research@hec - Issue #29 - (Page 5)

research hec There are flaws in all incentive programs, which employees exploit and that take time to be identified. a pplications in the workplace The Kerviel affair shows that companies have to change their incentive regimes on a frequent basis. Limiting their application over time is an efficient way of preventing employees from taking advantage of the schemes at the expense of the company. “They should change them more often than is generally thought”, says Tomasz Obloj, “but the optimal timing depends, of course, on each individual company.” existence of these cycles, the article by Obloj and Sengul examines how employees and organizations learn to respond to a given set of incentives. As Obloj points out: “This means that we can apply our theory to most organizations, not only a bank or particular type of company”. rect decisions that would have raised long-term share value). According to Tomasz Obloj, employees with prior experience curtail the effects of the incentive lifecycle: the more years of service an individual has, the more quickly he or she comes to understand the workings of the incentive regime. “We wondered whether learning was restricted to a particular incentive program and whether previous experience could be transferred from one organization to another or across different regimes. And, in fact, both are easily applied in new contexts”. Obloj gives the following example: “The traders who caused huge losses at banks such as Société Générale and UBS by taking too many risks had, generally speaking, previously worked in the back office. This meant they were able to accumulate experience about operational procedures and work out how to subvert them to win bonuses.” n Based on an interview with Tomasz Obloj and the article “Incentive Life-cycles: Learning and the Division of Value in Firms”, co-written with Metin Sengul and published in Administrative Science Quarterly, June 2012. M ethodology The researchers analysed data from a Polish commercial bank over a 13-month period from the introduction of a reward system until its replacement by a new system. Their aim was to show the existence of an incentive life-cycle, to explore the underlying micro-mechanisms and to provide strong quantitative and qualitative evidence of the presence of productive and adverse learning in bank outlets. EXAMPLES OF THE ADVERSE EFFECTS OF INCENTIVES This is the first empirical study to show that learning processes influence the evolution of the division of value between economic actors. The results can be positive or negative, with the researchers demonstrating the presence of both so-called productive learning (i.e. learning that produces the desired effects) and adverse learning (learning that has undesirable results). “There are flaws in all incentive programs, which employees exploit and that take time to be identified”, says Obloj. “The bestknown example occurred at Lincoln Electric in the 1980s, when, to encourage employees to work more quickly, they were given a bonus according to how many times they hit the keys on their typewriters. But they then started to strike their keyboards at random during their lunch-break.” The 1990s were also littered with similar examples in the field of stock options: many CEOs took to falsifying their accounts to artificially inflate share values before making money for themselves by selling their own shares in the short term (instead of taking the cor- october-november 2012 • 5

Table of Contents for the Digital Edition of research@hec - Issue #29

Cover & Contents
The Brand France, a source of great appeal
Managerial incentives: Life-cycles and the influence of learning processes
Searching for new sources of innovation: The role of consumers

research@hec - Issue #29