The Behavioral Promise and Pitfalls in Compensating Store Managers

2020 ◽  
Vol 66 (10) ◽  
pp. 4899-4919
Author(s):  
Shan Li ◽  
Kay-Yut Chen ◽  
Ying Rong
Keyword(s):  
Operations Management ◽  
Profit Sharing ◽  
Compensation Contracts ◽  
Effort Level ◽  
Store Manager ◽  
Compensation Systems ◽  
Fairness Concerns ◽  
Fixed Wage ◽  
Performance Based Compensation ◽  
New Formulation

Compensation systems have rapidly been shifting away from a fixed wage contractual payment basis. Many companies today are creating incentive compensation contracts to reward hard-working employees for jobs done well. Profit sharing (“sharing compensation contract”) and target with bonus (“target compensation contract”) are two common performance-based compensation contracts prevalent in business. We theoretically and behaviorally study the sharing and target compensation contracts in an operational context where a firm sets the parameters of the compensation contracts and a store manager, after observing the compensation contract offered to him, chooses his effort level (unobservable by the firm) and makes ordering decisions for the store. Our experimental data suggest systematic deviations from the theoretical benchmark and reveal behavioral promise and pitfalls under the two compensation contracts. In particular, the store manager is more willing to exert high effort under the target contract all else being equal. However, the store manager is also more likely to punish the firm for perceived “unfair” offers by submitting an extremely low order quantity. We find that bounded rationality plays an important role in driving a higher effort rate under the target contract than the sharing contract. We introduce a new formulation of the fairness concerns, which is referred to as by-state fairness, where individuals, rather than considering whether the expected profits received are fair, consider the fairness in the potential realized outcomes. This new formulation explains why managers are more likely to order very little to punish the firm under the target contract. In addition, we conduct validation experiments to verify our behavioral explanation. This paper was accepted by Jayashankar Swaminathan, operations management.

scholarly journals Dynamic Strategies on Firm Production and Platform Advertisement in Crowdfunding considering Investor’s Perception

2018 ◽  
Vol 2018 ◽  
pp. 1-12 ◽  
Author(s):  
Ying Ji ◽  
Ju Wei ◽  
Zhong Wu ◽  
Shaojian Qu ◽  
Baojun Zhang
Keyword(s):  
Product Quality ◽  
Operations Management ◽  
Cost Sharing ◽  
Reference Price ◽  
Simulation Experiment ◽  
Profit Sharing ◽  
Online Information ◽  
Data Simulation ◽  
Optimal Decisions ◽  
Dynamic Decision Model

Taking investor’s perception into account, the optimal decisions about the product quality and platform advertisement are investigated in a dynamic model in the context of crowdfunding. Researches in the literature, however, usually set investor’s perception as a fixed value and rarely consider the important phenomenon that the online information has some influences on investor’s perception. Considering the effects of information about product quality and platform advertisement on the investor’s perception, a dynamic decision model is proposed. Firstly, investment desire and reference price of the investor are introduced in two dynamic settings to describe investor’s perception. Then, the optimal decisions about the product quality and platform advertisement are formulated under two circumstances: the sponsor and the platform make decisions independently and they cooperate as a system. Finally, the influences of reference price and cost-sharing ratio on the optimal results are compared and the data simulation experiment verifies the necessity of the study. Some new insights can be drawn for the operations management of the firm in crowdfunding as follows: (i) it is more profitable for the firm to cooperate with the platform when investors pay more attention to their reference price; (ii) it is optimal for the firm to share a larger proportion of platform cost when the profit-sharing ratio is low.

scholarly journals A Building-Material Supply Chain Sustainable Operations under Fairness Concerns and Reference Price Benefits

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-14
Author(s):  
Huimin Xiao ◽  
Youlei Xu ◽  
Shiwei Li
Keyword(s):  
Supply Chain ◽  
Building Material ◽  
Cost Sharing ◽  
Reference Price ◽  
Dynamic Models ◽  
Stackelberg Game ◽  
Noncooperative Game ◽  
Sustainable Operations ◽  
Effort Level ◽  
Fairness Concerns

