Improving Firm Performance through Variable Incentive Plans - Research Proposal Example

Improving Firm Performance through Variable Incentive Plans Executive Summary There is tentative evidence that variable incentive plans enhance firm performance and vice versa. Hence, the study selected variable incentive plans as the independent variable, while firm performance was selected as the dependent variable with five performance measure variables: profit, ROI, market share, sales, and total shareholder return. In this case, an experiment was conducted to test whether variable incentive plans led to increased firm performance in these five measures by selecting a sample of (n=40) companies, (n=20) that was the experimental group and (n=20) that was the control group. Two tests were used, which involved administering questionnaire surveys to managers of the experimental and control groups one month before the variable incentive plans were implemented and five months after its implementation. This was to test whether the plans increased firm performance by comparing it to the control group. The experiment confirmed the hypotheses, specifically in relation to sales, market share, and profit performance. Variables Selection Process Variable incentive plans are increasingly popular as a means of compensation in the cotemporary business environment. Proponents of variable incentive plans argue that rewarding superior performance with tangible rewards encourages efficiency and hard work, which, in turn, leads to enhanced overall firm performance. Therefore, there is tentative evidence that variable incentive plans have enhanced firm performance and vice versa. Hence, variable incentive plans will be the independent variable for this experiment; presence of variable incentive (IV1) and lack of variable incentive plans (IV2). Firm performance, on the other hand, has become the ultimate dependent variable for business management researchers and academics. Firm performance is mainly made up of three major outcomes used to measure different aspects of organizational performance: profit performance (DV1), ROI performance (DV2), market share performance (DV3), sales performance (DV4), and total shareholder return performance (DV5). Research methodology The experiment study proceeded on the basis of five hypotheses: H1: Variable incentive plans will lead to increased profit performance by the firm. H2: Variable incentive plans will lead to increased return on investment performance by the firm H3: Variable incentive plans will lead to increased market share performance by the firm. H4: Variable incentive plans will lead to increased sales performance by the firm. H5: Variable incentive plans will lead to increased total shareholder return by the firm. The study, as aforementioned, used an experimental design to test these hypotheses, in which a group of firms implementing variable incentive plans was compared with a control group of firms without any plan to implement variable incentive programs. The control group was selected on the basis of its similarity to the experimental group because of their nature of work and operations. Through ensuring that this condition is held constant, the researcher was able to control for potential error sources within the experiment. For this study, the adopted experimental design was a post and pre-test control group design, which is efficient and statistically sound. In addition, testing for the experimental group was done prior to and after the firms were exposed to the variable pay plan; while the control group was also tested twice alongside the experimental group, albeit without the variable incentive treatment. The experimental design involved pre-test data that allowed comparison of control and experimental groups, which is superior to the one-group post and pre-test experiment or the static-group comparison. The sampling frame for this experimental design consisted of sales firms that had been in operation for at least five years, in which (n=60) companies were furnished and (n=40) selected randomly from each list. In this case, (n=20) firms were selected for the experimental group and (n=20) firms selected for the control group. The study selected the survey questionnaire method as the experiment’s research instrument with two sets of survey questionnaires developed with the aim of distribution at two points; phase 1 and phase two. The study also allowed adequate lead-time between survey administration in phase 1 and implementation of the variable incentive program in the experimental group, specifically to allow the experiment impact on the firm’s performance measures. Phase 1 was conducted for the control and experiment groups, with the variable incentive scheme implemented after one month for the experimental group. Five months following implementation of the variable incentive plan treatment, the second survey phase was administered to both the control and experimental group to measure the five levels of performance measures identified above. The lapse was allowed in order to enhance the treatment’s probability to take effect. After collecting data from the control and experimental groups of firms, analysis of this data was conducted sequentially. First, the study established the two groups’ equivalence before the experiment using a simple t-test, specifically to ascertain the levels of firm performance prior to the experiment in relation to profit, return on investment, sales, market share, and total shareholder return. After this, a MANOVA analysis was conducted to ascertain whether the control and experimental groups