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The Perils of Altering Incentive Plans: A case study

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  • Kauhanen, Antti

Abstract

This paper studies a retail chain that introduced a sales incentive plan that rewarded for exceeding a sales target and subsequently cut the incentive intensity in addition to increasing the target. Utilizing monthly panel data for 54 months for all 53 units of the chain the paper shows that the introduction of the sales incentive plan increased sales and profitability, while the changes in the plan lead to a marked drop in sales and profitability. Thus, modifying the incentive plan proved costly for the firm. The results are consistent with the gift-exchange model of labor contracts.

Suggested Citation

  • Kauhanen, Antti, 2011. "The Perils of Altering Incentive Plans: A case study," Discussion Papers 1247, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:dpaper:1247
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    File URL: http://www.etla.fi/wp-content/uploads/2012/09/dp1247.pdf
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    References listed on IDEAS

    as
    1. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
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    Cited by:

    1. Kato, Takao & Kauhanen, Antti & Salmi, Julia, 2013. "Empirical Evidence on the Dynamics of Incentive Plans," ETLA Working Papers 20, The Research Institute of the Finnish Economy.
    2. Kato, Takao & Kauhanen, Antti & Kujansuu, Essi, 2013. "The Performance Effects of Individual and Group Incentives: A Case Study," ETLA Working Papers 19, The Research Institute of the Finnish Economy.

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    More about this item

    Keywords

    incentive pay; gift exchange; panel data;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management
    • J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence

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