Rajiv D.  Banker, Seok-Young  Lee, Gordon  Potter, and Dhinu Srinivasan, “Contextual analysis of performance impacts of outcome-based incentive compensation,” Academy of Management Journal, August, 1996, 39(4), pp. 920-948.

A study investigates how contingency factors such as competitive intensity, customer profile, and behavior-based control influenced the effectiveness of an outcome-based incentive plan supporting a customer-focused service strategy.  Empirical analyses were based on the data for 77 months from 34 outlets of a major retailer, 15 of which implemented the incentive plan.  Results support theoretical predictions:  the positive impact of outcome-based incentives on sales, customer satisfaction, and profit increased with intensity of competition and proportion of upscale customers and decreased with level of supervisory monitoring.  

Harry G. Barkema and Lui R. Gomez-Mejia, “Managerial compensation and firm performance:  A general research framework,” Academy of Management Journal, April, 1998, 41(2), pp. 135-145.

A tremendous amount of research has explored the relationship between managerial pay and firm performance.  A paper argues that this research has generally been limited because it ignores other criteria that can be used to determine managerial pay, as well as the influence of a firm's governance structure and various contingencies.  The analysis leads to a general framework for research on executive pay.  The framework is used to evaluate the present state of research in the field.   

James N. Baron and David M.  Kreps, “Consistent human resource practices,” California Management Review, Spring, 1999, 41(3), pp. 29-53.  

The role of consistency in human resource practices is explored.  Different forms of consistency and why they are valuable in managing human resources are explored and explained:  consistency among different aspects of human resource policy, such as integrating compensation, recruitment, and promotion policies; consistency in how human resource policies affect different classes of employees (should scientists and engineers be treated similarly, for instance, and what about clericals?); and consistency of human resource policies over time.  In the context of the second sort of consistency, both the span of consistency and manufactured distinctions that facilitate distinctive treatment to different employees are explored.  The problem of measuring consistency is discussed and examples illustrating consistent and inconsistent human resource practices are provided.   

Matt Bloom and George T. Milkovich, “Relationships among risk, incentive pay, and organizational performance,” Academy of Management Journal, June, 1998, 41(3), pp. 283-297. 

A study extends agency-based research by examining the role of risk in the structure of managerial compensation and its relationship to organization performance.  Results suggest that organizations facing higher risk do not place greater emphasis on short-term incentives than other organizations - rather, they place less emphasis on them.  Also, higher-risk firms that relied on incentive pay exhibited poorer performance than higher-risk firms that did not emphasize incentive pay.     

Peter  Cappelli, “Career jobs are dead,” California Management Review, Fall, 1999, 42(1), pp. 146-167. 

After almost two decades of restructuring and downsizing, the expectation of secure careers within corporations is a thing of the past, especially for managers.  The defining feature of the new relationship is that all aspects of employment - careers, compensation and development - are now governed by the market, driven by management practices that have brought the competitive pressures of product markets inside the firm.  These changes do not necessarily make jobs bad, although they do shift much of the risk of doing business on to employees.  The shift away from "traditional" models of internal development and lifetime employment places new responsibilities on employees and on society.  It also raises new challenges for employers who must now deal with a market-driven workforce.

Peter Cappelli, “A market-driven approach to retaining talent,” Harvard Business Review, Jan/Feb, 2000,  78(1), pp. 103-111. 

To adopt a new strategy of retention, you first have to accept the new reality: the market, not your company, will ultimately determine the movement of your employees. Some elements which should be considered when adopting a new retention strategy are: 1. compensation, 2. job design, 3. job customization, 4. social ties, 5. location, and 6. hiring.

Nicholas G.  Carr, “Compensation:  Refining CEO stock options,” Harvard Business Review, Sep/Oct, 1998, 76(5), pp. 15-18.

The explosion of stock option grants over the last 2 decades has transformed the way US CEOs are paid.  More than 90% of CEOs now hold stock options, and the value of the average option grant grew almost 8-fold between 1980 and 1994.  Current stock-option plans, however, are not ideal.  Three suggestions for tightening the link between pay and performance are discussed, including: 1.  Use out-of-the-money and indexed options.  2.  Score the option package.  3.  Maintain the incentive.

Frank V.  Cespedes, “A Preface to Payment: Designing a Sales Compensation Plan,” Sloan Management Review, Fall, 1990,  32(1), pp. 59-69. 

