The Effects of Contract Design and Implementation Practices
on Worker Incentive Plan Outcomes

53 Pages Posted: 19 May 2008  

Francesca Franco

London Business School

Christopher D. Ittner

University of Pennsylvania - Accounting Department

David F. Larcker

Stanford University - Graduate School of Business

Date Written: May 1, 2007

Abstract

Key issues in the design of incentive plans include the choice of performance measures, the level of pay-performance sensitivity, and the use of individual versus group payouts. In addition, research suggests that implementation issues can also have significant effects on incentive plan outcomes. Using a sample of 462 worker (non-management) incentive plans, we examine a wide variety of measurement, contractual and implementation practices, and investigate their individual and joint effects on incentive plan outcomes. Despite the emphasis on performance measurement choices in past compensation studies, we find evidence that other contractual and implementation characteristics have equal or greater influence on plan outcomes, and that many of these features interact to impact performance in a non-linear fashion.

Keywords: worker incentives; performance measurement; implementation of incentive plans

JEL Classification: J33; M12; M52

Suggested Citation

Franco, Francesca and Ittner, Christopher D. and Larcker, David F., The Effects of Contract Design and Implementation Practices on Worker Incentive Plan Outcomes (May 1, 2007). Available at SSRN: https://ssrn.com/abstract=1133563 or http://dx.doi.org/10.2139/ssrn.1133563

Francesca Franco (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

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