The Predicament And Opportunities Of Incentive Plans

This paper argues that, in a free and competitive society, people establish, or join organizations in order to institutionalize the asymmetric distribution of authority determined as they hope; that the more likely an organization can realize this hope, the more powerful the organization is; that every incentive plan should aim to realize this hope.In the first two chapters, we explain that, without reference to the proposition mentioned above, the individual merit pay designed by principal-agent theory will distort employees' behavior and bring to organizations unwillingly destructive results.In the third chapter, we give an verification to this proposition. People's abilities to creat wealth and secure happiness are determined by their material capital, human capital, and authority (which determines the degree to which they can explore their own human capital and utilize other's material and human capital). When financial market is not fully developed, people can utilize other's material and human capital via their own material capital. But with the development of financial market, those with powerful human capital will occupy with easy material capital by individual financing. Thus, people's abilities to creat wealth and secure happiness are only determined by their human capital and authority (which determines the degree to which people can explore their own human capital and utilize other's human capital). To understand how authority is distributed among people and the relationship of this distribution with the situation of human capital, we assume an transaction system of two person. In this system,there are only two resources: human capital and authority. Human capital can not be transferred, while authority can be differently distributed, and different distribution results different system abilities. Our model shows that, in order to maxmize the cooperate utilities, rational people with lower degree human capital hope to transfer authority to whose with higher degree human capital, and rational people with higher degree human capital hope to receive authority from those with lower degree human capital, until the ratio of marginal utility produced by the last unit of authority on those with lower degree human capital to that on those with higher degree human capital equals to the ratio of higher degree human capital to lower one. This rational distribution of authority not only maxmizes cooperate utilities, but also creat splus abilities to secure wealth. In order to take advantage of this co- abilities in lower costs, people need to institutionalize that asymmetric distribution of authority, and thus to creat or join organizations. Maximizing the abilities (or effort) of every member doesn't necessarily maximize the abilities of organization. To maximize organization abilities, we should consider both human capital and authority. We conclude that three incentive plans can increase the organization abilities. Firstly, with employees' human capital given, to maximize organization abilities needs to optimize the distribution of authority, that is, to optimize the organization hierarchies (occupation incentive). Secondly, with hierarchies given, to increase organization abilities needs to make employees more cooperative (management environment incentive). Thirdly, with hierarchies and cooperate situation given, to increase organization needs to improveemployees' human capital (train and education incentive).In chapter four, we extend this proposition and put it into practice. On the basis of analysis in chapter three, we develop an ideal organization model and by comparing this model with Chinese state- owned firms we make some suggestions on its reform and reconstruction of incentive plans. The authority of the highest hierarchy in ideal organization comes from inside, but not from outside, while in state- owned firms, this authority get is from outside government, and this will hinder the growth of organization abilities. We suggest to cut off this improper authority relationship by le...