Dis 1
Per the textbook, George Baker states “the problem is not that incentives can’t work, it’s that they work too well” (Brickley et al., 2016). This means that some compensation plans lack the checks and balances that will prevent financial loopholes that can lead to unwanted or manipulative behavior. Employees can choose to work hard on the areas that impact their additional compensation and neglect the functions that have no incentives tied to them. This dishonesty leads to larger bonuses for incomplete work performed by employees. This lack of incentive oversight can lead to regulatory and compliance errors, auditing issues, and company reputation hits.
Importance of a Well-Balanced Compensation Plan
A well-balanced compensation plan encourages employees to behave ethically as they work their hardest to achieve a personal incentive, which also bodes well for company success. Companies need to design a compensation package where the benefit exceeds the cost. There are admin costs to managing compensation plans based on key metrics being achieved by the employee. The time spent by some employees monitoring the compensation achievements of other employees costs the admin workers time away from other tasks.
Attracting and Retaining Good Employees
Hiring based on culture and ethics matches will allow for firms to select employees that can be rewarded and compensated, as well as increase firm value. “Smart employers know that keeping quality employees requires providing the right compensation and benefits package” (Leonard, 2019). As tenured employees tend to know their value more, it is imperative to keep a competitive compensation rate to retain the best employees. A salaried position with health benefits and a retirement package are examples of compensation that can retain employees. Adding in an incentive plan that will retain and attract employees. To keep the plan from ‘working too well’, the incentive plans must meet the completed staff work requirements clearly outlined in the incentive plan. This will also appeal to the employee who is not a fan of risk-taking but respond to hitting key targets with their performance. It is important to include employees in the development of the plan and make sure they understand the firm needs, as the firm works to reward the employee efforts. The goal is to not have areas where employees can ‘game the system’ and start cutting corners on efforts, yet still get the bonus compensation.
Dis 2
I believe when Baker says that the incentive plan works to well he may be referring to situation like Enron. The compensation plan at Enron created an environment in which corners were cut, major risks were taken, employees were incentivized to maximize profits at the expense of compliance to make the most money they could for themselves. This incentive plan was not carefully created to ensure that employees remained honest, and in compliance with company policies however it did incentive employees to make the most money they could for Enron which in turn paid them a huge salary. In Enron’s case, and in most cases owners and employees have different objectives (Brickley, Smith and Zimmerman, 2016). The plan at Enron was not well written therefore it allowed its employees to “be creative” with how they did business which was not in the best interest of Enron. Incentive plans are generally created to encourage employees to perform at a higher level which when they do will increase the profits of the organization that they work for. Some of the challenges with incentive plans are that they may encourage risk taking. Some risk taking is good however if an employee takes too much risk to earn some extra incentive it places the company at greater risk of failure. In addition, all employees are different. Some like risk, some avoid risk. If an incentive plan is created based on risk, those risk averse employees will not be incentivized by the opportunity to earn extra and therefore won’t participate. If the company is depending on their staff being incentives by the plan and they are not, the company could hurt itself financially when the employees do not take the risk opportunity (Brickley, Smith and Zimmerman, 2016). Incentive plans need to be created that will allow the employee to earn extra money based on extra effort. A salaried employee has little incentive to work extra hard at a task unless of course their job is dependent upon it. However, if a salaried employee is offered an incentive to perform at a higher level than what they currently are at they may decide that the reward is worth the extra time and effort. Employers must also bear in mind that when an employee is paid more, they will bear more risk. If the employee is risk averse than they two will demand higher compensation. It will be up to the employer to balance the required additional output with the additional effort needed to achieve the goals (Brickley, Smith and Zimmerman, 2016)
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