Performance Measure Properties and the Effects of Incentive Contracts

34 Pages Posted: 19 May 2006  

Jan Bouwens

University of Cambridge Judge Business School

Laurence van Lent

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH - Accounting Department

Date Written: July 2006

Abstract

Using data from a third-party survey on compensation practices at 151 Dutch firms, we show that less noisy or distorted performance measures and higher cash bonuses are associated with better-directed effort and improved employee selection. Specifically, 1) an increase in the cash bonus increases the selection effects of incentive contracts, but does not independently affect the effort that employees deliver, and 2) performance measure properties directly impact both effort and the selection functioning of incentive contracts. These results hold after controlling for an array of incentive contract design characteristics and for differences in organizational context. Our estimation procedures address several known problems with using secondary datasets.

Keywords: incentive pay, effort and selection effects, performance measure properties, cash bonus

JEL Classification: J33, M52, M40, M46

Suggested Citation

Bouwens, Jan and van Lent, Laurence, Performance Measure Properties and the Effects of Incentive Contracts (July 2006). Available at SSRN: https://ssrn.com/abstract=903186 or http://dx.doi.org/10.2139/ssrn.903186

Jan Bouwens

University of Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Laurence Van Lent (Contact Author)

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH - Accounting Department ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany
+4969154008531 (Phone)

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