IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v57y2011i8p1424-1437.html
   My bibliography  Save this article

The Benefits of Aggregate Performance Metrics in the Presence of Career Concerns

Author

Listed:
  • Anil Arya

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

  • Brian Mittendorf

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

Abstract

This paper considers the desirability of aggregate performance measures in light of the fact that many individuals' performance incentives are driven by a desire to shape external perceptions (and thus future pay). In contrast to the case of explicit incentive contracts, we find that when individuals' actions are driven by career incentives, an aggregate measure (e.g., group or team output) can sometimes alleviate moral hazard concerns and improve efficiency. Aggregation intermingles performance measures that may be differentially affected by skill and effort of many agents. When such entanglement increases the prospect that the external market will attribute an employee's effort-driven contribution to transferable skills, the employee exerts higher effort as a means of posturing to the market. The incentive benefit of aggregation is weighed against the incentive cost because of information loss. Information loss from aggregation can reduce the market's reliance on the measure and thus diminish agents' desire to undertake effort to influence the measure. This paper was accepted by Stefan Reichelstein, accounting.

Suggested Citation

  • Anil Arya & Brian Mittendorf, 2011. "The Benefits of Aggregate Performance Metrics in the Presence of Career Concerns," Management Science, INFORMS, vol. 57(8), pages 1424-1437, August.
  • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:8:p:1424-1437
    DOI: 10.1287/mnsc.1110.1363
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1110.1363
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.1110.1363?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Arya, Anil & Fellingham, John & Glover, Jonathan, 1997. "Teams, repeated tasks, and implicit incentives," Journal of Accounting and Economics, Elsevier, vol. 23(1), pages 7-30, May.
    2. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
    3. Gigler, Frank & Hemmer, Thomas, 2002. "Informational costs and benefits of creating separately identifiable operating segments," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 69-90, February.
    4. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    5. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    6. Milbourn, Todd T & Shockley, Richard L & Thakor, Anjan V, 2001. "Managerial Career Concerns and Investments in Information," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 334-351, Summer.
    7. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    8. Oddvar M. Kaarbøe & Trond E. Olsen, 2006. "Career Concerns, Monetary Incentives and Job Design," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(2), pages 299-316, July.
    9. Anil Arya & Jonathan Glover & Pierre Jinghong Liang, 2004. "Intertemporal aggregation and incentives," European Accounting Review, Taylor & Francis Journals, vol. 13(4), pages 643-657.
    10. Florian Ederer, 2010. "Feedback and Motivation in Dynamic Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 733-769, September.
    11. Emmanuelle Auriol & Guido Friebel & Lambros Pechlivanos, 2002. "Career Concerns in Teams," Journal of Labor Economics, University of Chicago Press, vol. 20(2), pages 289-307, Part.
    12. Bengt Holmstrom & I. Ricard & Joan Costa, 1984. "Managerial Incentives and Capital Management," Cowles Foundation Discussion Papers 729, Cowles Foundation for Research in Economics, Yale University.
    13. Madhav V. Rajan & Bharat Sarath, 1997. "The Value of Correlated Signals in Agencies," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 150-167, Spring.
    14. Bengt Holmstrom & Joan Ricart i Costa, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 835-860.
    15. Demski, JS & Frimor, H, 1999. "Performance measure garbling under renegotiation in multiperiod agencies," Journal of Accounting Research, Wiley Blackwell, vol. 37, pages 187-214.
    16. Stephen Eliot Hansen, 2010. "The benefits of limited feedback in organizations," Economics Working Papers 1232, Department of Economics and Business, Universitat Pompeu Fabra.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rajiv D. Banker & Masako Darrough & Shaopeng Li & Lucas Threinen, 2019. "The Value of Precontract Information About an Agent's Ability in the Presence of Moral Hazard and Adverse Selection," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1201-1245, December.
    2. Hakenes, Hendrik & Katolnik, Svetlana, 2017. "On the incentive effects of job rotation," European Economic Review, Elsevier, vol. 98(C), pages 424-441.