This paper incorporates fairness concerns and consumer reference price effects into a two-echelon building-material closed-loop supply chain consisting of a manufacturer and a retailer. By establishing four differential game models, we investigate the sustainable operations and cooperation of this supply chain. The four game models are a Nash noncooperative game, Stackelberg game with cost sharing, Stackelberg game with fairness concerns and cost sharing, and centralized decision model. By using dynamic models and optimal control theory, we obtain the two members’ optimal equilibrium strategies in the supply chain. Analytical results show that the consumer reference price effect has a positive impact on the manufacturer’s effort level, retailer’s publicity level, and product brand goodwill, which can improve the supply chain performance. The retailer’s partial commitment to cost sharing can enhance the production enthusiasm of the manufacturer, improve the brand reputation of the product, and enhance the two members’ individual profitability. The distributional fairness concerns of the manufacturer not only prevent the manufacturer and retailer from achieving Pareto improvement but also lead to the decline of the manufacturer’s effort level and profitability. The research conclusions of this paper can provide some insights into the cooperation and sustainable development of the supply chain.

Investment Strategies for Sourcing a New Technology in the Presence of a Mature Technology

2021 ◽  
Author(s):  
Wei Zhang ◽  
Hsiao-Hui Lee
Keyword(s):  
Operations Management ◽  
New Technologies ◽  
New Technology ◽  
Investment Strategy ◽  
Profit Sharing ◽  
Development Effort ◽  
Investment Strategies ◽  
Cost Shifting ◽  
The One ◽  
The Cost

To stay competitive, high-technology manufacturers not only frequently source new technologies from their suppliers, but also financially support the development of these new technologies into component products or production tools. We consider a manufacturer that can either source a new but immature technology from a financially constrained supplier, or source a mature technology from an existing supplier if and only if the development of the new technology fails. To support the new technology, the manufacturer can choose to inject capital in the form of an equity or loan. The investment strategy not only affects the new supplier’s development effort and the probability of technical success (PTS), but also affects the existing supplier’s effort to improve the mature technology, which presents the manufacturer with a trade-off. Following the debt financing literature, we find that a loan contract is associated with a cost-shifting effect and often leads to a higher PTS. However, because the manufacturer not only maintains an investment but also a procurement relationship with the new supplier, we find a profit-sharing effect associated with an equity investment, which does not exist in the traditional equity issuance literature. In particular, we show that the profit-sharing effect can dominate the cost-shifting effect and lead to a higher PTS when the new supplier’s technological capability is sufficiently high. Nonetheless, we also show that the strategy that derives a higher PTS does not necessarily generate a higher payoff for the manufacturer. On the one hand, a loan can be preferred even when it leads to a lower PTS because the cost-shifting effect allows the manufacturer to offer a sufficiently low procurement payment while maintaining a sufficiently high PTS. On the other hand, when the existing supplier is very capable of reducing its costs, a loan can over-incentivize the new supplier to exert excessive effort and backfire. This paper was accepted by Charles Corbett, operations management.

scholarly journals Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

2018 ◽  
Vol 2018 ◽  
pp. 1-13 ◽  
Author(s):  
Jiajia Chang ◽  
Zhijun Hu
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Maximization Problem ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Constant Elasticity ◽  
Constant Elasticity Of Substitution ◽  
Effort Level ◽  
Fairness Concerns ◽  
Venture Enterprise

The development of new venture enterprise is the result of joint efforts of entrepreneurs and venture capitalists who collaborate based on complementary resources. In this paper, we analyze a venture capital incentive contracting model in which a venture capitalist interacts with an entrepreneur who is risk neutral and fairness concerned, offering him an equity contract. We solve the venture capitalist’s maximization problem in the presence of double-sided moral hazard. Our results show that fairness concerns change the structure of the optimal contract. More importantly, we show that the solution to the contract regarding the optimal share given to the entrepreneur is nonlinear and is a fixed point between 0 and 1. Further, we simulate the model under the assumption that venture project’s revenue is a Constant Elasticity of Substitution (CES) function and obtain the following results. (1) When the two efforts are complementary, the venture capitalist’s effort does not monotonically decrease in the share allocated to the entrepreneur, while the entrepreneur’s effort does not monotonically increase in his share. (2) Relative to the benchmark case where the entrepreneur is fairness neutral, the optimal equity share allocated to the fair-minded entrepreneur is larger than 1/2, and as the degree of efforts complementarity increases, the optimal equity share tends to 60%. In this scenario, for a given efforts substitution parameter, the fair-minded entrepreneur provides a higher effort level than the venture capitalist.

