Reward Systems

Rewards and incentives contribute to strategy implementation by shaping individual and group behavior. Well designed incentive plans are consistent with an organization’s objectives and structures. They motivate employees to direct their performance toward the organization’s goals. Sega’s reward system must be compatible with the risk of their strategy.

In setting up an incentive plan, the organization is faced with a series of choices: Should bonuses be in cash or stock? Current or deferred? How will performance be measured? How much discretion will managers have in awarding bonuses? How large will the bonuses be? The idea is to tailor the program to the organization’s objectives. Incentive plans can encourage short term or long term decision making greater or lesser risk taking more or less cooperation with other managers and the like. Table below reviews established practice in incentive plans for top management.

Short run vs. long run:

Mix of current bonus awards and stock options should reflect time horizon for policy level executives. Deferred instruments are weak reinforcers of short term performance.

Mix of quantitative measures of performance and more qualitative measures should reflect the relevant time horizon for executives. Qualitative measures usually reflect long run consideration more effectively than quantitative measures.

* Non-discretionary formula based bonuses tend to encourage a short run point of view.

* Frequent bonus awards encourage concentration on short term performance.

Risk aversion vs. Risk taking:

Current bonus awards, in cash or stock, can reinforce risk taking behavior.

Qualitative measures of performance can reinforce initiative by assuring executives that total performance will be evaluated for purposes of bonus awards.

Completely discretionary, highly personalized bonuses do not clarify the “rules of the game” and as a result can discourage risk taking behavior.

The size of both salary and incentive awards should be commensurate with the business and personal risks involved.

Interdivisional relationships:

Bonus pools can be based on divisional performance, total corporate performance, or mix of the two. Each arrangement sends different signals in terms of interdivisional co-operation.

Nondiscretionary formula based bonuses for division managers are most practical in companies where little cooperation among divisions is required Discretionary bonuses are practical when top management wants to encourage cooperation among divisions.

Company division relation ships:

Stock options can effectively link the interests of division personnel to the interests of the corporation.

Use of objective measures of performance of managers is more meaningful where the primary role of headquarters is to allocate capital than it is in instances where the head office plays an important role in ‘managing the businesses’ of the divisions.

Non-discretionary formula based bonuses are most practical in companies where headquarters does not interfere in management of the profit centers. Discretionary bonuses are most useful when top management wants to exert a direct influence on decisions in the divisions.

Many companies depend on their reward systems to help them implement strategy. From the multimillions awarded to some senior managers in stock options to vacations at resorts for winning sales people rewards and incentives play dominant part in an organization. Rewards and incentives play an equally important role in the broader society. Teachers use gold stars and merits for school children. Religious organizations reward perfect attendance and contribution. Political parties, have complex systems of rewards and incentives.

Imagine what your classes would be like if there were no rewards and punishments. What would motivate students to learn? Would classes be better or worse? More fun or less? What would take of rewards and punishments such as grades?

The basic idea is that people engage in behavior because it will lead to rewards. And as the concept of strategy implementation has evolved, many have argued that it is necessary to tie the achievement and achievement and implementation of strategic goals and plans to a specific system of rewards. To implement some long range strategic plans managers receive rewards years after the implementation actually took place.