Question

As companies have outsourced more supply chain activities, it has become harder to align the goals of all parties involved. A commonly used performance incentive sets "thresholds" for minimum performance below which there are no rewards. But the threshold incentive is known to create a pattern in which sales peak at the end of the evaluation period, referred to as the...

a) Peak sales phenomenon
b) End-of-period surge
c) Evaluation rush
d) Threshold effect

Answer 1

The threshold effect in performance incentives is known as the end-of-period surge, where sales peak at the end of the evaluation period. It creates an incentive for employees to meet or exceed minimum performance thresholds set by the company. However, it can also lead to artificial boosts in sales and potential inefficiencies in the supply chain.

Step-by-step explanation:

Threshold Effect in Performance Incentives

Many companies use performance incentives, such as setting thresholds for minimum performance, to align the goals of parties involved in the supply chain. However, this threshold incentive often creates a pattern called the end-of-period surge, where sales peak at the end of the evaluation period.

For example, let's say a company sets a threshold of 1,000 units sold. If an employee manages to sell 999 units, they would not receive any rewards. This can create an incentive for the employee to push sales to meet or exceed the threshold just before the evaluation period ends, resulting in the peak sales phenomenon.

The threshold effect can have both positive and negative consequences. On one hand, it motivates employees to meet minimum performance standards. On the other hand, it may lead to artificial boosts in sales and potential inefficiencies in the supply chain. Companies need to carefully consider the implementation of threshold incentives to strike a balance between motivating performance and avoiding unintended behavior.