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

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  • 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
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    References listed on IDEAS

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    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).

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