Welcome back. In this lesson we're talking about short term incentives. And in this video we're talking about what are short term incentives. So short term incentives include bonuses, commissions, piece rates and other incentives that are targeted on awarding and incentivizing specific key performance indicators. And what is a key performance indicator? Well, a key performance indicator is the performance measure that can be used to determine our short term incentives. So one way to think about it are our KPIs, our key performance indicators, are our imports. And our outputs are those short term incentives, such as the commissions, or bonuses, or so on. And remember short term incentives are just going to be one element in the pay mix. And again the main purpose of short term incentives are to motivate workers to work towards those key performance indicators. So key performance indicators could be measured in many different ways. So, and they typically are aligned to either the objectives of the individual, the group, or the organization. They can include things such as profits. So for example for a salesperson, the profits or the margins that are associated in the products that they sell. Or revenue, the amount of revenue that salesperson might bring in. Units such as the number of units sold on satisfied customers. So, scores on a customers satisfaction survey that might be administer to that sales persons customers. Our good evaluations from either from the bosses, or from their parents, or from customers, or so on. And once again let's keep promise indicator as your inputs and one of the outputs. Where the outputs are those short term incentives. So based on those profits, or the revenues of the units sold, or those evaluations will be awarding non discretionary bonuses such as those commissions that the salesperson might be entitled to. The discretionary bonuses as the boss might say. Your contributions to the organization were really great. And so, we would be giving you these discretionary bonuses on top of your other compensation. But then also your commissions and your other incentives as well. So we're talking about short term incentives. We were talking about both performance measures, those KPIs. And also rewards that could be distributed on the individual level, the team level, the division level, or the firm level. So for example, for an individual level KPI might include a salesperson's personal sales numbers. Or it could be based on a team's sales numbers, or division, or the firm. Then also that reward can be distributed specifically to that individual, for that own individual sales. Or it could be to the entire team, or to a certain, with each share going to the members of that team. Or divisional, or firm level there as well. And so, whether we use team incentives or individual incentives, or tournament, or ranked based incentives will depend a lot on, again, our money, our mix, and our messaging. And so when we have an individual incentive that means that I'm paid for my own personal measured performance. And in that case, the teammates performance goes up. Well that doesn't really affect me. And so I might not try to help my teammates, per se. I might not try to help my peers, because I'm not being paid for that. But at the same time, I won't really care if it goes up or down either. In contrast, if you have a team-based incentive. For example, we have for example, a manufacturing plant where there are four of us who are working at a work station or one working it. Then we might be paid based on the performance of my entire team. And in that case if my team does well then my pay goes up as well too. And in that case I might be more likely to be more willing to try to help my teammates do better. Kind of the opposite of a team-based pay is a rank or tournament-based incentive. That's where I am paid for my relative rank. So for example, there's a famous example of a sales team. You might have at the very top sales person might get a very fabulous vacation, or a new car, or a fabulous reward. The second place person might get a much smaller reward. And those who are relatively poor salespeople might not get any short term incentives, or might get terminated. And so, in these rank or tournament based incentives if my teammates do well. Then that means my pay goes down because my rank among my team looks worse. And so we have to think about, based on these individual team-based or rank based incentives what again, based on what happens to my pay based on how they do is going to affect how I'm going to allocate my efforts as well. So again, under individual based incentives I don't really care what my peers are up to. And also the risk that is being born for things that are outside of my control is relatively moderate. So what will I do? Well I'll pretty much keep to myself. Under a team-based incentive plan, I'll want my teammates to succeed. Because the better they do, the more I'll be paid as well. One of the disadvantages to this is that if there's some factor that's affecting my teammate's performance, that's outside of my control and outside of my teammate's control. For example, business seasonality. Then this is going to affect all of our pay at a very high degree. This can magnify the effect of those things outside of our control affecting our pay. So what will I do? Well some of the things that the organization wants us to do is to cooperate, which we'll do. We'll also try to teach our teammates our best practices. But of course one of the disadvantages to these team-based incentives is that I'm bearing more risk. And then also have incentive to free ride. That is, I'll want to sit back and let my teammates work really hard. And because my teammates are working hard, I'm going to be paid a lot. Because my team is doing well, but at the same time I'm doing less effort. And then lastly there's the rank-based and tournament incentives. While in this case I actually want my peers to do poorly. Because if I'm only being paid for being number one. Then the worse they look, the better I look in comparison. One of the nice things about these tournament based incentives is that I'm bearing relatively little risk for things that are outside of my or my teammates, or colleagues control. So for example, if I'm a phone salesperson and my product was doing okay until a competitor came out with a competitive phone. Well then that's not only going to affect my sales, but it's also going to make it harder for the other people in my organization to sell the phones as well. And so, even if my sales look relatively low by virtue of being the number one salesperson in a bad year. You know that I was doing my job relatively well. And so what will I do? Well under ranked based and or tournament incentive, you'd really compete with your peers. It's kind of the opposite of the team-based incentive where you try to teach them best practices. Under our rank based incentives, you'd potentially want to sabotage their work, or you certainly wouldn't want to share the best practices. You'd pretty much want to keep it to yourself. And so again, when we're using short term incentives you want to think about our money, our mix and our messaging. If we're using short term incentives, we want to explain why it is that we're using individual-based incentive, or a group-based incentives, or a tournament-based incentive. And what does that communicate for our value, and for the culture of our firm. So designing incentives, if we want teamwork. Again, don't use a tournament incentives. If you want competitiveness, once again don't use team incentives. So next step, we're going to ask. Should I use incentives? And we'll be asking questions like. Given my job, would this job be a good candidate for short term incentives? Thanks and I'll see you next time.
