Incentives &
Control
Summary of the Seminars
- Semester 1, Blok 1 2021-2022
,Contents
Chapter 1. Seminar Week 2....................................................................................................................2
1.1 Bouwens & Kroos (2019)..............................................................................................................2
1.2 Campbell (2012)...........................................................................................................................3
1.3 Wallace (1997)..............................................................................................................................4
1.4 Vyaderm business case.................................................................................................................5
Chapter 2. Seminar Week 3....................................................................................................................6
2.1 Campbell – Store24......................................................................................................................6
2.2 Gibbs et al. (2004).........................................................................................................................8
2.3 Birch Paper Case.........................................................................................................................10
Chapter 3. Seminar Week 4..................................................................................................................12
3.1 Kroos et al. (2017).......................................................................................................................12
3.2 Kroos et al. (2021).......................................................................................................................14
3.3 Cohen et al. (2008).....................................................................................................................16
3.4 Bark Gift Shop LTD......................................................................................................................18
Chapter 4. Seminar Week 5..................................................................................................................20
4.1 Core et al. (1999)........................................................................................................................20
4.2 Allee et al. (2020)........................................................................................................................22
4.3 Grabner & Moers (1999).............................................................................................................23
Chapter 5. Seminar Week 6..................................................................................................................25
5.1 Ittner et al (2020)........................................................................................................................25
5.2 Kim-Gina (2018)..........................................................................................................................26
5.3 Van der Stede et al (2020)..........................................................................................................28
5.4 Schloetzer (2012)........................................................................................................................28
,Chapter 1. Seminar Week 2
1.1 Bouwens & Kroos (2019)
1.What is the decision that is focal in this study and how is the delegation of decision rights
organized in this setting?
The decision that is focal in this study is approving loans. Banks give decision right (till a certain
amount) to loan officers, that can approve relatively smaller loans. If they want to give a higher loan,
then they have to take it to the higher-level officers.
2.What kind of customers are served in this bank and why is this relevant?
Customer that are served here are smaller businesses. These are smaller firms that want a loan but
they don’t have hard information. This means no financial statements and not audited. But the loan
officers get to know these business owners and know, to a certain degree, whether or not they are
credible.
3.What is the key problem that emerges when decision rights are organized as they are while
serving the kind of customers that they do?
The main problem is that a lot of information is soft. The information can be presented in a very
optimistic manner and if an loan officer presents it in an optimistic manner to a higher-level, then it is
likely that a loan will be given. This problem is bias. This also means that the loan officer has private
information.
4.What are the two components of the riskiness of a loan? In addition, how do loan rates move
(increase or decrease) when the credit risk and total outstanding debt increase? Does this make
sense to you?
Likelihood of default – how financial cash flows and balance sheet position. If it goes in default, how
bad is it? Do we have collateral?
5.What is the main takeaway from Table 5? Is this consistent with the key problem that you
discussed at point 3.
This table is the rate deviation table. The loan officers are inclined to communicate about the risk of
the loan in a positive bias way, they succeed in getting the loan rate but after it is approved, the loans
perform poor, meaning the loan doesn’t get paid in time or something else negatively.
6.What is the main takeaway from Table 6? Is this consistent with the key problem that you
discussed at point 3.
The loan officers communicate positively to get a discount on the loan rate. But this only applies to
the businesses where we don’t have audited information. When we do have audited information,
there is no discount or premium.
Higher level, without financial statements, you get a discount, namely -0.44
If you do have auditing information, then it is -0.08 and not significant. So we only find the discount
on the loans without the financial statements
Rate Deviation = Intercept + Beta1 * Higherlevel + Beta2Higherlevel * Auditing Information + …
2
, 1.2 Campbell (2012)
1.Explain the transition from centralized towards decentralized decision making at this credit
union? Describe the centralized and decentralized decision making system.
Centralized System – A standard rule or procedure for credit approval. Like asking for name, age,
education, income etc. No deviation from this is possible.
Decentralized System – We have procedures to ask for information for credit approval. But the
employees are able to make their own decisions and deviate from the rules to a certain level.
Meaning the rules and procedures turned into guidelines.
2.Describe the new strategy and did it fit with the new decentralized decision making system?
The new strategy is to focus on the member first and create relationships. It does fit with the system
because this way employees have some possibilities to deviate from the rule to make the customer
happy.
3.Do you believe that this new strategy makes sense given that the organization is a credit union?
Customer satisfaction is a means to increase financial results and therefore increase share price. At
the Credit Union, the customers are the owners. Financial stability is the means that you can
safeguard the owners. So the system is that you want to be customer oriented.
4.What are the implications of this new strategy for the incentive and control system? Do you
believe that the new strategy is easy to grasp by means of an incentive and control system that is
primarily based on performance measures and rewards?
It is very difficult to measure customer satisfaction through an objective performance measurement
system.
5.What will be the main component of the new incentive and control system that matches the new
strategy (use the Merchant & VD Stede framework as your frame of reference)?
Hiring the right people, there a personnel control
6.What are the two outcome variables that you would be especially interested in to examine how
successful the new decision making system and the new incentive and control system were?
Two things, namely whether or not employees do or do not deviate and secondly whether or not they
do it wisely.
7.What is the main takeaway from Table 5? Is the new systems successful?
New employee not referred, system say no, we still give the loan and deviate from interest. The new
employees do more often deviate from the guidelines. Based on what we want this system is
successful
8.What is the main takeaway from Table 7? Is the new system successful?
Charge off logits, the impairment of the loans are lower with the new employees. So they more often
deviate from the guidelines and have lower impairments on the loans. Therefore based on this table it
works.
