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5/15/2018Do Incentives Work? Busting Myths and BringingEvidence to Pay for PerformanceFermin Diez, PhDSingapore Management UniversityWhich Pay for Performance Scheme Yields the Best BusinessResults for Your Company?QUESTIONAnswer 1: Annual BonusAnswer 2: Long-Term IncentivesAnswer 3: High Base PayAnswer 4: Team IncentivesAnswer 5: Our Pay Programs Don’t Drive Performance Very Well Click Here for Poll ResultsFermin Diez, PhD21

5/15/2018What Is the Most Important Criteria You Use in Setting Pay forPerformance Programs?QUESTIONAnswer 1: Market CompetitivenessAnswer 2: Defensible to Shareholders and Oher External StakeholdersAnswer 3: Retention of Key StaffAnswer 4: Alignment with Market/Industry PracticeAnswer 5: Driving Business ResultsClick Here for Poll ResultsFermin Diez, PhD3CONTEXTFermin Diez, PhDLTIPay MixPayModelsIndividualVs. Team42

5/15/2018FINDINGSRESEARCH BASED VS. BEST PRACTICESFermin Diez, PhD5THEEXPERIMENTLTI: Stock options, Stockgrants, PerformancesharesPay Mix: Equal, Balanced,Short-term, Long-termPay Models: Membership,Bonding, TournamentTeam: Shared, Not shared,50/50, 75/25, 25/75Fermin Diez, PhD63

5/15/2018THEHYPOTHESESPay MixLTI’sPayModelsIndividualVs. TeamPROSPECTTHEORYFermin Diez, PhDTEAM YFermin Diez, PhD84

5/15/2018PROSPECTTHEORYFermin Diez, PhD9RESULTSLTIPerformanceSharesStock GrantStockOptions100120140160Profit @P20Not Statistically SignificantFermin Diez, PhD105

5/15/2018RESULTSPay t @P20Not Statistically SignificantFermin Diez, PhD11RESULTSPay t @P20Not Statistically SignificantFermin Diez, PhD126

5/15/2018THE RESULTSTeam Incentives75/2550/50Shared GoalsIndividual Goals100120140160Profit @P20Not Statistically SignificantFermin Diez, PhD13RESULTSTeam vs. IndividualAvg All TeamAvg All Individual100120140160Profit @P20**SIGNIFICANT**Fermin Diez, PhD147

5/15/2018RESULTSCultureNo DifferenceFermin Diez, PhD15RESULTSProspect TheoryBothRisk When BehindStop When Ahead020406080% Using this StrategyIt DependsFermin Diez, PhD168

5/15/2018RESULTSRoRReturn on Rewards (RoR);Must choose approachcarefullyLTI: better RoR at end;lowest RoR on average resultIndividual Incentives higher RoRFermin Diez, PhD17ADDITIONALRESEARCHDifferent ConditionsCap ( 15)Goal (200; No Pay)Avg (136; No Pay)Framing ( 100)Base Case (SO)100120140160Profit @P20**SIGNIFICANT**Fermin Diez, PhD189

5/15/2018ADDITIONALRESEARCHFermin Diez, PhDScenarioProfit @P20SignificanceSO (Base Case)124.88--- 100 (ProspectTheory)148.35.096* (.957)AVG (136 – NoPay)138.77.240 (1.000)GOAL (200 – NoPay)155.80.011** (1.114)CAP ( 15)148.21.033** (.330)19ADDITIONALRESEARCHTarget setting has a greater impact on results than plan designStretch targets yield better results than average targetsCaps may be useful when forecasting or budgeting is suspectTargets frame expected resultsFermin Diez, PhD2010

5/15/2018SUPPORTINGEVIDENCEShaw & Gupta (2015): financial incentives work; we can move to questions such asthe best combinations of intrinsic and extrinsic rewardsCerasoli et al (2014): intrinsic motivation less important when incentives directly tiedto performance and better predicted quality, whereas incentives better predictedquantityAaron et al. (2014:) When an executive's total compensation package is based moreon firm performance there is often a level of higher returns, but to a point ofdiminishing returnsEderer (2013): performance is highest when subjects receive a mix of individual andgroup incentives that reward long-term joint successShaw & Mitra (2017): There is no extrinsic vs. intrinsic motivation tradeoffFermin Diez, PhD21TARGETSETTINGFermin Diez, PhD2211

5/15/2018TARGETSETTINGFermin Diez, PhD23What Will You Consider Doing Differently After ThisPresentation?QUESTIONAnswer 1: Emphasize Team IncentivesAnswer 2: Stretch TargetsAnswer 3: Change Pay MixAnswer 4: Change to One of the Three Base Pay ModelsAnswer 5: No Change: My Plan Already Drives Business ResultsClick Here for Poll ResultsFermin Diez, PhD2412

5/15/2018TAKEAWAYSTeam IncentivesWorkTargets FrameExpected ResultsWorry LessAbout theRestFermin Diez, PhD2526Fermin Diez, PhDfdiez@smu.edu.sg13

FerminDiez, PhD Singapore Management University FerminDiez, PhD QUESTION Which Pay for Performance Scheme Yields the Best Business Results for Your Company? 2 Answer 1: Annual Bonus Answer 3: High Base Pay Answer 2: Long-Term Incentives Answer 4: Team Incentives Answer 5: Our Pay Programs Don't Drive Performance Very Well Click Here for .