Designing Compensation Strategy with Game Theory Perspectives

[We’re pleased to welcome back Pankaj M. Madhani, Associate Dean and Professor of ICFAI Business School (IBS). Dr. Madhani is the author of “Salesforce Control and Compensation System: A Game Theory Model Approach which appeared in Compensation and Benefits Review, Volume 47, Issue 4, and is currently free to read for a limited time. From Madhani:]

The performance of a sales organization is positively influenced by ethical behavior of sales people. The design of salesforce control and compensation system is crucial in salesforce management as it plays an important role in influencing ethics of salespeople. To understand this relationship, this research applies game theory model in the areas of salesforce control and compensation system.

The propensity for sales people to make unethical choices can be reduced by designing an appropriate salesforce control system and a relevant compensation plan. Ethical behavior in sales organization can also be influenced by various organizational drivers such as ethical climate, code of ethics, hiring, selection and training process and ethical leadership. By such organizational influences, if a salesperson is motivated to act ethically by putting high efforts for building long term customer relationships, trust and loyalty, it results into a win-win situation for both sales people and the organization. Research has developed various frameworks, models and payoff matrices to validate application of game theory in the field of salesforce compensation. After considering multiple scenarios in the game to identify optimal payoff, research concludes that a sales organization is better off with outcome control when sales people behave honestly as it has the highest payoff among all other possibilities.

pa.jpg

Pankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University.

He has more than 30 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with theOutstanding Young Managers Award. He is now working as a professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 300 book chapters and research articles in several refereed academic and practitioner journals such as World at Work Journal and the European Business Review. He has received the Best Research Paper Award at the IMCON-2016 International Management Convention. He is a frequent contributor to Compensation & Benefits Review and has published 19 articles on sales compensation. His main research interests include salesforce compensation, corporate governance and business strategy. He is also editor of The IUP Journal of Corporate Governance.

Interested in submitting to Compensation & Benefits Review? Visit the Submission Guidelines page today for more details!

 

Salesforce Control and Compensation System: A Game Theory Model Approach

Optimal Compensation Strategy during the Growth Stage: A Financial Modelling Approach

[We’re pleased to welcome Pankaj M. Madhani, Associate Dean and Professor of  ICFAI Business School (IBS). Dr. Madhani is the author of “Managing Salesforce Compensation During the Growth Stage A Financial Modelling Approach which appeared in most recent issue of Compensation and Benefits Review, Volume 47, Issue 5/6. From Madhani:]

The salesforce is a strategic lever of the sales organization for improving sales growth, market share and profitability. Although, the salesforce is a critical component to the overall success of the sales organization’s goals and objectives, it’s also a cost generator, influencing not only the cost of the salesforce but also the variable expenses associated with sales volume. The salesforce design (i.e. salesforce size and structure) has major impact on compensation policies and practices of sales organizations as it’s influenced by organizational and environmental variables.

The size and structure of the salesforce significantly impact the operation of salesforce in terms of efficiency and effectiveness and hence it needs to change as the sales organization enters the growth stage. It is mainly because these attributes have highest impact on overall success of sales organization in the growth stage compared to other stages of business life cycle. However, designing an optimal salesforce size and structure is an intricate task. This study looks into this area and develops various methodologies, matrices and analytical tools to determine optimal salesforce size and the right balance between generalized and specialized sales roles in the salesforce structure during growth stage. At optimal salesforce size and corresponding structure, sales organization is able to attract, retain and motivate the ‘right’ type of sales people, build long term relationship with customers, gain market share, enhance profitability and thus maximize the value of sales organization. Research develops a financial model and provides a numerical illustration to calculate optimal salesforce size and structure.

pa.jpgPankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University.

He has more than 30 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with the Outstanding Young Managers Award. He is now working as associate dean and professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 300 book chapters and research articles in several refereed academic and practitioner journals such as World at Work Journal and the European Business Review. He has received the Best Research Paper Award at the IMCON-2016 International Management Convention. He is a frequent contributor to Compensation & Benefits Review and has published 19 articles on sales compensation. His main research interests include salesforce compensation, corporate governance and business strategy. He is also editor of The IUP Journal of Corporate Governance.

