he could have concluded that the prospects of a higher bonus and promotion outweighed the costs. Nevertheless. however. This does not. He apparently had confidence that the European stock market would increase over time. it is plausible that the bank's organizational architecture contributed to the problem – the bank's delegation of decision rights provided the opportunity to undertake the trades." 2. necessarily imply that the trader was acting "irrationally" in placing the bets. the bank's incentive system may have helped to motivate the improper actions. While the details of the fraud at Societe Generale were still being investigated. they have incentives to limit the discussion with the customer and to dispatch a service representative even if a longer discussion would address the issue over the phone. Clearly the trader's actions were risky and have legal implications. While the trader's compensation may be small from the standpoint of the bank. the service representatives want to make service calls. it was likely important to him. Neither the phone representatives nor the service representatives have incentives to take the follow-up activities seriously. The service representatives like this arrangement because they are compensated on the number of service calls they make. It is true that the Societe Generale employee traded on behalf of the bank and that any of the direct gains and losses from the transactions would go to the bank not the employee. Similarly. SOCIETE GENERALE Discussion Question Answers: 1. The example raises managerial questions about whether it is wise to move an employee with detailed knowledge of the internal controls into a trading position without additional monitoring or better controls. Thus. It is likely that at least part of his bonus was either directly or indirectly tied to his performance as a trader. His knowledge of the control system helped him to conceal the transactions and reduce the likelihood that his actions would be detected. it is not clear that they were completely "irrational.Solutions Manual Chapter 1 Introduction ORGANIZING XEROX SERVICE CENTER Discussion Question Answer: The individuals who answer the 800 number have the incentives to answer many telephone calls but not to spend time on any given call. and the bank's monitoring staff policies could have increased the likelihood that they would not be detected. Indeed his actions were only discovered after a huge and rather unusual on day drop in European stock prices of nearly 6%. The phone people do not want to learn how to serve customers better if it means handling fewer calls.Managerial Economics and Organizational Architecture . 2 . Also his performance could affect his prospects for proportions to higher level positions and compensation at the bank. While his actions could be characterized as risky and apparently illegal.
As a manager it is important you consider these issues before the problems arise. you should carefully consider the incentives that are created by your bank's compensation and promotion policies. The box in this chapter on the subprime mortgage crisis emphasizes the same point. As an executive.Managerial Economics and Organizational Architecture .Solutions Manual 3. Reasonable controls and safeguards should be adopted to limit negative behavior. Even well designed incentive plans can motivate a certain amount of unproductive and even illegal behavior. A primary purpose of this book is help managers become better designers of organization architecture. 3 . Annual bonuses and the prospects for promotion provided important incentives in banks and many other organizations. Naïve design of incentives and /or poorly designed controls can be a recipe for disaster.