Download this Paper Open PDF in Browser

Optimizing Incentive Plan Design: A Case Study

49 Pages Posted: 12 Sep 2011  

Alec R. Levenson

University of Southern California - Center for Effective Organizations (CEO)

Cynthia Zoghi

U.S. Bureau of Labor Statistics

Michael Gibbs

University of Chicago Booth School of Business; Institute for the Study of Labor (IZA)

George S. Benson

University of Texas at Arlington

Multiple version iconThere are 2 versions of this paper

Date Written: September 11, 2011

Abstract

We study effects of a firm’s attempt to optimize an existing incentive scheme to increase sales growth for direct store delivery workers. Before optimization workers reported Ratchet Effects that lowered productivity. The altered incentive plan offered higher compensation for increased sales relative to a sales growth target, and lower compensation for failing to meet the target. We gathered data on performance and attitudes at pilot and control sites before and after the change. Relative to control sites, sales growth increased in the pilot sites by two percent, a meaningful contribution to firm profits. We find no change in distortion of effort or manipulation of the performance measure. Workers did not substantially change number of hours worked, though allocation of time across tasks changed slightly. Despite increased productivity, workers continued to report Ratchet Effects after the change. We also find that an unplanned price increase midway through a fiscal year affected the extent of Ratchet Effects that year.

Keywords: Incentives, Ratchet Effect

JEL Classification: M52, J33, M12, L81

Suggested Citation

Levenson, Alec R. and Zoghi, Cynthia and Gibbs, Michael and Benson, George S., Optimizing Incentive Plan Design: A Case Study (September 11, 2011). Available at SSRN: https://ssrn.com/abstract=1925770 or http://dx.doi.org/10.2139/ssrn.1925770

Alec Levenson (Contact Author)

University of Southern California - Center for Effective Organizations (CEO) ( email )

Los Angeles, CA 90089
United States
213-821-1095 (Phone)

Cynthia Zoghi

U.S. Bureau of Labor Statistics ( email )

2 Massachusetts Avenue, NE
Washington, DC 20212
United States

Michael Gibbs

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

George S. Benson

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

Paper statistics

Downloads
86
Rank
187,494
Abstract Views
664