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Four Incentive Methods Comparison

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Four Incentive Methods Comparison
Introduction
To motivate staff contribute more to the company, companies use their own incentive methods. British firms prefer share scheme, merit pay is often used in French companies (David & Richard, 2010) while In China, a large amount of corporations perform EVA-based scheme. (Yongjian, Lei &Donghua, 2015) For executives, formula-based arrangement is often used. (Robert, David & Richard, 1995). This leads to the question of what’s the advantage and disadvantage of the four payments. In the literature, I only discuss about individual incentives.
Knowledge Gap
The share scheme is extended rapidly these years. The incentive helps the employees perform as the shareholders do. When the company’s retained earnings increases, they are also benefited. Another advantage of this incentive is tax-avoiding.
Merit pay is a traditional but effective motivating method. How much one earns depends on his performance. However, it is also difficult to determine what kind of expectation should be rewarded and how to reward. If the standard is not fair enough, it might lead to contradiction between the employees and executives. (David & Richard, 2010)
EVA-based mechanism grantees the profit of the company. EVA defines company profit as the part of the return exceeds the capital cost. Under the mechanism, the more profit the company earns, the more incentive the staff will have. Also, when the company’s revenue is negative, the incentive will be reduced as well. (Yongjian, Lei &Donghua, 2015)
For senior-level executives, formula-based calculation is often used. The formula links the annual bonus with the financial performance. Each executive has a minimum and maximum goal bonus, which promises the senior staff a fruitful income and protects the firm’s benefit. (Robert, David & Richard, 1995)
In conclusion, share scheme encourage staffs to work as owners but it will also cause free-rider issues. Merit pay is motivating but establishing fair standards is quite essential and difficult. EVA-based mechanism is the most suitable method from the company’s perspective. But the system requires lasting profit, which makes the staffs work under long-term burden. The target-based method might reduce the executive’s passion to work because of the pre-established maximum and minimum bonus. The differences between these methods lead to my research question:
Research Question
What kind of condition dose each method suit?
Reference
David Marsden, Richard Belfield (2010) British Journal of Industrial Relations: Institutions and the Management of Human Resources: Incentive Pay Systems in France and Great Britain, 48(2), 235-283
Yongjian Shena , Lei Zoub, Donghua Chenb (2015) China Journal of Accounting Research: Does EVA performance evaluation improve the value of cash holdings? Evidence from China, 8(3), 213-241
Robert, David & Richard, (1995) Journal of Accounting & Economics: Annual bonus schemes and the manipulation of earnings, 19(1), 29-74

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