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Case 1
In order to solve the problem of inefficient operations, a reform of public hospitals had been arisen all over the world. China had also participated in the trend of public health institution reform. With the reform, performance-related-pay system was widespread implemented.
This case aims at observing the changes of revenue, cost recovery, productivity which were resulted by the PRP system and whether the "bonus" system was the cause of unnecessary treatments and drugs. The case analyzes the data collecting from six hospitals and 2303 patients from 1978 to 1997.
The first hypothesis in the case is that the effect of the bonus system on hospital revenue, cost recovery, and the productivity is dependent on the different economic stimulus intensity of different systems and the reflection of the individual doctor. The case also presumes that doctors who take the necessary care will gain income as the form of the utility harvest. At the same time, they have to pay more efforts as the form of the loss. However, unnecessary care will undertake moral risk besides gain income and pay more efforts. Leisure desire and morals may limit the unnecessary care behavior of doctors.
There were three different PRP systems, be termed flat bonus, quantity-related bonus and revenue-related bonus, had been adopted. The case assumes that flat bonus will encourage doctors to provide the necessary care, but are unlikely to stimulate the doctor provides unnecessary care.If there is sufficient demand, the necessary care provided by doctors is beneficial to the patient, the hospital and the doctor. Accordingly, the income, cost recovery, productivity of the public hospital will be improved. But the doctor will not take action when the demand is insufficient with flat bonus. The quantity-related bonus will also encourage doctors to provide the necessary care, and will also encourage doctors provide more care when demand is not sufficient. Finally, the revenue-related bonus strongly stimulates doctors to provide unnecessary services and drugs in order to increase their income.
In order to verify the assumption, the case collected abundant data to observe what kinds of bonus systems had been adopted by the hospitals, what kinds of changes happened in average activity levels and productivity in the panel hospitals, and what kinds of changes happened in revenue, cost recovery, productivity and unnecessary care with changes in bonus system.
All the panel hospitals had shifted their compensation system with no bonus to flat bonus to revenue-related bonus. With the change of system, revenue rose obviously, and cost recovery increased as well. Although the productivity remained downward because of the vast input relative to lesser output, the productivity dropped more slowly than before. But the average expense of the patient increased markedly, and much of this was unnecessary.
In general, to the hospital, PRP systems, called revenue-related bonus, have a positive impact on the revenue, cost recovery, and productivity. Meanwhile, to the patients, unnecessary care and expensive drugs became a burden.
In this paper, 350 companies were used as a sample to present a research about how participants in the process of remuneration-setting evaluate performance-related pay scheme.The aim of the research is to examine the different reasons given for using performance-related pay, and try to address “Why do companies use performance-related pay?” This research is conducted on the basic of existing theories which were introduced at the beginning of the paper: agency theories, motivation theories, and institutional and legitimacy theories.
The research findings illustratethe following three main reasons for theimplement of performance- related pay schemes: current market practice, companies’ need for legitimacy, and to attract and retain good executives, which are portrayed in detail as follow.
First of all, the schemes can be used to set performance measures and targets so that to communicate the company’s strategy, and can be intended to influence directors’ behaviors towards carrying out that strategy.
Then, the reward itself exceptproviding a monetary award for the director, it can also increase directors’ self-esteem, provideconfidencewhen he compares himself with his peers, and improve the executive’s track record, increase his negotiation ability as a kind of human capital for future pay.
In addition, since the PRP schemes can make it clear that what is important in the board’s view, and what is important in the CEO’s view, so that the CEO and the rest of the company can understand and focus to their work and make efforts.
Furthermore, companies implement performance- related pay also for the need of fairness. This is extended in two aspects: the inner fairnessin a same company between employees, and the external fairnessbetween the directors indiffidentcompanies.
Though there are many reasons to support the using of performance-related pay, there still exist some problems with it.
It is areal challenge that relating a longer term performance-related pay is difficult, since when the award period ends,the conditions may be different with those when the performance measures and targets were set.And selecting appropriate performance measures and targets can be also very difficult; and it is hard to incentive the ability of PRP; and the achievement or otherwise of results and payouts can beinfluencedby luck, particularly when based on equity schemes.
