HRM/Economics Assessing an Incentive Scheme for Bobs

HRM/Economics

Assessing an Incentive Scheme for Bobs Burgers

Bobby's Burgers has an incentive problem. In order to overcome the current issues, which include poor performance of managers allowing the quality to deteriorate, tt has been suggested that a stock plan is implemented that will give the unit managers 500 shares each. This is a plan that has some potential, but it is not the only option. The first section of the paper will assess the proposal and the second section will consider other ways that the firm may motivate the managers.

Proposal of the stock plan

A major benefit of the stock plan is the way it will provide an incentive for the managers to increase their effort by overcome the principle agent problem by giving the managers a stake in the performance of the company. The problem within firms is that the owners, who are the shareholders, and benefit from increases in earnings and stock prices, effectively delegate the running of the firm to the managers, or agents (Eisenhardt, 1989). The agents do not have the same priorities, they do not have the same interest in increasing the value of the firm; they will have personal interests, such as self preservation (Eisenhardt, 1989). If they have no benefit from changes in the share price their actions are unlikely to be motivated to create these changes and support the shareholders needs. The idea of making the managers shareholders may help to overcome this breaching the gap, is the managers are shareholders they will then have the same interest in supporting the firms stock price value, which may reduce the agency costs (costs which are associated with the potential conflict of needs of agency and principle). 500 shares will give an interest in the company performance.

The presence of stockownership is expected to provide an incentive to the managers to increase their input or effort the job. The value of the stock will reflect the performance of the company, increasing as the market expects the firm to improve and reacting to news on performance. Effectively, the managers may expect to receive a marginal reward for a marginal increase in the value of the shares.

A benefit of the stock option is the relatively low cost for an ongoing incentive. This is an incentive where there is the one off cost which is minimal to the firm as it is not a financial cost, but the issuance of shares from equity. The ongoing incentive is provided by the ongoing ability of the share price to increase. However, there are also some potential drawbacks; once the shares are issued to the managers they may sell them. The sale of the shares will eradicate the incentive. There is also the danger that the price of the shares may decrease as well as increase due to factors that are outside of the control of the manager. The potential benefit from 500 shares may also be seen as minimal and may not incentivize large increases in overall effort, especially as the efforts of many others are also required.

Alternative Incentives

The firm may look at other forms of incentive, such as bonuses or profit related pay. As the firm is trying to improve the performance of each unit an alternate approach may be to reward each manager more directly for the results they can control. By developing an incentive scheme based on the individual unit performance there may be a much higher incentive for managers to increase their effort in the workplace as it will have a direct result on their utility (Baye, 2007).

The incentive level would need to be assessed in order to determine the level that would be sufficient to increase the incentive as a result of the provision of additional utility for the managers, at the same time as providing value for money for the employer. If the incentive offered is too high it can be costly for the firm, and the increased utility gained from minimal effort may be constrained. If the incentive is too low, then managers may not deem it worth the effort. The balancing of these two elements to maximize the effort from the managers at a suitable incentive level may provide a high level of benefit. This may be more suitable as the quality control that the employers wish to increase is directly under the control of the managers and the efforts they exert.