Bonus Incentives

The Bark Gift Shop Ltd. case from HBR has an example of a CFO setting sales targets for stores with a bonus incentive based on exceeding targets. I got curious about the optimal policy a manager would use in this scheme. I had to make some assumptions about how increased effort reduced the marginal increase in sales, how the market grew, and what managers valued. I made it simple and said they maximized bonus /effort. According to my python script, managers would not uniformly exert extra effort if targets grew faster than the market. The optimal policy was to throw some quarters away and exert extra efforts in others. This seems consistent with known issues around hurdle and ratchet effects. Despite the intention to motivate store managers to increase sales, the result was managers increasing compensation.