MGMT 8009M Week 9 Incentive Analysis Example

Eleven Proceeds in Twelve: An Incentive Analysis of Why a Manufacturer's Acquisition Analysts Almost Never Advised Walking Away, Tracing the Pattern to a Bonus Formula, a Review Form and the Order of Speakers at Each Kickoff

Student Name

Walden University

MGMT 8009M: Organizational Decision Making and Judgment

Instructor Name

Month Day, Year

Eleven Proceeds in Twelve: An Incentive Analysis of Why a Manufacturer's Acquisition Analysts Almost Never Advised Walking Away, Tracing the Pattern to a Bonus Formula, a Review Form and the Order of Speakers at Each Kickoff

The Record

From 2022 through 2024, the corporate development team at Carden Industrial, a composite manufacturer of pumps and flow-control equipment, reviewed twelve possible acquisitions. It recommended proceeding on eleven. The twelfth, a valve maker in Ontario, received a recommendation to decline, but the seller had withdrawn from the process two weeks earlier, so the recommendation changed nothing. Of the eight deals that closed, three have met the revenue targets in their approval memos, two are below target, and three are too recent to judge.

The pattern alone does not prove that judgment failed. Carden might have screened targets so well that most deserved to proceed. But a team whose only negative recommendation concerned a deal already lost has, in practice, never advised walking away. The analysis asks what in the organization made that recommendation so hard to make.

A Plan That Paid for Closings

[after]

The plan says nothing about deals declined. A recommendation to walk away, however sound, earns nothing under the first two components and can only count through the individual review.

Table 1

Corporate Development Bonus Plan, 2022 to 2024

Paying for One Thing, Hoping for Another

Kerr (1975) gathered examples from universities, government, medicine and business of reward systems that favored behavior other than what leaders said they wanted, and observed how reliably people did what was rewarded. Carden's stated expectation for the team was independent judgment on whether each deal created value. Its bonus plan rewarded closing. The mismatch is plain once the plan is shown, and the analysis does not need more than this paragraph to establish it. But the plan alone does not explain the whole pattern, because 15 percent of each bonus depended on an individual review in which good judgment could, in principle, be recognized.

Evaluators With Known Views

Prendergast (1993) modeled how subjective evaluation creates an incentive for employees to conform to their evaluator's opinion. When a supervisor's assessment of a worker depends partly on whether the worker's findings match what the supervisor believes, the worker gains by echoing that belief, and the information the organization receives becomes less useful. Prendergast called these workers yes men, and argued that the problem is built into the structure of subjective review rather than into the character of employees.

At Carden, the analysts' annual reviews were written by the head of corporate development. That executive reported to a chief executive who had announced, in 2021, a goal of doubling revenue by 2027, with acquisitions expected to supply half of the growth. The head of corporate development's own bonus included progress toward that goal. The review form for analysts asked the reviewer to rate "commercial judgment" and "alignment with strategy." An analyst who recommended declining a deal the chief executive favored would be judged on both dimensions by someone whose own targets depended on closing.

The Answer Before the Analysis

Lerner and Tetlock (1999) reviewed research on accountability and concluded that its effects depend on its form. Accountability to an audience whose views are unknown tends to promote more careful, self-critical thinking. Accountability to an audience whose views are known tends to produce conformity: people shift their judgments toward what the audience prefers. The kickoff agendas for all twelve Carden reviews show the same order of business. The chief executive opened each with remarks on the target's strategic fit, and the analysts presented their work plan afterward. Analysts therefore learned the preferred answer before they began. The analysis treats this timing as its most important finding, because it explains why even careful work tended to confirm the opening view.

Limits of the Claim

Nothing here suggests the analysts were greedy, timid or careless. Their individual memos are thorough, and several flag risks in detail before recommending to proceed. The claim is that three features of the organization, a bonus paid for closing, a review written by an evaluator with a known stake and a kickoff that announced the preferred view, together made a recommendation to decline costly to make and unlikely to be rewarded.

Separating Advice From Reward

The redesign addresses each mechanism. The bonus plan replaces deals closed with a measure based on the quality of recommendations, scored three years later against the targets in each approval memo, whether the recommendation was to proceed or decline. Analysts' reviews are written by the chief financial officer's office, which has no acquisition target. And the chief executive's view on strategic fit is delivered after the analysts' first independent assessment, not before.

The Cost of the Redesign

The redesign will likely slow deal flow. If the team recommends declining two or three deals a year that it would previously have backed, Carden may close fewer acquisitions and reach its revenue goal later. That cost should be stated plainly to the board. It is the price of receiving advice that can say no.

Limits

Carden is a composite, and the deal outcomes are constructed. With only eight closed deals, the record cannot show that the pattern lowered returns, only that it removed one kind of advice.

References

Kerr, S. (1975). On the folly of rewarding A, while hoping for B. Academy of Management Journal, 18(4), 769-783. https://doi.org/10.2307/255378

Lerner, J. S., & Tetlock, P. E. (1999). Accounting for the effects of accountability. Psychological Bulletin, 125(2), 255-275. https://doi.org/10.1037/0033-2909.125.2.255

Prendergast, C. (1993). A theory of "yes men." American Economic Review, 83(4), 757-770.