Compensation is a tool for attaining sales performance consistent with marketing strategy.  This implies that compensation, evaluation, and other motivational procedures should be linked coherently in the sales management system.  Managers should start with the types of efforts and behavior desired of salespeople and then design the particular compensation plan aimed at encouraging these efforts.  Developing and implementing a sales compensation plan requires an analytical process that answers 5 questions: 1.  What is the sales task facing the firm in a market? 2.  What must the salesperson do to succeed? 3.  What is the labor-pool frame of reference? 4.  How should the salary-incentive mix be structured? 5.  How should the incentive component be designed? Four factors should be considered as part of a quick audit of sales management policies and practices: 1.  the marketing strategy, 2.  the role of personal selling in the strategy, 3.  sales performance expectations, and the sales compensation plan.    

Graef S. Crystal, “Why CEO Compensation Is So High,” California Management Review, Fall, 1991,  34(1), pp. 9-29. 

Executive compensation in the US has gotten out of control because of the actions - or non-actions - of a number of parties.  The first culprits are compensation consultants, company boards of directors, and more specifically, board compensation committees.  From an economic standpoint, chief executive officers (CEOs) are the sellers of their own services, compensation committees are the buyers of those services, and what the CEOs receive is the price of their services.  The problem is that the buyers are not as informed as the sellers.  The Financial Accounting Standards Board is another culprit because it has created a non-level playing field and has distorted the long-term incentives now in use.  But it is the US Securities and Exchange Commission (SEC) that has a more direct impact on executive compensation through its rules on proxy reporting, where deceptive practices occur.

Kathleen M. Eisenhardt, “Agency- and Institutional-Theory Explanations: The Case of Retail Sales Compensation,” Academy of Management Journal, September, 1988, 31(3), pp. 488-511. 

In order to determine when firms use salary compensation and when they use performance-based compensation, data were collected using both questionnaires and interviews from 54 specialty stores in a suburban Bay Area shopping center.  The research design included variables from both agency theory, which models the relationship between a principal who delegates work to an agent who performs the work, and institutional theory, which emphasizes the influence of organizational structure on practices and behavior.  The main instrument used to obtain data was a questionnaire developed from interviews with retailers and retail salespeople, union business agents, and personnel specialists.  Both models were tested using 2-group discriminant analysis.  Results show that programmability of a job, span of control, uncertainty, type of merchandise, and age of a store chain are all significant predictors of compensation policy.  Both agency and institutional theory provided a good description of compensation policies in this research setting, and both perspectives were seen to be complementary.  

Barry Gerhart and Charlie O. Trevor, “Employment variability under different managerial compensation systems,” Academy of Management Journal, December, 1996,  39(6), pp. 1692-1712.

Variability in employment levels, particularly when resulting from downsizing and layoffs, has considerable consequences for employees and organizations.  Applying strategic compensation and agency theory  principles to multiple years of employment, financial performance, and managerial compensation data on 152 organizations, a study found that compensation design was related to employment variability through 2 avenues.  First, organizations relying more heavily on long-term compensation incentives for managers exhibited less employment variability.  Second, when groups of employees where covered by variable pay plans, their employment variability was lower.     

Elaine C.  Hollensbe and James P. Guthrie, “Group pay-for-performance plans:  The role of spontaneous goal setting,” Academy of Management Review,  October, 2000, 25(4), pp. 864-872.

Despite the increasing popularity of group pay-for-performance plans, relatively little theory exists regarding the dynamics of these plans. Goal setting, pay plan characteristics, and group factors are integrated to explain and predict the effectiveness of what is called "open-goal" group pay plans. Spontaneous goal setting is introduced as a process explanation and antecedents that affect a group's propensity to set goals, the goal level chose, and goal commitment, are proposed. Implications of the propositions for future research are discussed.

Rabindra N.  Kanungo and Manuel Mendonca, “Evaluating Employee Compensation,” California Management Review, Fall, 1988,  31(1), pp. 23-39. . 

