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"Incentives"
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Is Pay for Performance Detrimental to Innovation?
Previous research in economics shows that compensation based on the pay-for-performance principle is effective in inducing higher levels of effort and productivity. On the other hand, research in psychology argues that performance-based financial incentives inhibit creativity and innovation. How should managerial compensation be structured if the goal is to induce managers to pursue more innovative business strategies? In a controlled laboratory setting, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, whereas golden parachutes can alleviate these innovation-reducing effects.
This paper was accepted by David Hsu, entrepreneurship and innovation.
Journal Article
Should Governments Invest More in Nudging?
Governments are increasingly adopting behavioral science techniques for changing individual behavior in pursuit of policy objectives. The types of \"nudge\" interventions that governments are now adopting alter people's decisions without coercion or significant changes to economic incentives. We calculated ratios of impact to cost for nudge interventions and for traditional policy tools, such as tax incentives and other financial inducements, and we found that nudge interventions often compare favorably with traditional interventions. We conclude that nudging is a valuable approach that should be used more often in conjunction with traditional policies, but more calculations are needed to determine the relative effectiveness of nudging.
Journal Article
Economic Incentives and Social Preferences: Substitutes or Complements?
Explicit economic incentives designed to increase contributions to public goods and to promote other pro-social behavior sometimes are counterproductive or less effective than would be predicted among entirely self-interested individuals. This may occur when incentives adversely affect individuals' altruism, ethical norms, intrinsic motives to serve the public, and other social preferences. The opposite also occurs—crowding in—though it appears less commonly. In the fifty experiments that we survey, these effects are common, so that incentives and social preferences may be either substitutes (crowding out) or complements (crowding in). We provide evidence for four mechanisms that may account for these incentive effects on preferences: namely that incentives may (i) provide information about the person who implemented the incentive, (ii) frame the decision situation so as to suggest appropriate behavior, (iii) compromise a control averse individual's sense of autonomy, and (iv) affect the process by which people learn new preferences. An implication is that the evaluation of public policy must be restricted to allocations that are supportable as Nash equilibria when account is taken of these crowding effects. We show that well designed fines, subsidies, and the like minimize crowding out and may even do the opposite, making incentives and social preferences complements rather than substitutes.
Journal Article
Incentives for Tax Planning and Avoidance: Evidence from the Field
We analyze survey responses from nearly 600 corporate tax executives to investigate firms' incentives and disincentives for tax planning. While many researchers hypothesize that reputational concerns affect the degree to which managers engage in tax planning, this hypothesis is difficult to test with archival data. Our survey allows us to investigate reputational influences and, indeed, we find that reputational concerns are important—69 percent of executives rate reputation as important and the factor ranks second in order of importance among all factors explaining why firms do not adopt a potential tax planning strategy. We also find that financial accounting incentives play a role. For example, 84 percent of publicly traded firms respond that top management at their company cares at least as much about the GAAP ETR as they do about cash taxes paid and 57 percent of public firms say that increasing earnings per share is an important outcome from a tax planning strategy.
Journal Article
Mixed signals : how incentives really work
An informative and entertaining account of how actions send signals that shape behaviors and how to design better incentives for better results in our life, our work, and our world Incentives send powerful signals that aim to influence behavior. But often there is a conflict between what we say and what we do in response to these incentives. The result: mixed signals. Consider the CEO who urges teamwork but designs incentives for individual success, who invites innovation but punishes failure, who emphasizes quality but pays for quantity. Employing real-world scenarios just like this to illustrate this everyday phenomenon, behavioral economist Uri Gneezy explains why incentives often fail and demonstrates how the right incentives can change behavior by aligning with signals for better results. Drawing on behavioral economics, game theory, psychology, and fieldwork, Gneezy outlines how to be incentive smart, designing rewards that are simple and effective. He highlights how the right combination of economic and psychological incentives can encourage people to drive more fuel-efficient cars, be more innovative at work, and even get to the gym. \"Incentives send a signal,\" Gneezy writes, \"and your objective is to make sure this signal is aligned with your goals.\"
Book
The Role of CEO's Personal Incentives in Driving Corporate Social Responsibility
In this study, we explore the role of Chief Executive Officers' (CEOs') incentives, split between monetary (based on both bonus compensation and changes in the value of the CEO's portfolio of stocks and options) and non-monetary (career concerns, incoming/departing CEOs, and power and entrenchment), in relation to corporate social responsibility (CSR). We base our analysis on a sample of 597 US firms over the period 2005–2009. We find that both monetary and non-monetary incentives have an effect on CSR decisions. Specifically, monetary incentives designed to align the CEO's and shareholders' interests have a negative effect on CSR and non-monetary incentives have a positive effect on CSR. The study has important implications for the design of executive remuneration (compensation) plans, as we show that there are many levers that can affect the CEO's decisions with regard to CSR. Our evidence also confirms the prominent role of the CEO in relation to CSR decisions, while also recognizing the complexity of factors affecting CSR. Finally, we propose a research design that takes into account endogeneity issues arising when examining compensation variables.
Journal Article