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This paper studies incentive compensation at Fritz Hansen, a Danish manufacturer of exclusive design furniture. A vast amount of literature exists within incentives theory. However, regardless of the establishedness of incentives theory it is not able to fully explain the case at Fritz Hansen. Several short-comings of incentives theory are found: managers whose compensation is not tied to BSC measures behave in accordance with these measures; no bonus bank is included in the incentives system to accompany EVA measures on which managers are rewarded but there seem to be no resulting focus on short-term results; managers self-select the bonus measures but they select measures that they cannot directly influence. Regardless of these breaches, the situation at Fritz Hansen seems to be in equilibrium with managers behaving in the interest of the owners and the owner representatives being satisfied with the incentives system. In order to better understand how and why the design of incentive compensation at Fritz Hansen seems to function, contingency theory is drawn upon. While contingency theory provides a usable framework for the study important variables not previously mentioned in contingency theory is missing before the case of Fritz Hansen can be explained. Using the case study method the variables change urgency, the presence of an ultimate lagging goal, the legitimising effect, the system of measurement, non-financial measurement and lastly the controllability principle are extracted from the case. Together, these can explain why EVA is still included as a compensation base and why managers are motivated by BSC measures although they are not part of the compensation base.

Incentive compensation in Fritz Hansen: The shortfall of incentives theory and the insights from contingency theory