Exercise | February 2002 (Revised December 2003)

Incentives Game, The

by Jason R. Barro, Brian J. Hall and Jonathan Lim

Abstract

This exercise provides an opportunity to gain insight about designing, negotiating, and responding to incentives. The setting is investment management. A class is divided into a certain number of investment firms. Each company has one CEO and begins with four portfolio managers (PMs), who manage their portfolios by choosing from a restricted set of assets. The game takes place over approximately two weeks and is divided into three periods. Each period will last from two to four days. At the end of each period, new funds flow to high-performing portfolios, wheras funds flow out of poorly performing portfolios, simulating contributions from investors. CEOs and PMs negotiate compensation arrangements and PMs may move from one company to another, subject to some costs and rules regarding how much of their portfolio they take with them to their new companies. CEOs try to maximize the value of their companies at the end of the game, whereas PMs attempt to maximize their total compensation during the game.

Keywords: Motivation and Incentives; Compensation and Benefits; Investment; Management;

Citation:

Barro, Jason R., Brian J. Hall, and Jonathan Lim. "Incentives Game, The." Harvard Business School Exercise 902-197, February 2002. (Revised December 2003.)