Académique Documents
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MBAO 6030
Non-financial Rewards
1. Intrinsic Rewards centers on the work itself
2. Praise, recognition, time off and other rewards
given to the employee by peers or superiors.
Training
Overtime
pay rules in
contract
Labor
Relation
s
Sign-on Bonus
Culture
Merit pay reinforces
performance culture
Rewards
Performance
Management
Employment
Merit Pay
versus
Ir/Or
I = Inputs:
employees contribution to
employer
R = Referent:
comparison person
S = Subject:
Consequences of Inequity
Agency Theory
Agency Theory
1. Principals = owners or managers who delegate
responsibilities
2. Agents = managers or employees who manage
firm assets for owners or other principals.
3. Information asymmetry = managers or other
agents have greater access to strategic
information than principals, who are not willing
to bear the cost of directly monitoring the agents
due to steep agency costs.
Agency Theory
4. Risk Preferences principals are risk neutral
and willing to bear greater risks than agents
because their asset wealth is more likely to be
diversified between corporate assets and other
equities/investments. Agents are more risk
averse than principals, because most of their
wealth is concentrated in the firm and received
in the form of pay and opportunities for
promotion.
Agency Theory
5. Moral Hazard agent is tempted (and some
cases succeeds) in taking advantage of
information asymmetry with principal and act
opportunistically (defined as making decisions
not aligned with principals interests) and use
the firm resources to maximize wealth of the
agent (often at the expense of the principal).
Agency Theory
6. Agency Contract provides solution to moral
hazard/agency problem, by establishing rules
of the game to control agent opportunism
agents performance will be judged by
outcomes (often financial benchmarks) not
behaviors (which require direct supervision of
agents actions). These outcomes will reflect
principals goals and risk preferences.
Agency Theory
7. Incentive alignment the agency contract will
specify a compensation plan that aligns the
interests of the principal and agent. This agency
contract will be a type of pay for performance plan.
Meeting or exceeding pre-agreed upon financial or
non-financial outcomes triggers various forms of
compensation (individual or group-based) for the
agent. Some agency costs are borne by the
principal in the form of financial incentives for the
agent.
Tournament Theory
1. Tournaments are competitions between peers to
achieve a promotion to a higher rank along with the
pay and perks that go with it.
2. Tournaments are likely to result in a winner take all
outcome.
3. Managers who enter the tournament must forego
other alternatives (such as jobs with other firms, start
own business, receive more pay with an alternative
opportunity) to compete in the tournament.
Tournament Theory
4. A high pay differential (such as the CEO
receiving much greater pay than any
subordinates) attracts more players to the
tournament.
5. Players must invest (work long hours, accept
less pay, show loyalty to their boss) to enter the
tournament firm captures value from these
players, more than what it gives up to the
winner for the prize.