differed in terms of firm performance measures following the experiment. The MANOVA analysis was taken as superior to the ANOVA test because it provides one overall group differences test at specified significance levels, reducing Type 1 error rates. Summary of findings The researcher administered (n=40) questionnaires to both groups twice and all the participants responded to the survey, of which (n=20) were from the control group and (n=20) were from the experimental group. Reliable measurement evidence was provided through the demonstration of a high value of alpha in Cronbach’s reliability test, in which all reliabilities were found to be favorable with all alpha coefficients ranging above 0.66 as shown in Tables 1 and 2. Table 1: means, S.Ds, and Correlations for variables tested in phase 1 Dependent Variable Mean Standard Deviation Alpha coefficient reliability Profit performance 5.57 5.27 .73 Return on Investment performance 5.40 4.76 .76 Market share performance 10.01 6.25 .77 Sales performance 7.72 5.43 .69 Total shareholder return performance 2.77 0.69 .69 N=20 Table 2: means, S.Ds, and Correlations for variables tested in phase 2 Dependent Variable Mean Standard Deviation Alpha coefficient reliability Profit performance 6.76 5.59 .74 Return on Investment performance 5.03 5.44 .75 Market share performance 11.79 7.76 .85 Sales performance 9.21 5.85 .73 Total shareholder return performance 2.63 0.80 .75 N=20 Results for the t-tests for independent samples indicated that there was insignificant difference between both samples in the firm performance variables during the first phase of measuring, which confirms the contention that both sample groups were equivalent. These are shown in table 3 and 4 below Table 3: Means and paired t-tests of DVs for experimental group prior to and after experiment Dependent Variables Phase One (Before experiment) Phase Two (After experiment) t-value Profit performance 5.57 6.67 -2.01 Return on Investment performance 5.40 5.03 .51 Market share performance 10.01 11.79 -2.27 Sales performance 7.72 9.21 -2.59 Total shareholder return performance 2.77 2.63 -1.59 Table 4: Means and paired t-tests of DVs for control group prior to and after experiment Dependent Variables Phase One (Before experiment) Phase Two (After experiment) t-value Profit performance 6.17 5.71 .77 Return on Investment performance 4.93 4.39 1.0 Market share performance 10.64 11.23 -.85 Sales performance 7.04 6.78 .49 Total shareholder return performance 2.85 2.74 1.42 In table 3, it can be seen that the experimental group went through a significant increase in profit performance (t=-2.01), market share performance (t=-2.27), and sales performance (t=-2.59). In contrast, table 4 indicates that there were lower firm performance levels in the control group in relation to four of the five firm performance measures, although the decline was not significant. These t-tests, in summary, indicate that the experimental group reacted positively to the variable incentive plan treatment, while firm performance in the control group stayed relatively the same. These results are in support of hypothesis 1, hypothesis 3, and hypothesis 4. Prior to testing the hypotheses using MANOVA, data was also tested in order to ascertain that it met essential assumptions. Since the survey questionnaires were administered to the respondents individually, as well as allowed for them to take the questionnaires home with them, there is little reason to suspect lack of independence in their answers about the state of the five firm performance measures. In addition, both groups were of equal size and, as such, variance matrix equality was not an issue. Hypotheses Testing Results In table 6, the univariate analysis reveals the differences between the different variables. The reason for this is because the experiment explained only the variances in firm performance with profit performance (F=3.84) and sales performance (F=4.88), rather than market share performance (F=1.29). Therefore, in summary, the variable incentive plan has a differential impact on profit performance, market share performance, and sales performance. More significant and stronger effects were identified profit performance and sales performance. Therefore, hypotheses one, three, and four, which states that variable incentive plans increased profit performance, market share performance, and sales performance by the firm respectively, were proved to be true and the relationship was statistically significant for these performance measures. Hypotheses two and five, which stated that variable incentive plans increased return on investment and total shareholder return respectively, were also proved to be true, although the effect that variable incentive plans had on these performance measures was not as significant. Table 6: Univariate Analyses Dependent Variable Group Time Group x Time F Ratio Sig F F Ratio Sig F F Ratio Sig F Sales performance 6.88 .00 2.38 .13 4.88 .03 Market share performance .00 .97 5.13 .02 1.29 .26 Profit performance .15 .70 .75 .39 3.84 .05 Recommendations While there have been some questions around the effectiveness of variable incentive plans, the experiment above shows that this plan has a significant effect on sales performance and profit performance, with a less significant effect on market share performance. However, its effect on Return on Investment performance and total shareholder return performance was found not to be significant. Therefore, companies that are involved in sales should introduce variable incentive plans to increase sales, profits, and, to a lesser extent, market share. Read More