Waging Politics: A Case Study of Change in Incentive Compensation

This case study examines how incentive pay programs are designed and changed over time in a financial organization that has typically relied on fixed salary compensation. Once incentive programs are introduced, pay plans change frequently, and this process allows the study of assumptions embedded in various incentive theories. Economic theories tend to explain incentives from an agency perspective, which suggests that incentives satisfy elaborate contractual requirements and vary with the risk preferences and costs of managers versus employees. Power theories, by contrast, argue that the interests and resources of various firm groups determine incentive structures. For this case study, qualitative data describing a firm’s process of changing compensation were gathered from documents, personnel manuals, and interviews with company managers. The findings suggest that instead of following from complicated cost‐benefit analyses, pay plans are often implemented within short time frames and with scant performance/effectiveness information. This evidence highlights the influence of power in efforts to change compensation structures and the importance of a multidisciplinary understanding of rewards.