3
Control
Summary of the Seminars
- Semester 1, Blok 1 2021-2022
,Contents
Chapter 1. Seminar Week 2....................................................................................................................2
1.1 Bouwens & Kroos (2019)..............................................................................................................2
1.2 Campbell (2012)...........................................................................................................................3
1.3 Wallace (1997)..............................................................................................................................4
1.4 Vyaderm business case.................................................................................................................5
Chapter 2. Seminar Week 3....................................................................................................................6
2.1 Campbell – Store24......................................................................................................................6
2.2 Gibbs et al. (2004).........................................................................................................................8
2.3 Birch Paper Case.........................................................................................................................10
Chapter 3. Seminar Week 4..................................................................................................................12
3.1 Kroos et al. (2017).......................................................................................................................12
3.2 Kroos et al. (2021).......................................................................................................................14
3.3 Cohen et al. (2008).....................................................................................................................16
3.4 Bark Gift Shop LTD......................................................................................................................18
Chapter 4. Seminar Week 5..................................................................................................................20
4.1 Core et al. (1999)........................................................................................................................20
4.2 Allee et al. (2020)........................................................................................................................22
4.3 Grabner & Moers (1999).............................................................................................................23
Chapter 5. Seminar Week 6..................................................................................................................25
5.1 Ittner et al (2020)........................................................................................................................25
5.2 Kim-Gina (2018)..........................................................................................................................26
5.3 Van der Stede et al (2020)..........................................................................................................28
5.4 Schloetzer (2012)........................................................................................................................28
,Chapter 1. Seminar Week 2
1.1 Bouwens & Kroos (2019)
1.What is the decision that is focal in this study and how is the delegation of decision rights
organized in this setting?
The decision that is focal in this study is approving loans. Banks give decision right (till a certain
amount) to loan officers, that can approve relatively smaller loans. If they want to give a higher loan,
then they have to take it to the higher-level officers.
2.What kind of customers are served in this bank and why is this relevant?
Customer that are served here are smaller businesses. These are smaller firms that want a loan but
they don’t have hard information. This means no financial statements and not audited. But the loan
officers get to know these business owners and know, to a certain degree, whether or not they are
credible.
3.What is the key problem that emerges when decision rights are organized as they are while
serving the kind of customers that they do?
The main problem is that a lot of information is soft. The information can be presented in a very
optimistic manner and if an loan officer presents it in an optimistic manner to a higher-level, then it is
likely that a loan will be given. This problem is bias. This also means that the loan officer has private
information.
4.What are the two components of the riskiness of a loan? In addition, how do loan rates move
(increase or decrease) when the credit risk and total outstanding debt increase? Does this make
sense to you?
Likelihood of default – how financial cash flows and balance sheet position. If it goes in default, how
bad is it? Do we have collateral?
5.What is the main takeaway from Table 5? Is this consistent with the key problem that you
discussed at point 3.
This table is the rate deviation table. The loan officers are inclined to communicate about the risk of
the loan in a positive bias way, they succeed in getting the loan rate but after it is approved, the loans
perform poor, meaning the loan doesn’t get paid in time or something else negatively.
6.What is the main takeaway from Table 6? Is this consistent with the key problem that you
discussed at point 3.
The loan officers communicate positively to get a discount on the loan rate. But this only applies to
the businesses where we don’t have audited information. When we do have audited information,
there is no discount or premium.
Higher level, without financial statements, you get a discount, namely -0.44
If you do have auditing information, then it is -0.08 and not significant. So we only find the discount
on the loans without the financial statements
Rate Deviation = Intercept + Beta1 * Higherlevel + Beta2Higherlevel * Auditing Information + …
2
, 1.2 Campbell (2012)
1.Explain the transition from centralized towards decentralized decision making at this credit
union? Describe the centralized and decentralized decision making system.
Centralized System – A standard rule or procedure for credit approval. Like asking for name, age,
education, income etc. No deviation from this is possible.
Decentralized System – We have procedures to ask for information for credit approval. But the
employees are able to make their own decisions and deviate from the rules to a certain level.
Meaning the rules and procedures turned into guidelines.
2.Describe the new strategy and did it fit with the new decentralized decision making system?
The new strategy is to focus on the member first and create relationships. It does fit with the system
because this way employees have some possibilities to deviate from the rule to make the customer
happy.
3.Do you believe that this new strategy makes sense given that the organization is a credit union?
Customer satisfaction is a means to increase financial results and therefore increase share price. At
the Credit Union, the customers are the owners. Financial stability is the means that you can
safeguard the owners. So the system is that you want to be customer oriented.
4.What are the implications of this new strategy for the incentive and control system? Do you
believe that the new strategy is easy to grasp by means of an incentive and control system that is
primarily based on performance measures and rewards?
It is very difficult to measure customer satisfaction through an objective performance measurement
system.
5.What will be the main component of the new incentive and control system that matches the new
strategy (use the Merchant & VD Stede framework as your frame of reference)?
Hiring the right people, there a personnel control
6.What are the two outcome variables that you would be especially interested in to examine how
successful the new decision making system and the new incentive and control system were?
Two things, namely whether or not employees do or do not deviate and secondly whether or not they
do it wisely.
7.What is the main takeaway from Table 5? Is the new systems successful?
New employee not referred, system say no, we still give the loan and deviate from interest. The new
employees do more often deviate from the guidelines. Based on what we want this system is
successful
8.What is the main takeaway from Table 7? Is the new system successful?
Charge off logits, the impairment of the loans are lower with the new employees. So they more often
deviate from the guidelines and have lower impairments on the loans. Therefore based on this table it
works.
3