According to expectancy theory, the critical attributes of organizational rewards are contingency, valence, and saliency.  If rewards are seen in terms of these attributes, the theory postulates that the rewards will have a significant impact on work motivation.  Kanungo and Hartwick (1987) found that rewards are perceived by employees in terms of 3 dimensions: 1.  performance contingent reward, 2.  intrinsic-extrinsic mediation, and 3.  reward generality.  These concepts of expectancy theory are forged into an action program to design and administer the reward system and to assess its effectiveness.  Its procedural steps involve: 1.  developing a list of all the rewards the organization offers employees, 2.  deciding on the purpose of each reward, 3.  conducting a survey of employees to determine how they perceive each reward, 4.  examining the survey findings and investigating those rewards where employee perceptions are different from those of the organization, and 5.  reviewing.  The effectiveness of the compensation program of a group of senior managers of a corporation in Canada is tested with the technique.     

Alfie  Kohn, “Why incentive plans cannot work,” Harvard Business Review, Sep/Oct, 1993, 71(5), pp. 54-63.

The vast majority of US corporations use some sort of program intended to motivate employees by tying compensation to one index of performance or another.  The assumption that people will do a better job if they have been promised an incentive is pervasive, but a growing collection of evidence supports an opposing view.  According to numerous studies, rewards typically undermine the very processes they are intended to enhance.  Incentives, a version of what psychologists call extrinsic motivators, do not alter the attitudes that underlie behaviors.  They do not create an enduring commitment to any value or action, rather, incentives merely - and temporarily - change what people do.  As for productivity, at least 2 dozen studies show that people who expect to receive a reward for completing a task do not perform as well as those who expect no reward at all.  The number one casualty of rewards is creativity.  Bribes in the workplace simply do not work.

Joel A. Kurtzman, “CEO pay and perks: Money speaks louder than words,” Harvard Business Review, Mar/Apr, 1993,  71(2), pp. 9-10.

The effects of executive compensation packages on corporate culture and the organization itself are discussed.

Judi McLean Parks and Edward J. Conlon, “Compensation contracts: Do agency theory assumptions predict negotiated agreements?”  Academy of Management Journal.  June, 1995, 38(3), pp. 821-838.

A study examined how the ability to monitor an agent's actions and environmental munificence affect compensation contracts in principal-agent dyads.  A laboratory experiment was used to test predictions based on both assumptions grounded in agency theory and an alternative perspective.   In simulated munificent environments, inability to monitor fostered contracts that were contingent on outcomes, and agents received larger relative shares of dyadic earnings.  In environments characterized by scarcity, the reverse was true.  The findings suggest that the agency model applies under conditions of munificence but fails under scarcity.   

Edward J. Ost, “Team-Based Pay: New Wave Strategic Incentives,” Sloan Management Review,  Spring, 1990, 31(3), pp. 19-27. 

At one time, gain sharing was a tactical measure aimed largely at improving production efficiency.  Some corporations are attempting to tie team-based incentive systems to corporate strategy.  The development and implementation of such systems require, among other things, a participative organizational structure and a workforce capable of adjusting to complex, fluid performance measures.  A survey of 102 US firms was conducted by telephone and mail to establish the extent and nature of pay-for-performance programs.  Detailed, open-ended phone and personal interviews were conducted with human resource executives, plant managers, and gain-sharing facilitators at 30 of these firms.  Some of the results are: 1.  A total of 21 of the surveyed firms had either developed or were interested in developing team-based compensation systems for their white-collar employees.  2.  Financial service firms rarely make employee involvement a prime objective in their programs. 

Anne G. Perkins, “The growth of benefits,” Harvard Business Review, Jan/Feb, 1995, 73(1), pp. 12-14.

According to a new study by Robert B.  Stobaugh, compensation paid to boards of directors exceed previously reported figures by at least 50%.  The difference is the increasing amount of benefits directors are receiving in lieu of  more traditional compensation.  Major types of benefits offered to directors include: 1.  stock options, 2.  retirement programs, 3.  deferred compensation programs, 4.  medical insurance, and 5.  death benefits.

Jeffrey Pfeffer, “Six dangerous myths about pay,” Harvard Business Review, May/Jun, 1998,  76(3), pp. 108-119. 

Every day, organizational leaders confront decisions about pay.  There are generally 4 decisions that relate to compensation: 1.  how much to pay employees, 2.  how much emphasis to place on financial compensation as a part of the total reward system, 3.  how much emphasis to place on attempting to hold down the rate of pay, and 4.  whether to implement a system of individual incentives to reward differences in performance and productivity, and, if so, how much emphasis to place on these incentives.  Six dangerous myths about compensation are discussed: 1.  Labor rates and labor costs are the same.  2.  You can lower your labor costs by cutting labor rates.  3.  Labor costs constitute a significant proportion of total costs.  4.  Low labor costs are a potent and sustainable competitive weapon.  5.  Individual incentive pay improves performance.  6.  People work for money. 

