Subjective Evaluation, Performance Targets, and Incentives

44 Pages Posted: 25 Feb 2020

See all articles by Tae Sik Ahn

Tae Sik Ahn

Seoul National University - College of Business Administration

Jeong-Hoon Hyun

Chung-Ang University - College of Business Administration

Michal Matejka

Arizona State University

Peter (Seung Hwan) Oh

McGill University - Desautels Faculty of Management

Date Written: January 29, 2020

Abstract

Managerial incentive plans often combine objective measures of performance relative to beginning-of-year targets with ex post subjective evaluations. We argue that one of the roles of subjectivity is to offset the limitations of target-based rewards and strengthen managerial incentives when targets lose their motivating effects due to unforeseen events. We use detailed data on 2004–2015 subjective and objective performance assessments of Korean state-owned enterprises to empirically examine the role of ex post subjectivity when incentives are based on ex ante targets. We find that subjective and objective evaluations of the same performance dimension are strongly positively correlated but only when performance falls short of the target, which implies that subjective evaluations can discourage failure to meet a target by a wide margin. We also find that such failure is associated with next-period incentive plan adjustments that render areas with poor prior-period performance more important in future evaluations. We discuss how these subjective choices facilitate multi-tasking and strengthen incentives to improve performance even in areas where targets become ineffective.

Keywords: Subjective evaluation, performance targets, multi-tasking, incentives

JEL Classification: M21, M41

Suggested Citation

Ahn, Tae Sik and Hyun, Jeong-Hoon and Matejka, Michal and Oh, Peter (Seung Hwan), Subjective Evaluation, Performance Targets, and Incentives (January 29, 2020). Available at SSRN: https://ssrn.com/abstract=3527147 or http://dx.doi.org/10.2139/ssrn.3527147

Tae Sik Ahn

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Jeong-Hoon Hyun

Chung-Ang University - College of Business Administration ( email )

221 Hukseuk-Dong
Seoul 156-756
Korea

Michal Matejka (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287-3706
United States
480-965-7984 (Phone)

Peter (Seung Hwan) Oh

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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