Sooner or Later: The Effects of Timing on Managers’ Discretionary Weighting of Multiple Performance Measures

Abstract

We investigate whether the weights managers place on multiple performance measures for the purpose of determining performance-contingent pay depend on whether weights are determined before or after employees exert effort. We propose that, while the overall purpose of determining these weights (to guide employees toward desired actions) is unaltered by timing, managers frame the weighting decision differently depending on timing. Specifically, prior to employee effort, managers frame the decision as one intended to motivate employee effort in line with firm objectives. After employee effort, managers frame the weighting decision as one intended to evaluate employee effort in a way that can be justified to the employee as fair. Thus, we expect, and find, that managers weight measures that are more congruent with firm objectives more heavily when weightings are determined ex ante (before employee effort) and weight measures that more precisely capture employee effort more heavily when weightings are determined ex post. This effect is mitigated when ex post measure outcomes indicate relatively favorable outcomes for more congruent measures. Our study contributes to academics’ and practitioners’ understanding of how this timing influences these weightings, the implications of which are integral to the effectiveness and efficiency of a firm’s performance measurement and compensation system.

Keywords: subjectivity, performance evaluation, discretion, contracting, compensation