Contemporaneous and Forward-Looking Measures: Implications for Incentive Structure for Long-Horizon Employees

Abstract

Using car dealership data, we examine the relevance of forward-looking (FL) and contemporaneous (CO) measures for pay-for-performance incentives (bonus, annual raise, promotions) for long-horizon employees. Economic models suggest that while contracts with FL performance measures mitigates the shortsighted efforts of employees whose employment horizons are not aligned with the firm's profitability horizons, these measures have no influence on effort as employment horizons approach the firm's long-term profitability horizon. We predict and show for long-horizon employees that: their incentive contracts weights FL measures significantly more and are assigned greater weights than CO measures; and, compared to CO measures, the weights on FL measures increase as the time horizon of the incentives increase (bonus to raise to promotion).

JEL Classification: J33, M40, M46