentives.

Can you tell me something about the theory behind the tournament model?

Answer: The tournament model is an economic model and is a reduced form of the agency model. Managers compete against one another in a related series of tournaments. Trade-offs are being made between benefits and efforts. The goal is to place the top performing agent in the upper level position. Compensation is an increasing function of organizational level. Value option: incentive to compete. Option level goes down as there are less organizational levels left. Final level: zero option value and no future horizon. Make the difference greater between winning and losing at the highest level (extraordinary pay), this extends the horizon of those surviving at top levels and make managers behave as if the tournament model has infinite number of levels. Infinite number of levels: CEO can ben replaced by second best if he/she is not providing enough effort.

What is the first hypothesis of the tournament model? Explain it.

Answer: H1: The function describing the relationship between executive compensation and organizational level is convex. The hypothesis is supported. People are risk averse. The higher in the organizational level, how less change you have on promotion. Only at the final level, the payment becomes an extra ordinary pay, so the benefits > costs.

What is the second hypothesis of the tournament model? Explain it.

Answer: H2: The difference in compensation level for the CEO related to the next lower position in the organizational hierarchy should be extraordinary large relative to the changes in compensation levels observed at other points in the hierarchy. The hypothesis is supported. To compensate for the zero option value and no future horizon, the manager has to be compensated by extraordinary large compensation.

Can you tell me something about the theory behind the managerial power model?

Answer: Managerial power is the ability to managers to influence their will on decisions made by the board of directors or compensation committee of the board. The managerial power model is a non-economic model.

What is the third hypothesis of the article "The structure of organizational incentives"? Please explain.

Answer: H3: The level of an executive's compensation will be an increasing function of the level of managerial power. The more power an executive has, the more influence this person has over his compensation. Factors: 1. Managerial power goes up/down as organizational level goes up/down. Formal control over activities. 2. Information control and position in communication lines. Impact on agenda setting and outcomes group decision making process. 3. Executives can use personal wealth to accumulate equity ownership in the firm or use their organizational postion to influence the selection of the board of directors.

What is the last hypothesis of the article "The structure of organizational incentives"? Please explain.

Answer: H4: The level of an executive's compensation will be an increasing function of the executive's performance. In order to motivate the agent to select actions that are in the principal's best interests, the principal designs a compensation contract that makes the agent's compensation contingent on observed measures of performance. The principal can only rely on observed performance due to information asymmetry. The hypothesis is supported.

What is the conclusion of the article "The structure of organizational incentives"?

Answer: A combination of the three models is most appropriate for the understanding and designing of incentive structures. Identification and testing of alternative compensation models can serve as a conceptual framework for firms that are engaged in redesigning their incentive structures.

What is the motivation of the article "Measuring and motivating quantity, creativity or both?

Answer: Examine compensation based on quantity, creativity or both. Firms must generate creative innovations while also maintaining high ongoing productivity. Examine how workers productivity differs when compensation is based on quantity, creativity or both.