Performance Measure Properties and Incentive System Design
University of Chicago Booth School of Business; Institute for the Study of Labor (IZA)
Kenneth A. Merchant
University of Southern California - Leventhal School of Accounting
Wim A. Van der Stede
London School of Economics & Political Science (LSE)
Mark E. Vargus
University of Texas at Dallas - Department of Accounting & Information Management
Industrial Relations: A Journal of Economy and Society, Vol. 48, Issue 2, pp. 237-264, April 2009
We analyze effects of performance measure properties (controllable and uncontrollable risk, distortion, and manipulation) on incentive plan design, using data from auto dealership manager incentive systems. Dealerships put the most weight on measures that are "better" with respect to these properties. Additional measures are more likely to be used for a second or third bonus if they can mitigate distortion or manipulation in the first performance measure. Implicit incentives are used to provide ex post evaluation, to motivate the employee to use controllable risk on behalf of the firm, and to deter manipulation of performance measures. Overall, our results indicate that firms use incentive systems of multiple performance measures, incentive instruments, and implicit evaluation and rewards as a response to weaknesses in available performance measures.
Number of Pages in PDF File: 28
Date posted: April 27, 2009
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