Incentives, Corporate Culture and Executive Compensation
Apr
16
03:15 PM - 05:30 PM
Incentives, corporate culture and executive compensation
On April 16, the UBS Center hosted a full day event dedicated to knowledge transfer between academia, industry and the interested members of the general public.
The day started with a roundtable on the topic of “incentives, corporate culture and executive compensation.” More than 25 chairmen, CEOs, and members of the boards of directors of large Swissbased companies met with renowned academic specialists to discuss the topic.
Among the speakers was Professor Daniel Kahneman, who kicked-off the discussion by giving his views on the mechanics of judgment and decision making in the corporate world. He was followed by Professor Ernst Fehr, who elaborated further on the academic viewpoint on the topic.
Fehr explained that empirical studies show that corporate culture – although often neglected – is one of the most important factors for success. He explained that several tools that can be used to engineer a firm’s culture have been scientifically examined; belief management, peer pressure and sanctions, financial incentives and priming.
The power of peer groups
The most powerful tools are belief management and peer sanctions. Making people believe that an overwhelming proportion of their colleagues comply with the company’s requirements, coupled with leadership by example, triggers voluntary compliance among 50% to 70% of staff. If companies want to reach the remaining employees who don’t comply voluntarily, they need to introduce peer sanctions. Experiments showed that the use of such sanctions increased compliance to nearly 100%.
Peer groups seem to be an important factor not only when it comes to sanctions but also when shaping financial incentives. These incentives can influence the caliber of employees a firm can attract and keep, how existing employees behave and also to what degree employees comply with the firm’s norms. Fehr said that financial incentives should be objective, simple to understand and based on peer-group adjusted performance. He generally sees a need to radically simplify compensation measurements. Peer-group adjusted performance would smooth out fluctuations and neutralize external effects. He pointed out that, contrary to usual practice, organizations should ensure that peer groups are relatively large and include companies from other sectors.
New regulations should be balanced
The third speaker, Professor Axel Weber, UBS Chairman, provided a private-sector perspective on the matter, agreeing with the academic speakers that fundamental change is needed, not only for the sake of sustainable financial success, but also for maintaining a critical level of public and political support. He also made clear that while most companies have already started to overhaul their policies and approaches, it is still work in progress. The lively plenary discussion involving all participants confirmed these views and also highlighted that many chairmen see a very real risk that some of the political and regulatory initiatives in this area might lead to an overshooting, which could seriously endanger the entrepreneurial freedom and profitability and harm Switzerland’s position as a business hub for large companies.
On April 16, the UBS Center hosted a full day event dedicated to knowledge transfer between academia, industry and the interested members of the general public.
The day started with a roundtable on the topic of “incentives, corporate culture and executive compensation.” More than 25 chairmen, CEOs, and members of the boards of directors of large Swissbased companies met with renowned academic specialists to discuss the topic.
Quote
Corporate culture – although often neglected – is one of the most important factors for success.
Ernst Fehr
Speakers
Professor of Economics, Affiliated Professor at the UBS Center
Ernst Fehr received his doctorate from the University of Vienna in 1986. His work has shown how social motives shape the cooperation, negotiations and coordination among actors and how this affects the functioning of incentives, markets and organisations. His work identifies important conditions under which cooperation flourishes and breaks down. The work on the psychological foundations of incentives informs us about the merits and the limits of financial incentives for the compensation of employees. In other work he has shown the importance of corporate culture for the performance of firms. In more recent work he shows how social motives affect how people vote on issues related to the redistribution of incomes and how differences in people’s intrinsic patience is related to wealth inequality. His work has found large resonance inside and outside academia with more than 100’000 Google Scholar citations and his work has been mentioned many times in international and national newspapers.
Daniel Kahneman was Professor of Psychology and Public Affairs, Emeritus, and Senior Scholar, Woodrow Wilson School, Princeton University. His research interests included psychology of judgment and decision-making (e.g. cognitive basis for common human errors), and behavioral economics and hedonic psychology. In 2002, he won the Nobel Memorial Prize in Economics. His current book, "Thinking, Fast and Slow", has become an international bestseller.
Chairman UBS
Prof. Axel Weber
Axel A. Weber has been Chairman of UBS since May 2012. From 2004 to 2011, he was president of the German Bundesbank, during which time he also served as a member of the Governing Council of the European Central Bank, as a member of the Board of Directors of the Bank for International Settlements, as German governor of the International Monetary Fund, and as a member of the G7 and G20 Ministers and Governors.
From 2010 to 2011, Axel Weber was a member of the Steering Committee of the Financial Stability Board and in 2011 member of the Steering Committee of the European Systemic Risk Board. He is also a board member of the Institute of International Finance and a member of the Group of Thirty.
Professor of Economics, Affiliated Professor at the UBS Center
Ernst Fehr received his doctorate from the University of Vienna in 1986. His work has shown how social motives shape the cooperation, negotiations and coordination among actors and how this affects the functioning of incentives, markets and organisations. His work identifies important conditions under which cooperation flourishes and breaks down. The work on the psychological foundations of incentives informs us about the merits and the limits of financial incentives for the compensation of employees. In other work he has shown the importance of corporate culture for the performance of firms. In more recent work he shows how social motives affect how people vote on issues related to the redistribution of incomes and how differences in people’s intrinsic patience is related to wealth inequality. His work has found large resonance inside and outside academia with more than 100’000 Google Scholar citations and his work has been mentioned many times in international and national newspapers.
Daniel Kahneman was Professor of Psychology and Public Affairs, Emeritus, and Senior Scholar, Woodrow Wilson School, Princeton University. His research interests included psychology of judgment and decision-making (e.g. cognitive basis for common human errors), and behavioral economics and hedonic psychology. In 2002, he won the Nobel Memorial Prize in Economics. His current book, "Thinking, Fast and Slow", has become an international bestseller.
Chairman UBS
Prof. Axel Weber
Axel A. Weber has been Chairman of UBS since May 2012. From 2004 to 2011, he was president of the German Bundesbank, during which time he also served as a member of the Governing Council of the European Central Bank, as a member of the Board of Directors of the Bank for International Settlements, as German governor of the International Monetary Fund, and as a member of the G7 and G20 Ministers and Governors.
From 2010 to 2011, Axel Weber was a member of the Steering Committee of the Financial Stability Board and in 2011 member of the Steering Committee of the European Systemic Risk Board. He is also a board member of the Institute of International Finance and a member of the Group of Thirty.
Venue
University of Zurich
Department of Economics, SOF-G-21, Schönberggasse 1, 8001 Zürich
(Google Maps)