Alfred  Rappaport, “New thinking on how to link executive pay with performance,” Harvard Business Review, Mar/Apr. 1999,  77(2), pp. 91-101.

As the stock market began its ascent in the mid-1990s, executive pay - always the subject of heated debate - mounted along with it.  That is because among the largest US companies, stock options now account for more than half of total CEO compensation and about 30% of senior operating managers' pay.  One problem became particularly clear during the bull market's astonishing run: even below-average performers reap huge gains from stock options when the market is rising rapidly.  The author proposes steps to close the gap between existing compensation practices and those needed to promote higher levels of achievement at all levels of the corporation. 

T. J.  Rodgers, Susan P.  Eichen, James F.  Morgan, Robert J.  Saldich, “Taking account of stock options,” Harvard Business Review, Jan/Feb, 1994, 72(1), pp. 27-36. 

Since June 1993, the Financial Accounting Standards Board (FASB) has been accepting comments on its proposal to require companies to recognize as expenses all stock-based awards, including stock options.  The proposal has been on the FASB's agenda since 1984, long before executive compensation became a hot topic.  Many investors argue that the new rules would give them a better understanding of a company's financial status.  But many in management are opposed, especially entrepreneurs.  Many predict that the number of successful start-ups will fail if the use of options is curtailed by requiring fledgling enterprises to record them as expenses.  Several experts consider the FASB's proposal and its implications.  According to Susan P.  Eichen of William M.  Mercer Inc., the proposal represents, by and large, sound accounting policy.  However, James F.  Morgan of National Venture Capital Association believes that the FASB has attempted to use a political tailwind and its position of unfettered power to fix a problem that does not exist in the view of financial statement issuers, auditors and users.

Harbir Singh and Farid Harianto, “Management-Board Relationships, Takeover Risk, and the Adoption of Golden Parachutes,” Academy of Management Journal, March, 1989, 32(1), pp.  7-24. 

A comparison is made between the characteristics of the top management and boards of directors in large firms that have adopted golden parachutes for chief executive officers (CEO) and those of an industry- and size-matched control group.  A model is constructed using data from 84 large public corporations in the Fortune 500 that had adopted golden parachutes (incentive packages for incumbent management teams as insurance against the possibility of takeover) as of December 1985.  The data include information on the size of the firms' boards, their composition in terms of ratios of inside to outside directors, and CEO compensation.  Results show that firms that have experienced takeover threats are more apt to adopt golden parachutes than firms that have not.  The findings also suggest that firms adopting golden parachutes have relatively higher diffusion of stock ownership, higher tenure of the CEO compared to that of board members, and a greater proportion of external directors on their boards.       

Linda K. Stroh, Jeanne M.  Brett, Joseph P. Baumann, Anne H. Reilly, “Agency theory and variable pay compensation strategies,” Academy of Management Journal, June, 1996, 39(3), pp. 751-767. 

A study used a sample of middle-level managers to investigate the effects of organization-level agency-theory-based variables on the proportion of variable compensation that managers receive.  Level of task programmability was associated with an increased use of variable pay, and long-term relationships between an agent and principal were associated with decreased use.  Results supported the classical organization-theory prediction that under higher risk, organizations use higher proportions of variable pay; but results question agency theory's ability to predict compensation strategy for middle-level managers in the high-risk situation.   

G Bennett  Stewart III, Eileen Appelbaum, Michael  Beer, Andrew M. Lebby, “Rethinking rewards,” Harvard Business Review, Nov/Dec, 1993,  71(6), pp. 37-49.

The vast majority of US corporations use some sort of incentive program intended to motivate employees by tying compensation to one index of performance or another.  Although the assumption that people will do a better job if they have been promised some sort of incentive and the practices associated with it are pervasive, a growing collection of evidence supports an opposing view.  Alfie Kohn argues in his book, Why Incentive Plans Cannot Work, that the failure of any given incentive program is due less to a glitch in that program than to the inadequacy of the psychological assumptions that ground all such plans.  Research suggests that rewards succeed at securing one thing only: temporary compliance.  They do not create an enduring commitment to any value or action.  According to Kohn, incentives in the workplace simply cannot work.  Nine experts consider the role, if any, of rewards in the workplace.

