Internal Incentive Mechanism Design of Corporations - Several Discussions from Managers' Behavior and Business Model Evolution


Student thesis: Doctoral Thesis

View graph of relations


Related Research Unit(s)


Awarding Institution
Award date30 Apr 2019


As an important means of motivating employees and regulating working rhythm, the internal incentive mechanism serves as a critical component of the internal management of an organization. The study of incentive mechanism design for corporations has drawn substantial attention from both practitioners and academia. A series of studies in this area have investigated incentive mechanism design of corporate managers, e.g., CEOs, considering their management decision-making behavior, the majority of which has been devoted to discussion of research and development investment or merger and acquisition decisions. However, for traditional companies in competitive industries, e.g., product manufacturers and product selling companies, advertising and promotion (A&P) play important roles in market expansion and profit enhancement. The existing literature has paid little attention to the A&P investment behavior of managers with respect to incentive mechanism design. In addition, Some research has found that a well-defined business model should be accompanied by an appropriate incentive mechanism so that the business can achieve final success. Unfortunately, little attention has been paid to the influence of incentive mechanisms on the implementation and evolution of the whole business model of a corporation.

Thus, in this thesis, we study incentive mechanism design from two new perspectives. First, we study incentive mechanism design for corporate managers considering their A&P investment behavior in the competitive market. Second, from a macro perspective, we discuss incentive mechanism design for an entire company, along with the business model evolution. The main contents and contributions of the two research components are stated as follows.

1. In the first study, we discuss incentive mechanism design for managers considering their A&P investment behavior in a competitive market. On the basis of a two-stage Stackelberg game, we provide the equilibrium managerial incentives for both homogeneous and heterogeneous competitive markets. A detailed analysis of the relevant parameters in the equilibrium solutions is provided. The results of our model suggest that the managerial-incentive plan is related more to revenue than to profit when the company is in a highly competitive market. However, the compensation plan for managers should always consider net profit, regardless of market competition intensity. Furthermore, as the number of market participants increases, the effect of market competition on the equilibrium compensation plans marginally decreases. To make equilibrium incentives more practical in actual business, two approximations of equilibrium solutions are proposed when companies have access to only incomplete information about the market.

2. In the second study, we discuss the incentive mechanism for the entire organization considering business model evolution. Different strategies for business model evolution and corresponding compensation plans are provided in different scenarios, including different expectations about future revenues/costs and different business stages, e.g., new, preliminary mature, and fully mature. Both static and dynamic compensation plans are proposed. On the basis of the model, we find that when the human effort requirement increases, the compensation plan update follows a nonmonotonic pattern. Specifically, when the human effort requirement grows far more quickly or slowly than revenue, the compensation plan should be updated, whereas if the growth rates of human effort requirement and revenue are similar, the compensation plan should remain unchanged. This type of nonmonotonic pattern also exists in different business stages. Specifically, for a new or fully mature business, the compensation plan should be updated frequently, whereas for middle or preliminary mature businesses, the compensation plan should be updated cautiously in an intermittent pattern. In addition, two different motivations to update the compensation plan are found for different business stages. Specifically, for new businesses, the goal of the incentive plan update is largely to motivate employees to work consistently with the business model. For mature businesses, the compensation plan should be updated frequently to save additional compensation costs.

    Research areas

  • Business Model, Incentive Mechanism, Game Theory, Advertising