The Effects of Biasing Performance Measurement Systems on Incentives and Retention Decisions

Posted: 2 Aug 2018

See all articles by Ramji Balakrishnan

Ramji Balakrishnan

University of Iowa - Department of Accounting

George Drymiotes

Texas Christian University

Shiva Sivaramakrishnan

Rice University

Date Written: June 20, 2018

Abstract

We examine a principal-agent setting in which the principal uses a performance measurement system for multiple purposes to provide incentives and for retention decisions. The principal chooses the nature and extent of bias in the system, which determines whether the performance report is stringent, neutral, or lenient relative to the unobservable actual outcome. We show that when the report is used only for incentive purposes, stringency alleviates moral hazard. On the other hand, there is a demand for leniency when the system is used only for retention decisions. Surprisingly, however, when the system serves an incentive role, we show that adding a fit evaluation role can accentuate the demand for stringency.

Keywords: incentive, retention, bias

Suggested Citation

Balakrishnan, Ramji and Drymiotes, George and Sivaramakrishnan, Shiva, The Effects of Biasing Performance Measurement Systems on Incentives and Retention Decisions (June 20, 2018). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3222900

Ramji Balakrishnan (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0958 (Phone)
319-335-1956 (Fax)

George Drymiotes

Texas Christian University ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817 257 5448 (Phone)

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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