scholarly journals How do contract types and incentives influence driver behavior?−An analysis of the Kigali bus network

2021 ◽  
Vol 8 (1) ◽  
Author(s):  
Leif Sörensen ◽  
Jan Schlüter
Keyword(s):  
Linear Models ◽  
Driver Behavior ◽  
Policy Implications ◽  
Negative Externalities ◽  
Passenger Safety ◽  
Bus Driver ◽  
Fixed Wage ◽  
Bus Network ◽  
Performance Based Compensation ◽  
The City

AbstractThe rapidly growing city of Kigali has a bus network that is undergoing increased development as underlined in its Transport Master Plan. Two schemes of bus driver remuneration coexist in the city: One constitutes a hybrid salary and commission system, while the other pays a fixed monthly salary. This paper examines the effect of these differing compensation schemes on driver behavior in Kigali using survey data from 2019. The analysis applies linear models incorporating various aspects of driver behavior in a principal-agent framework. The results indicate that the performance-based compensation scheme is associated with higher per-trip passenger fluctuation and faster driving (possibly due to drivers aiming to accrue a higher income) compared to the fixed-wage system. Policy implications comprise the inclusion of further criteria in incentive contracts to internalize potential negative externalities on society, e.g., to hinder the endangerment of passenger safety by appropriately incentivizing drivers. In conclusion, bus drivers who are compensated by performance are more likely to alter their behavior, responding to the incentive scheme through several channels.

Venture investment under multi-stage incentive model based on fairness concerns

Kybernetes ◽  
2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yadong Shu ◽  
Ying Dai ◽  
Zujun Ma ◽  
Zhijun Hu
Keyword(s):  
Venture Capital ◽  
Two Stage ◽  
Content Type ◽  
Effort Level ◽  
Asymmetrical Information ◽  
Second Stage ◽  
Venture Investment ◽  
Multi Stage ◽  
Fairness Concerns ◽  
The Impact

PurposeThis study explores the impact of EN's (venture entrepreneurs, simplified as EN) jealousy fairness concerns coefficient on two-stage venture capital decision-making in cases of symmetrical and asymmetrical information. It discusses the equilibrium solution of two-stage venture.Design/methodology/approachThe principal-agent model was established based on multiple periods, and differentiated contracts were established at different stages. The validity of the models and the contract was verified by numerical simulation.FindingsThe results suggest that with the increase in the EN fairness concerns coefficient, the effort level of EN decreases continuously and decreases faster in the second stage because this is the last stage. The level of VC's (venture capitalist, simplified as VC) effort declines first and then increases; that is, VC will increase the effort level when the fairness concerns coefficient increases to a certain threshold. To motivate EN to pay more effort, VC will increase the incentive to EN in the first stage. However, it will reduce the level of incentive to EN in the second stage. In the limited stage of venture investment, consider that the fairness concerns of EN do not make the profits of EN and VC achieve Pareto improvement simultaneously.Originality/valueFirst, the authors implanted fairness concerns into multi-stage venture capital and discussed the impact of fairness concerns on the efforts and returns of both parties. Second, among the influencing factors of the project output, the authors consider the bilateral efforts of EN and VC, the working capacity of EN, the initial investment scale, and the external uncertain environment.

