Olin Award-Winning Research Examines Compensation and Fraudulent Behavior

Olin Business School congratulates Judi McLean Parks, Reuben C. and Anne Carpenter Taylor, Professor of Organizational Behavior, for winning this year’s Olin Award. Her research paper “Give & Take: Incentive Framing in Compensation Contracts,” examines the relationship between compensation and fraudulent behavior.

The topic is timely in the wake of recent financial scandals and the panel of judges also noted that every company must deal with compensation issues and how they affect employee behavior.

McLean Parks and co-author James W. Hesford, assistant professor at Cornell University, conducted a series of experiments to test this hypothesis: that the type of compensation plan — contingent versus noncontingent (and the form of the contingency: a bonus or penalty based on performance) — might be related to fraudulent reporting and the misappropriation of assets.

McLean Parks sums up the results of the study this way: “If you pay someone contingent on their performance, you have motivated them to perform. However, if they are unable to perform well because the task is hard because of economic conditions you have also given them an incentive to cook the books!”

She says the study’s results have implications for CEO compensation plans and the financial difficulties many companies are experiencing today.

“For years we have touted the basic mantra of pay for performance because that’s the way you get the best performance,” McLean Parks says. “Maybe you get the best performance reported, but what’s the underlying performance?”

Honoring research by Olin faculty that provides practical and performance-enhancing applications for business managers, the Olin Award was initiated in 2007 by Richard Mahoney, executive-in-residence at Olin and former chairman and CEO of Monsanto.

A panel of prominent business executives and educators reviews and judges a range of research papers submitted for the competition, which awards a $10,000 prize.


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