Companies institute incentive systems to achieve goal congruence with employees. Incentive systems have long been used by organizations to motivate employees and achieve their desired outcomes. However, traditional incentive systems may not align with sustainability goals. In this course, we will explore both, the theory and practice of incentive systems and new developments regarding sustainable incentive systems.

Incentives systems are reward systems that tie pay to performance. To be effective, incentives must be clearly defined and considered a viable, valuable reward for the associated workload. Designing suitable incentive systems that are sustainable is a challenging task that requires the definition of appropriate performance measures and effective means of control. This course stresses the importance of incentive systems to align diverging interests within organizations with particular focus on understanding how systems may also generate dysfunctional or unintended incentives or results and how they can become more sustainable.

The aim of this course is to develop a framework for analyzing incentive systems, which allows to evaluate compensation schemes, and the underlying governance in organizations. Students become familiarized with the theoretical principles on incentive systems and adopt these principles to explain recent trends in corporate governance and incentive compensation considering sustainability goals, e.g., say on pay provisions, pay disparities, relative performance evaluation, pay for performance, ESG goals and ESG KPIs. Students apply the acquired knowledge when analyzing and discussing current compensation practices within firms and screening them for potential problems and best practices.

Students will learn technical and organizational aspects of sustainable incentive systems. This includes deeper understanding of compensation and reward systems, incentives as a corporate governance issue, performance planning, (ESG) goal setting, and the like. Students will learn which factors determine whether a performance measure is useful or not and to challenge applied incentive schemes.

After completing this course students will have the ability to:

• Explain the basic principles of sustainable incentive systems.
• Explain how incentives guide principal-agent relationships.
• Deal with theoretical frameworks .
• Analyze various aspects of incentive contracts in practice and consequences of incorrectly designed and implemented incentives systems.
• Explain how recent trends in including sustainability goals in incentive systems look like.

Apart from that, completing this course will contribute to students’ ability to:

• Efficiently work and communicate in a team
• Improve their oral and written communication and presentation skills
• Learn to give and receive constructive feedback

In order to successfully pass this course, your absence is limited to 20 % of our appointments.

The course will combine various learning methods to deliver the different topics to the students. These will include readings, open class discussions, teamwork, case studies, exams and presentations. We will analyze the incentive systems of real companies and their development in order to become more sustainable. These cases will document best as well as worst practices.

The final grade of the course will depend on:

• Pre-assignment 10%
• Group assignment 30%
• solving a problem set/ small group assignment 20%
• Exam 30%
• Class participation 10%

Class participation is mandatory with continuous assessment of student Performance.

Grading key: 

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Prof. Anne d'Arcy