Are Incentives the Bricks or the Building?

Ron Schmidt

Journal of Applied Corporate Finance, 2010, vol. 22, issue 1, 129-136

Abstract: The efforts of economists to emphasize the importance of incentives as determinants of organizational performance, while successful to some degree, may have left the mistaken impression that “getting the incentives right” is the only task requiring the attention of senior executives when designing corporate organizations. The author identifies the incentive‐intensive companies envisioned by economists as “mercenary organizations” (or MOs), or companies whose distinguishing feature is near‐complete reliance on financial rewards and controls. Citing the difficulties of devising an effective incentive system that cannot be gamed (which he calls the organizational equivalent of “an anti‐gravity machine”), the article questions whether such organizations are likely to yield superior performance. As an alternative to paying more attention to incentive design, the author suggests devoting more corporate resources to seeking and attracting individuals with low “monitoring costs.” After holding up examples of top executives who appear committed to that search, the author posits a “character‐rich” organization (CRO) as an alternative to the MO of the economists. Then, viewing all companies as occupying points on a continuum with the MO and CRO as its poles, the author argues that all companies combine elements of both kinds of organizations. And perhaps most important, the CEOs of many of the most successful large organizations, without minimizing the importance of incentives, pay even greater attention to the search for trustworthy individuals and the creation of a culture of teamwork and accountability.

Date: 2010
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