Henry L.  Tosi and Steve Werner,  “Managerial discretion and the design of compensation strategy,” Academy of Management Journal.  (Best Papers Proceedings 1995), pp. 146-150.

Little is known about the role of managerial discretion as a determinant of firm compensation strategy.  A study investigates how compensation strategies are related to ownership structure.  Hypotheses are formulated about how 2 aspects of compensation strategy, choices about pay levels and pay-performance sensitivities, for all employees in a firm differ as a function of ownership structure.  It is found that change in performance is significantly related to change in pay per employee for owner-controlled firms, while change in size is significantly related to change in pay per employee only for manager-controlled firms. 

Dave Ulrich, “A new mandate for human resources,” Harvard Business Review, Jan/Feb, 1998,  76(1), pp. 124-134. 

In recent years, a number of people who study and write about business - along with many who run businesses - have been debating the necessity of HR.  Human Resources, as it is configured today in many companies, is indeed ineffective, incompetent, and costly.  But it has never been more necessary.  The solution is to create an entirely new role for the field that focuses it not on traditional HR activities, such as staffing and compensation, but on business results that enrich the company's value to customers, investors, and employees.  Four broad tasks for HR that would allow it to help deliver organizational excellence are described:  1.  HR should become a partner in strategy execution.  2.  It should become an expert in the way work is organized and executed.  3.  It should become a champion for employees.  4.  It should become an agent of continual change.   

Steve Werner and Henry L. Tosi, “Other people's money:  The effect of ownership on compensation strategy and managerial pay,” Academy of Management Journal, December, 1995,  38(6), pp. 1672-1691.

A study analyzes the compensation strategy of firms.  In particular, the study examines the differences in the pay and incentives of lower-level managers in firms with different levels of management discretion.  It is found that firms with higher managerial discretion paid compensation premiums through higher salaries, greater bonuses, and more long-term incentives; however, changes in pay were not related to changes in performance, and high-discretion firms did not perform better than other types of firms.    

Katherine Zoe Andrews, “Equity compensation,” Harvard Business Review, Mar/Apr, 1996, 74(2), pp. 13-14.

American Capital Strategies maintains the Employee Ownership Index (EOI), which tracks the performance of about 350 stocks of companies with 10% or more employee ownership.  A comparison of the EOI with general stock-market indexes shows that EOI companies are outperforming their more traditional counterparts.  Recommendations for designing an equity compensation strategy include: 1.  Define objectives.  2.  Evaluate current conditions.  3.  Investigate options.  4.  Analyze impact.  5.  Implement and adjust.

Katherine Zoe Andrews, “Executive bonuses: Two kinds of performance measures,” Harvard Business Review, Jan/Feb, 1996,  74(1): 8-9.

A study from the Wharton School examined which companies are forgoing the traditional approach to executive compensation and are choosing nonfinancial measures to determine bonuses.  The researchers found that 36% of the companies in their sample used nonfinancial measures to determine executive rewards.  They uncovered 2 critical factors that influenced which type of measure a company preferred: 1.  corporate strategy, and 2.  corporate governance.

Case Studies

Kevin J. Murphy, “Merck & Co., Inc. (A),” HBS Case, 9-491-005, 1991. 

Merck & Co., Inc., a major pharmaceutical company, is in the process of reviewing and evaluating its personnel policies and practices. Employee interviews revealed that rewards for excellent performance were not adequate: outstanding performers received salary increases that were, in many cases, only marginally better than those given to average performers. In many cases, outstanding performance was not even clearly identified. The objective is to have students wrestle with a common malady of performance appraisal systems: the tendency of managers to assign uniform ratings to employees regardless of performance. Alternative appraisal systems should be suggested and discussed.

M. Diane Burton, “Rob Parson at Morgan Stanley (A),: HBS Case, 9-498-054, 1998. 

Rob Parson was a star producer in Morgan Stanley's Capital Markets division. He had been recruited from a competitor the prior year and had generated substantial revenues since joining the firm. Unfortunately, Parson's reviews from the 360-degree performance evaluation process revealed that he was having difficulty adapting to the firm's culture. His manager, Paul Nasr, faces the difficult decision of whether to promote Parson to managing director. Nasr must also complete Parson's performance evaluation summary and conduct Parson's performance review. Teaching purpose: To explore managerial problems associated with performance appraisal and performance management.