Interested in submitting to Compensation & Benefits Review? Visit the Submission Guidelines page here!

 

On SAGE Insight: The link between superbugs and hospital outsourced cleaners

[The following post is re-blogged from SAGE Insight. Click here to view the original post.]

Article title: Superbugs versus outsourced cleaners: Employment Arrangements and the Spread of Health Care–Associated Infections
From ILR Review

On any given ILR_72ppiRGB_powerpoint.jpgday, one in every 25 patients in U.S. hospitals has a health care–associated or hospital-acquired infection (HAI)—one of a handful of so-called superbugs that contribute to the deaths of 75,000 of these patients. Not surprisingly, health care practitioners and scholars have turned their attention to clinical and delivery-of-care factors that might account for HAIs. This article provides novel, quantitative, empirical evidence linking a specific type of employment arrangement—outsourcing—to patient safety. It shows that in addition to the more widely examined clinical culprits, the HAI challenges plaguing the U.S. health care system are also a function of the strategic employment choices that organizations make in relating to their nonclinical staff. The findings have important implications for health care scholars, practitioners, and policymakers.

 Abstract

On any given day, about one in 25 hospital patients in the United States has a health care–associated infection (HAI) that the patient contracts as a direct result of his or her treatment. Fortunately, the spread of most HAIs can be halted through proper disinfection of surfaces and equipment. Consequently, cleaners—“environmental services” (EVS) in hospital parlance—must take on the important task of defending hospital patients (as well as staff and the broader community) from the spread of HAIs. Despite the importance of this task, hospitals frequently outsource this function, increasing the likelihood that these workers are under-rewarded, undertrained, and detached from the organization and the rest of the care team. As a result, the outsourcing of EVS workers could have the unintended consequence of increasing the incidence of HAIs. The authors demonstrate this relationship empirically, finding support for their theory by using a self-constructed data set that marries infection data to structural, organizational, and workforce features of California’s general acute care hospitals. The study thus advances the literature on nonstandard work arrangements—outsourcing in particular—while sounding a cautionary note to hospital administrators and health care policymakers.

Read this article for free

Article details
Superbugs versus outsourced cleaners: Employment Arrangements and the Spread of Health Care–Associated Infections
Adam Seth Litwin, Ariel c. avgar, and Edmund E. Becker
ILR Review
May 2017
DOI: 10.1177/0019793916654482

For more of the latest research from ILR Review, be sure to visit the Table of Contents for the latest May issue.  Included in the newly released issue are papers that discuss the debate on the effects of minimum wage, recent labor market topics, employment effects of healthcare reform, and how underemployment will continue to affect labor market opportunities.

Sign up for email alerts through the journal homepage so you never miss the latest research.

Family Firms and the Impact of Incentive Compensation

[We’re pleased to welcome authors James Chrisman of Mississippi State University, Srikant Devaraj of Ball State University, and Pankaj Patel of Villanova University. They recently published an article in Family Business Review entitled “The Impact of Incentive Compensation on Labor Productivity in Family and Nonfamily Firms.” From Chrisman, Devaraj, and Patel:]

 Family firms are thought to face a managerial capacity constraint owing to the preference of hFBR_72ppiRGB_powerpoint.jpgigh-ability job candidates from outside the family to seek employment with non-family firms, which usually offer higher compensation and more lucrative career opportunities. In our paper, we theorize that incentive compensation can ease this constraint by signaling the attractiveness of working in family firms, thereby increasing the average ability of a family firm’s workforce. We therefore hypothesize that incentive compensation will reduce the productivity gap between family firms and non-family firms.

We are interested in this topic because much of the focus in the literature on non-family employees in family firms deals with issues associated with alignment of interests after workers have been hired. Few studies deal with the pre-employment problem of adverse selection, which is primarily (but not entirely) an issue of worker ability rather than worker effort. We also wanted to emphasize that if job candidates seek employment with firms that are compatible with their self-interest, adverse selection can exist even in the absence of an opportunistic pursuit of self-interest (or in the presence of stewardship motives).

