Performance-Based Incentive Plans

Incentive plans are an integral part of management control since incentives as measures of recognition of performance are significant motivating factors for corporate executives. In this paper we describe how such incentive plans can be devised. We employ multiattribute preference theory in the design of incentive plans. The basic idea is to state empirically verifiable conditions on the decision maker's preferences that imply some particular form of the incentive function. First, we show how an incentive plan can be devised when incentive compensation to managers is based on their actual performance on some predetermined criteria. Next, we consider goal-based plans that encourage managers to set accurate goals and motivate them to strive for a better performance subsequent to goal setting. Finally, we extend the goal-based plans to include situations in which the goals are reported probabilistically. Several suggestions for further research are also provided.

Duke Scholars

Author Robert L. Winkler Fuqua School of Business