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Who Benefits from Bonuses?
Over the past decade, senior corporate executives have been earning record-high bonuses in record-high numbers. What accounts for this striking increase? Do bonuses motivate executives and enhance organizational performance?
In a 1997 working paper, "Do Incentives Work?," HBS professor Michael Beer and Harvard University doctoral candidate Nancy Katz report on a survey of 205 executives from 30 countries in industries such as manufacturing, retail, and financial and professional services. The survey examined whether senior executives perceived incentives to have positive motivational value, how employees at lower levels viewed the fairness of incentive plans, and whether incentives had an effect on corporate performance.
The results were surprising. Most noteworthy: making pay contingent on performance has a negligible effect on executives' motivation, and companies with such plans do not perform better financially. Further analysis prompted Beer and Katz to conclude that the real role of bonuses is simply to attract highly qualified executives to a corporation. "Companies are forced into incentive systems to compete in the labor market," write the authors. "They use motivation [merely] as the rhetoric to justify their actions."
Moreover, the authors found that only two variables in their survey were associated with corporate financial performance: the presence of a strong team-based culture and a bonus system that was based on overall corporate performance rather than individual or unit performance. Beer and Katz thus suggest that instead of putting energy into designing complicated incentive plans intended to motivate executives, top managers should focus on developing an effective team-based organization and culture. And since incentive compensation does not result in improved performance in American companies, they conclude, corporations abroad should resist pressures to tie incentives to individual and unit performance.
Two Best Ways?
When HBS assistant professor Jonathan West set out to examine manufacturing process development in the U.S. and Japanese semiconductor industries, he made a surprising discovery: Although U.S. and Japanese firms' development programs were both successful, they appeared to pursue radically different organizational strategies that showed no sign of converging into a single, optimal approach.
West explores these differences in a working paper titled "Limits to Globalization: Organizational Homogeneity and Diversity in the Semiconductor Industry." Extensive interviews with managers at nine major firms (four American and five Japanese) and an analysis of performance data drawn from industry publications and technical journals revealed that firms in each country followed a distinctive, national pattern. U.S. companies used a tightly focused, project-based mode of organization that emphasized experimentation and relied on academically trained personnel. In contrast, Japanese companies pursued a looser, more flexible organizational strategy drawing on employees' experience with previous generations of products rather than formal training. Although these differences became more pronounced between 1985 and 1995, the performance gap between U.S. and Japanese semiconductor companies narrowed.
"Much of what we teach in management theory is that there is one best way to do things," West observes. To explain the existence of two "best ways," he cites differences in the institutional contexts in which U.S. and Japanese firms operate. Japanese firms recruit talented personnel at the outset of their careers and expect to train them through a lifetime of experience. "Guaranteed employment allows Japanese firms to pursue more confidently an experience-based, rather than experiment-based, approach to knowledge creation and problem solving," he writes. The U.S. firms' focus on experimentation and project-specific teams, on the other hand, reflects the advantages - and risks - of a more mobile, highly trained labor force.
West's research highlights the difficulties involved in trying to "globalize" the management of innovation. "Knowledge creation, even within global firms, is inextricably intertwined with institutions that are inherently local," he writes. He intends to test his findings by investigating process innovation in companies entering the semiconductor industry from Europe and Asia. He also plans to conduct a similar study of biotechnology in agribusiness.
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