Bounded rationality and information asymmetry make judging the ability of potential employees difficult for the owner-managers of both family firms and non-family firms (and even for the potential employees themselves). However, when the labor pool available to family firms becomes attenuated because high-ability workers self-sort according to a preference to work in non-family firms, the adverse selection problem facing family owner-managers becomes even greater.

Incentive compensation will be more valuable for high-ability job candidates than it will for low-ability job candidates because the former are most likely to benefit from it. Thus, incentive compensation signals performance will be rewarded, which may help alleviate the adverse selection problem facing family firms. Our empirical analysis of a matched sample of over 200,000 small and medium-sized firms obtained from a U.S. Census survey supports our contentions. Findings indicate that the productivity of family firms that provide incentive compensation increases at a greater rate than the productivity of non-family firms that provide incentive compensation (compared, respectively, with family and non-family firms that do not offer incentive compensation).

We hope that our paper will inspire further work on the adverse selection problem facing family firms. We also hope that our paper will lead researchers to focus more on how bounded rationality and information asymmetry, rather than simply opportunism or the lack thereof, influences the behavior and performance of non-family employees in family versus non-family firms.  In this respect, we suggest that the presence of bounded rationality and information asymmetry make incentive compensation and monitoring valuable tools in family firms regardless of the composition or proclivities to behave opportunistically of the workforce.

Sign up for email alerts so you never miss the latest research. 

Elephant or Donkey? How Board Political Ideology Impacts CEO Pay

6261650491_0cd6c701bb_zHow much does directors’ political ideologies impact CEO compensation? Perhaps more than you might think–according to a recent paper published in Administrative Science Quarterlyentitled “The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay” from authors Abhinav Gupta and Adam J. Wowak, conservative and liberal boards differ in not only how much they pay CEOs, but how they adjust CEO compensation based upon company performance. The abstract for the paper:

We examine how directors’ political ideologies, specifically the board-level average of how conservative or liberal directors are, influence boards’ decisions about CEO compensation. Integrating research on corporate governance and political psychology, we theorize that conservative and liberal boards will differ in their prevailing beliefs about the appropriate amounts CEOs should be paid and, relatedly, the extent to which CEOs should be rewarded or penalized for recent firm performance. Using a donation-based index to measure the political ideologies of Current Issue Coverdirectors serving on S&P 1500 company boards, we test our ideas on a sample of over 4,000 CEOs from 1998 to 2013. Consistent with our predictions, we show that conservative boards pay CEOs more than liberal boards and that the relationship between recent firm performance and CEO pay is stronger for conservative boards than for liberal boards. We further demonstrate that these relationships are more pronounced when focusing specifically on the directors most heavily involved in designing CEO pay plans—members of compensation committees. By showing that board ideology manifests in CEO pay, we offer an initial demonstration of the potentially wide-ranging implications of political ideology for how corporations are governed.

You can read “The Elephant (or Donkey) in the Boardroom: How Board Political Ideology Affects CEO Pay” from Administrative Science Quarterly free for the next two weeks by clicking here. Want to stay up to date on all of the latest research published by Administrative Science QuarterlyClick here to sign up for e-alerts!

*Image attributed to DonkeyHotey (CC)

Happy Election Day from Management INK! Did you vote yet?

Call for Papers: Compensation & Benefits Review!

PenCompensation & Benefits Reivew is currently accepting submissions for manuscripts that discuss the design, implementation, evaluation and communication of compensation and benefits policies and programs. The journal supports human resources and compensation and benefits specialists and academic experts with up-to-date analyses and information on salary and wage trends, labor markets, pay plans, incentive compensation, legal compliance, retirement programs, and health care benefits. Do you have a manuscript that would fit well in Compensation & Benefits ReviewClick here to read more about the journal’s submission guidelines, and click here to submit your manuscript!

