The Twelve Principles of Incentive Pay

32 Pages Posted: 29 Aug 2011

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

Date Written: April 29, 2011

Abstract

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.

Keywords: Incentive mechanisms, risk, incentive pay

Suggested Citation

Boyer, Marcel, The Twelve Principles of Incentive Pay (April 29, 2011). CIRANO - Scientific Publication No. 2011s-42, Available at SSRN: https://ssrn.com/abstract=1919042 or http://dx.doi.org/10.2139/ssrn.1919042

Marcel Boyer (Contact Author)

CIRANO, Université de Monréal ( email )

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HOME PAGE: http://www.cirano.qc.ca/~boyerm

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