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The Twelve Principles of Incentive Pay

Listed author(s):
  • Marcel Boyer

The incentive mechanisms used in the financial services industry in particular, but also in many other contexts, reward income generated almost regardless of risk, with negligent and faulty risk measurement and unjustified risk taking as predictable results. A number of economists warned financial, industrial and service corporations against these practices, reminding them that, in designing incentive mechanisms, it is necessary to take account of the risks taken or incurred to avoid what economists and insurers call moral hazard. I review incentive pay based on first principles of the economics of organization. Clearly, in many cases, those principles were not followed, which led to a governance crisis, a financial crisis and an economic crisis. Les mécanismes d'incitation utilisés dans l'industrie des services financiers en particulier, mais aussi dans de nombreux autres contextes, reconnaissent les revenus générés presque indépendamment des risques, menant à la négligence des risques et donc à une prise injustifiée risques. Plusieurs économistes ont mis en garde les entreprises financières, industrielles et de services contre ces pratiques, leur rappelant l'importance de bien considérer la prise de risque pour éviter ce que les économistes et les assureurs appellent « l'aléa moral ». Je passe en revue la rémunération incitative basée sur les premiers principes de l'économie des organisations. De toute évidence, dans de nombreux cas, ces principes n'ont pas été suivis, ce qui a conduit à une crise de gouvernance, une crise financière et une crise économique.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2011s-42.

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Length: 32 pages
Date of creation: 01 Apr 2011
Handle: RePEc:cir:cirwor:2011s-42
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