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Performance-Based Incentive Plans

Author

Listed:
  • Rakesh K. Sarin

    (University of California, Los Angeles)

  • Robert L. Winkler

    (Indiana University and INSEAD)

Abstract

Incentive plans are an integral part of management control since incentives as measures of recognition of performance are significant motivating factors for corporate executives. In this paper we describe how such incentive plans can be devised. We employ multiattribute preference theory in the design of incentive plans. The basic idea is to state empirically verifiable conditions on the decision maker's preferences that imply some particular form of the incentive function. First, we show how an incentive plan can be devised when incentive compensation to managers is based on their actual performance on some predetermined criteria. Next, we consider goal-based plans that encourage managers to set accurate goals and motivate them to strive for a better performance subsequent to goal setting. Finally, we extend the goal-based plans to include situations in which the goals are reported probabilistically. Several suggestions for further research are also provided.

Suggested Citation

  • Rakesh K. Sarin & Robert L. Winkler, 1980. "Performance-Based Incentive Plans," Management Science, INFORMS, vol. 26(11), pages 1131-1144, November.
    • Handle: RePEc:inm:ormnsc:v:26:y:1980:i:11:p:1131-1144
    DOI: 10.1287/mnsc.26.11.1131
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    Cited by:

    1. Ayc{s}e Kocab{i}y{i}kou{g}lu & Ioana Popescu, 2007. "Managerial Motivation Dynamics and Incentives," Management Science, INFORMS, vol. 53(5), pages 834-848, May.
    2. D. Johnstone, 2007. "The Value of a Probability Forecast from Portfolio Theory," Theory and Decision, Springer, vol. 63(2), pages 153-203, September.
    3. James E. Smith & Detlof von Winterfeldt, 2004. "Anniversary Article: Decision Analysis in Management Science," Management Science, INFORMS, vol. 50(5), pages 561-574, May.

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