Performance Measure Properties and the Effect of Incentive Contracts

Posted: 20 Jun 2006

See all articles by Jan Bouwens

Jan Bouwens

Amsterdam Business School

Laurence van Lent

Frankfurt School of Finance and Management

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

Suggested Citation

Bouwens, Jan and van Lent, Laurence, Performance Measure Properties and the Effect of Incentive Contracts. Journal of Management Accounting Research, Vol. 18, No. 1, pp. 55-75, Available at SSRN: https://ssrn.com/abstract=909801

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Laurence Van Lent (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

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