Incentives and Ratcheting in a Multiproduct Firm: A Field Experiment

Brahm, Francisco; Poblete, Joaquín

doi:10.1287/mnsc.2017.2861

Cited by 11 publications

(6 citation statements)

References 43 publications

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“…This effect is consistent with a study described above (Hansen & Van der Stede, 2004). Chow, Cooper and Haddad (1991) Experimental Truth on Pay Schemes Dechow and Sloan (1991) Archival Analysis Ratcheting CEO Pay Defond and Park (1997) Archival Analysis Smoothing income on Future Earnings Chowdhury (2006) Archival Analysis Manager Performance and Discounts Indjejikian and Nanda (2002) Archival Analysis Meeting Targets Consecutively Holzhacker, Kramer, Matějka, and Hoffmeister (2018) Archival Analysis Relative target setting and cooperation Armstrong, Chau, Ittner and Xiao (2017) Archival Analysis Target Ratcheting in CEO incentives Brahm and Poblete (2017) Experimental Ratcheting in a Multiproduct Firm Kuroki (2018) Archival Analysis Budget Ratcheting Under Zero-Profit Incentive Cardella and Depew (2016).…”

Section: Target Adjustmentsupporting

confidence: 82%

Target Setting And Firm Performance: A Review

Yitzhaky

Bahli

2021

JABR

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The consequences of missing targets can be found on a daily basis in many organizations. As such, targets and target setting in an extremely important topic to companies and one that should receive more attention. Although the vast amount of reasons for missing targets are difficult to study, the process of setting the target which includes budgeting has been proven to affect performance and achievement through goal setting theory (Locke & Latham, 2002). Thus, targets are an important element in almost every organization (Chenhall, 2003). We focus this review of literature exclusively in the relationship between target setting and firm performance and as such consolidate, organize, and synthesize past literature in this field and provide a clear direction for future research. We further identify two impactors found to affect firm and management performance but never researched as an impactor of the relationship between target setting and firm performance. Those impactors are Transparency of targets and length of management experience. In this paper, we fill the gaps identified above and inform the study of target setting in order to spark future research on this topic. We also identify the dimensions affecting the relationship between target setting and firm performance as well as the different measurement approaches in target setting literature.

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Section: Target Adjustmentsupporting

confidence: 82%

Target Setting And Firm Performance: A Review

Yitzhaky

Bahli

2021

JABR

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“…They conclude that the incentive schemes that are theoretically susceptible to the ratchet effect empirically work very well in the initial rounds because inefficient imitation emerges only gradually over time. Brahm and Poblete (2017) investigate the behavior of salespersons who face a ratchet effect in a situation in which the better they perform, the more their targets are increased. In a field experiment, they observe that the strategic behavior of salespersons is highly heterogeneous.…”

Section: Literature Reviewmentioning

confidence: 99%

Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

Johnsen

Sadrieh

Voigt

2021

Production and Operations Management

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In laboratory experiments, we compare the performance of short‐term and long‐term contracts in a two‐period supplier–buyer dyad with asymmetric cost information. We find that buyers tend to reject offers if the payoff inequality increases from one period to the next. We coin this dynamic form of inequity aversion as “ratcheting aversion.” We show that under short‐term contracting, the buyer's ratcheting aversion limits the supplier's leeway to exploit information revelation in earlier periods because suppliers fear contract rejections in later periods. As a result, the suppliers' empirical benefit of offering long‐term contracts over short‐term contracts is significantly larger than theory predicts. Furthermore, long‐term contracts enable supply chain partners to achieve less volatile supply chain performance than short‐term contracts because the buyers' ratcheting aversion leads to more contract rejections under short‐term contracting. While normative theory predicts that suppliers should include all future informational rents of the buyers in the first‐period offer, thereby creating large payoff differences between periods, we show that it can be behaviorally optimal for the supplier to make offers that lead to more equitable payoffs between periods.

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“…Second, our theory and evidence on the dynamic performance effects of incentive payments inform the broader understanding of effort dynamics in incentive plans. Some prior work points to time-varying incentives as a source of such dynamics by revealing that employees may strategically reallocate effort over time, which can be dysfunctional and harm organizational outcomes (e.g., Asch, 1990;Brahm & Poblete, 2018;Larkin, 2014;Oyer, 1998). Other work suggests that effort dynamics may be traceable to external interventions that make incentives salient-for example, an unobtrusive note regarding the piece rate at the beginning of a shift (Englmaier et al, 2017).…”

Section: Discussionmentioning

confidence: 99%

“…Also, WebCo's customer-support employees are subject to linear and stable incentives, which generates a time-invariant incentive pressure. By design, this eliminates as a confounding force the intertemporal effort reallocation and concomitant performance dynamics often observed under time-varying incentives, such as when firms reward employees only once they reach a quota (e.g., Asch, 1990), or when incentives change across evaluation periods (e.g., Brahm & Poblete, 2018). Next, incentive payments are based on explicit criteria directly tied to individual performance, and employees have continual access to their performance data, so they have an accurate sense of the magnitude of upcoming incentive payments.…”

Section: Figure 1 Hypothesized Performance Dynamics In Stylized Formmentioning

confidence: 99%

Beyond Reward Expectancy: How Do Periodic Incentive Payments Influence the Temporal Dynamics of Performance?

Frankort

Avgoustaki²

2021

Journal of Management

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Prior theory suggests that incentive plans, such as piece-rate or commission plans, motivate good performance because employees anticipate that current performance will generate matching future incentive payments. In this article, we move beyond reward expectancy to argue that performance can also derive from employees’ reactive responses to received incentive payments. We propose a salience-based theory casting incentive payments as recurring temporal markers that periodically increase the salience of the incentive plan, to which employees respond by temporarily increasing incentivized and unincentivized performance. We introduce multivariate time-series methods to test our hypotheses in longitudinal data spanning 169 weeks (1,183 days), drawn from an online firm using an incentive plan for its customer-support employees. While we find no evidence that incentive payments affect the dynamics of incentivized performance, they do temporarily boost several unincentivized behaviors and outcomes. Combined with fieldwork, these findings support our proposed mechanism of “salience-induced reciprocity”—that is, the temporary reciprocity in response to a periodic increase in the salience of the incentive plan. This article contributes to a more complete understanding of performance and effort dynamics in incentive plans, offers new inroads into studying temporality in the functioning of human resources practices, and provides other future research avenues.

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Incentives and Ratcheting in a Multiproduct Firm: A Field Experiment

Cited by 11 publications

References 43 publications

Target Setting And Firm Performance: A Review

Target Setting And Firm Performance: A Review

Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction

Beyond Reward Expectancy: How Do Periodic Incentive Payments Influence the Temporal Dynamics of Performance?

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