The Impact of Deductibility Limits on Compensation Contracts: A Theoretical Examination

2001 ◽  
Vol 23 (s-1) ◽  
pp. 52-65 ◽  
Author(s):  
Robert M. Halperin ◽  
Young K. Kwon ◽  
Shelley C. Rhoades-Catanach
Keyword(s):  
New York ◽  
Empirical Studies ◽  
New York Times ◽  
Chief Executive ◽  
Publicly Traded ◽  
Compensation Contracts ◽  
Executive Performance ◽  
Theoretical Examination ◽  
Performance Based Compensation ◽  
The Impact

In 1993, Congress passed § 162(m) of the Internal Revenue Code. Section 162(m) disallows a deduction for compensation in excess of $1,000,000 paid to the chief executive officer (CEO) and the four highest compensated officers other than the CEO of a publicly traded corporation unless the excess is “performance-based.” Several articles in the popular and professional press (The New York Times 1993; The Journal of Taxation 1994) predicted that executives whose nonperformance-based compensation exceeded $1,000,000 before the passage of the legislation would find their salaries reduced and their performance-based compensation increased as a result of the legislation. Other predictions regarding the impact of § 162(m) have been mixed, with some commentators predicting no real effect (Burzawa 1993). While several empirical studies have examined firm reactions to § 162(m) in terms of compensation packaging, no prior research has considered the impact of this legislation on executive performance. This paper provides a theoretical examination of both firm and executive responses to the deductibility limit imposed by § 162(m). The results of this study may be useful to tax policymakers considering the effectiveness of § 162(m) in meeting Congressional objectives, and to empirical researchers examining the impact of this legislation on firm and executive performance.

Experimental Evidence on the Links among Monetary Incentives, Task Attractiveness, and Task Performance

2003 ◽  
Vol 15 (1) ◽  
pp. 161-176 ◽  
Author(s):  
Nicholas J. Fessler
Keyword(s):  
Task Performance ◽  
Complex Task ◽  
Monetary Incentives ◽  
Experimental Task ◽  
Compensation Contracts ◽  
Piece Rate ◽  
Fixed Wage ◽  
Wage Compensation ◽  
Or Task ◽  
And Task

This study reports the results of a laboratory experiment where subjects performed a complex task under two types of compensation contracts, fixed-wage and piece-rate. Additionally, all subjects evaluated the attractiveness of the task prior to learning how they would be compensated during the experiment, and after they performed the experimental task under their assigned compensation contract. The results show that when the task was originally perceived as being attractive, piece-rate compensation led to a significant reduction in the perceived attractiveness of the task and worsened task performance relative to fixed-wage compensation. When the task was originally perceived as being unattractive, the form of compensation did not affect perceptions of task attractiveness or task performance. However, these results did not hold for a second group of subjects who performed a less complex task.

scholarly journals The fixed wage puzzle: Why profit sharing is so hard to implement

2011 ◽  
Vol 110 (2) ◽  
pp. 104-106 ◽  
Author(s):  
Jürgen Jerger ◽  
Jochen Michaelis
Keyword(s):  
Profit Sharing ◽  
Fixed Wage

scholarly journals The Impact of Rebate Distribution on Fairness Concerns in Supply Chains

Mathematics ◽  
2021 ◽  
Vol 9 (7) ◽  
pp. 778
Author(s):  
Xi Jiang ◽  
Jinsheng Zhou
Keyword(s):  
Supply Chain ◽  
Positive Impact ◽  
Fairness Perception ◽  
Effort Level ◽  
Profit Distribution ◽  
Fairness Concerns ◽  
Normal Method ◽  
The Stability ◽  
Fairness Concern ◽  
The Impact

The reasonable distribution of supply chain profits among supply chain members is the core of the stability of a supply chain. Manufacturer rebates are a normal method to improve the performance of a supply chain and balance profit distribution. Based on consideration of the behavior preferences of supply chain members, in this paper, we study the influence of rebate distribution on supply chain utility. We establish a supply chain utility model, including the proportion of distribution, fairness concern coefficient and effort level, and discuss three different situations of supply chain members. The results show that (i) a manufacturer’s rebate can more effectively improve the utility in a supply chain with fairness perception; (ii) with other conditions unchanged, the fairness perception of supply chain members will have a positive impact on their own utility; and (iii) at the same time, when the party who has more discourse power in the supply chain has a sense of fairness, this is conducive to realizing the stable development of the supply chain through changes in the proportion of rebate distribution.

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