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Performance Measure Properties and Incentive System Design

28 Pages Posted: 27 Apr 2009  

Michael Gibbs

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

Abstract

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.

Suggested Citation

Gibbs, Michael and Merchant, Kenneth A. and Van der Stede, Wim A. and Vargus, Mark E., Performance Measure Properties and Incentive System Design. Industrial Relations: A Journal of Economy and Society, Vol. 48, Issue 2, pp. 237-264, April 2009. Available at SSRN: https://ssrn.com/abstract=1394664 or http://dx.doi.org/10.1111/j.1468-232X.2009.00556.x

Michael Gibbs

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4842 (Phone)
213-747-2815 (Fax)

Wim A. Van der Stede

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 7420 (Fax)

Mark E. Vargus

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)

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