    3. Evangelia Chalioti, 2015. "Team Production, Endogenous Learning about Abilities and Career Concerns," Cowles Foundation Discussion Papers 2020, Cowles Foundation for Research in Economics, Yale University.
    4. Jakob Infuehr & Sebastian Kronenberger, 2023. "The Impact of Job Similarity Along the Career Path on the Firm’s Promotion Strategy," Schmalenbach Journal of Business Research, Springer, vol. 75(2), pages 149-172, June.
    5. Jing Li & Lin Nan & Ran Zhao, 2018. "Corporate governance roles of information quality and corporate takeovers," Review of Accounting Studies, Springer, vol. 23(3), pages 1207-1240, September.
    6. Peter O. Christensen & Hans Frimor & Florin Şabac, 2020. "Real Incentive Effects of Soft Information," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 514-541, March.
    7. Tim Hensel & Jens Robert Schöndube, 2022. "Big bath accounting and CEO turnover: the interplay between optimal contracts and career concerns," Journal of Business Economics, Springer, vol. 92(8), pages 1249-1281, October.
    8. Brown, Paul J & Matolcsy, Zoltan & Wells, Peter, 2014. "Group versus individual compensation schemes for senior executives and firm performance: Some evidence based on archival data," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(2), pages 100-114.
    9. Smith, Michael, 2022. "Monetizing virtuous employees," Accounting, Organizations and Society, Elsevier, vol. 98(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anil Arya & Brian Mittendorf, 2007. "The Benefits of Aggregate Performance Metrics in the Presence of Career Concerns," Yale School of Management Working Papers amz2549, Yale School of Management, revised 01 Jan 2009.
    2. Anil Arya & Brian Mittendorf, 2007. "The Benefits of Aggregate Performance Metrics in the Presence of Career Concerns," Yale School of Management Working Papers amz2549, Yale School of Management, revised 01 Jan 2009.
    3. Arya, Anil & Mittendorf, Brian, 2015. "Career concerns and accounting performance measures in nonprofit organizations," Accounting, Organizations and Society, Elsevier, vol. 40(C), pages 1-12.
    4. Christensen, Peter O. & Feltham, Gerald A. & Sabac, Florin, 2005. "A contracting perspective on earnings quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 265-294, June.
    5. Englmaier, Florian & Filipi, Ales & Singh, Ravi, 2010. "Incentives, reputation and the allocation of authority," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 413-427, November.
    6. Li, Xiaoyang & Low, Angie & Makhija, Anil K., 2011. "Career Concerns and the Busy Life of the Young CEO," Working Paper Series 2011-4, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    7. Sabac, Florin, 2008. "Dynamic incentives and retirement," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 172-200, September.
    8. Citci, Sadettin Haluk & Inci, Eren, 2016. "The masquerade ball of the CEOs and the mask of excessive risk," Economic Modelling, Elsevier, vol. 58(C), pages 383-393.
    9. Tobias Brünner & Guido Friebel & Richard Holden & Suraj Prasad, 2022. "Incentives to Discover Talent," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 38(2), pages 309-344.
    10. Peter O. Christensen & Hans Frimor & Florin Şabac, 2020. "Real Incentive Effects of Soft Information," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 514-541, March.
    11. Andrea Prat & Amil Dasgupta, 2004. "Career Concerns in Financial Markets," FMG Discussion Papers dp494, Financial Markets Group.
    12. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    13. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    14. Koch Alexander K & Morgenstern Albrecht, 2010. "Coordination under the Shadow of Career Concerns," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-40, March.
    15. Frédéric Loss & Antoine Renucci, 2021. "Promotions, managerial project choice, and implementation effort," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(4), pages 799-819, November.
    16. Christensen, Peter O. & Feltham, Gerald A. & Sabac, Florin, 2003. "Dynamic incentives and responsibility accounting: a comment," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 423-436, August.
    17. Florin c{S}abac, 2007. "Dynamic Agency with Renegotiation and Managerial Tenure," Management Science, INFORMS, vol. 53(5), pages 849-864, May.
    18. Benjamin Davies, 2022. "Why do experts give simple advice?," Papers 2209.11710, arXiv.org.
    19. Caruana, Guillermo, 2001. "Career concerns and contingent compensation," UC3M Working papers. Economics we014811, Universidad Carlos III de Madrid. Departamento de Economía.
    20. Kim, Doyoung, 2017. "Motivating for new changes when agents have reputation concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 37-53.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:8:p:1424-1437. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.