The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases

Abstract

Moods are low intensity affective states that individuals bring to a decision, and may be especially important when the balanced scorecard (BSC) is used for performance evaluation purposes. We propose that financial incentives can motivate decision makers to correct mood congruency biases, in which judgments and decisions are consistent with moods. In Experiment 1 participants rated the performance of one division manager based on two accounting measures and another manager based on a 16 measure BSC; there were mood congruency biases at both levels of information load. Financial incentives to make benchmark-consistent judgments eliminated bias in the former condition but not in the BSC condition. In Experiment 2 incentives were offered and performance evaluations were based on an eight measure BSC; mood congruency bias was eliminated. Results suggest that management control systems, specifically financial incentives, should be included in future affect correction research.

Keywords: Affect, Financial Incentives, Mood Correction, Information Load

JEL Classification: M41