To highlight the kind of content Compensation & Benefits Review publishes, here’s the abstract from a recent paper published in the journal from author John G. Kilgour, entitled “Unemployment Insurance and the Great Recession”:

The Unemployment Insurance system of the United States is a federal-state Current Issue Coverpartnership. It responded well to the usual frictional unemployment and to the several recessions since its creation in 1935. The recent Great Recession beginning 2008, however, was its most severe test. Numerous extended-benefit programs were called upon to aid the large number of unemployed men and women who had exhausted their benefits. This article examines the performance of the Unemployment Insurance program during that test with emphasis on coverage, benefits, funding, the Unemployment Trust Fund and the several Extended Benefit programs. In addition to the entire United States system, it focuses on the experience of the five largest states: California, Florida, Illinois, New York and Texas as a sample of the whole.

You can read “Unemployment Insurance and the Great Recession” from Compensation & Benefits Review free for the next two weeks by clicking here. Want to stay current on all of the latest research published by Compensation & Benefits ReviewClick here to sign up for e-alerts!

Overcoming Obstacles to Establish the Largest Voluntary Employees’ Beneficiary Association

16687016354_ca450d18ec_z[We’re pleased to welcome Frank Giancola, HR researcher and retired practitioner for companies like Ford Motor Company, Eastern Michigan University, and the US Air Force. Frank recently published an article in Compensation Benefits Review entitled “The Turbulent History of the Nation’s Largest Voluntary Employees’ Beneficiary Association.”]

I decided to write an article about the U.S. auto workers’ healthcare VEBA for several reasons. First, I thought that the VEBA concept was not well-known in the benefits profession and that additional coverage was warranted. Second, the history of the auto workers’ VEBA tracks the timeline of the recent decline, bankruptcies, and Current Issue Coverrevival of the auto companies, one of the nation’s most important industries that directly and indirectly is responsible for millions of American jobs. Legacy health care costs were an important factor driving the bankruptcies. Third, I had the good fortune to work for one of the involved companies, Ford Motor Company, as a benefits professional, so I had first-hand knowledge of the issues and how the companies work with the hourly employees’ union, the United Auto Workers, to establish innovative employee benefit programs.

The union proposed the VEBA to the companies, as a means to protect the health care benefits of its retired members. Because of its commitment to its members, and the companies’ responsibility to its retirees and need to mitigate huge legacy costs, the parties were able to overcome monumental challenges that threatened the existence of the VEBA. The success of the VEBA demonstrates the ability of the collective bargaining process to deal effectively with a major issue in our country.

I was pleasantly surprised to see that the VEBA was able to provide medical benefits to over 500,000 retirees without encountering significant start-up difficulties, and that supplemental plan funding was obtained from reductions in the pay of active employees.

It is my hope that readers will find this history to be interesting and informative, so that when faced with the rising costs of providing health care benefits to retirees, they will have another option to consider to meet the challenge.

The abstract for the paper:

The Detroit automakers’ Retiree Medical Benefits Trust is the nation’s largest Voluntary Employees’ Beneficiary Association (VEBA). It is an independent trust with assets of $60 billion that is responsible for providing medical, prescription drug, dental and vision benefits to 720,000 hourly retirees, surviving spouses and dependents of General Motors, Ford and Fiat Chrysler. It was established in 2007 through the joint efforts of the Big Three Detroit automakers and the United Automobile Workers Union primarily to protect the health care benefits of hourly retirees and to provide the companies with financial relief from the burdens of legacy costs that eventually contributed to their bankruptcies. Although it is now viewed as a success, there were times in its history when its inception and future were seriously in doubt. A review of its history will inform HR professionals of the problems and solutions they may encounter in establishing a VEBA.

You can read “The Turbulent History of the Nation’s Largest Voluntary Employees’ Beneficiary Association” from Compensation Benefits Review free for the next two weeks by clicking here. Want to stay current on all of the latest research from Compensation Benefits Review? Click here to sign up for e-alerts!

*Image attributed to Pictures of Money (CC)