The Power of Incentives in Decision Making

The Power of Incentives in Decision Making

Geraldine Ryan (University College Cork, Ireland) and Edward Shinnick (University College Cork, Ireland)
DOI: 10.4018/978-1-59904-843-7.ch081
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Abstract

The organisation of the workplace is evolving. In many industries, mass production by large, vertically integrated, hierarchically organised firms is being replaced with more flexible forms of both internal organisation and industrial structure (Brynjolfsson & Mendelson, 1993). Work is increasingly accomplished through networks of smaller, more focused enterprises. Added value is generated by ever-changing coalitions, where each member of a coalition specialises in its area of core competence and controls it through the use of strategic partnerships. The information systems (IS) revolution has had an enormous influence on how organisations are managed. Electronic access, communication, and decision support influence several managerial processes and systems including the nature and scope of managerial roles, organisational structure, strategic planning systems, budgeting, performance measurement and review, incentive compensation systems, and knowledge management.

Key Terms in this Chapter

Hidden Information: Hidden information refers to the situation where the agent has better knowledge about the decisions he/she is taking on behalf of the principal.

Hidden Action: Hidden action refers to when the principal is not able to observe exactly how much effort the agent really puts forth because monitoring is costly and precise measures of the agent’s behaviour are not available.

Economies of Scale: Economies of scale is a situation where unit costs drop as volume increases.

Incentive: Incentives are financial compensation, public recognition, or other benefits used to reward higher levels of performance and/or new ideas or contributions.

Core Competence: A firm’s core competency is the one thing that it can do better than its competitors. A core competency can be anything from product development to employee dedication.

Asymmetric Information: Information asymmetry occurs when one party to a transaction has more or better information than the other party.

Incentive Theory: Incentive theory is an element of human resources or management theory. It states that firm owners should structure employee compensation in such a way that the employees’ goals are aligned with owners’ goals. It is more accurately called the principal-agent problem.

Added Value: Added value refers to the increase in worth of a product or service as a result of a particular activity.

Strategic Partnership: A strategic partnership is a type of cooperative strategy in which corporate alliances are made between organizations—including between former rivals—as part of a global business strategy.

Outsourcing: Outsourcing is the practice of a firm contracting a non-core activity to a third party.

Contract: A contract is an agreement between two or more persons which creates an obligation to do or not to do a particular thing. A legally enforceable agreement between two or more competent parties made either orally or in writing.

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