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Performance Measure Properties and Incentives

Author

Listed:
  • Gibbs, Michael

    () (University of Chicago)

  • Merchant, Kenneth A.

    () (University of Southern California)

  • Van der Stede, Wim A.

    () (University of Southern California)

  • Vargus, Mark A.

    () (University of Texas at Dallas)

Abstract

We examine the effects of performance measure properties on incentive system design, using data on incentive contracts for auto dealership managers. The data include information on five properties: two indicators of risk; two indicators of distortion; and one indicator of potential manipulation. We find that these properties have important effects on incentive system design. First, firms appear to choose the “best” performance measure available along these dimensions, and use it for the most important (primary) formula bonus. Second, the properties of this primary performance measure are important determinants of the weight placed on the measure for explicit. Third, firms appear to use other performance measures to balance multitask incentives relative to the primary performance measure. Specifically, we find evidence that second and third bonuses are used to provide better incentives for cooperation and to reduce incentives for manipulation. Fourth, we present evidence that subjectivity, through discretionary bonuses based on subjective performance evaluations, and also through implicit incentives for promotions and other rewards, also appear to play the same roles.

Suggested Citation

  • Gibbs, Michael & Merchant, Kenneth A. & Van der Stede, Wim A. & Vargus, Mark A., 2004. "Performance Measure Properties and Incentives," IZA Discussion Papers 1356, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1356
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    References listed on IDEAS

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    1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    2. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    3. Joel S. Demski & Hans Frimor & David E. M. Sappington, 2004. "Efficient Manipulation in a Repeated Setting," Journal of Accounting Research, Wiley Blackwell, vol. 42(1), pages 31-49, March.
    4. Slade, Margaret E, 1996. "Multitask Agency and Contract Choice: An Empirical Exploration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 465-486, May.
    5. repec:bla:joares:v:27:y:1989:i:1:p:21-39 is not listed on IDEAS
    6. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    7. Bushman, Robert M. & Indjejikian, Raffi J. & Smith, Abbie, 1996. "CEO compensation: The role of individual performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 161-193, April.
    8. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    9. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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    Citations

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    Cited by:

    1. Kauhanen, Antti & Salmi, Julia & Torkki, Paulus, 2013. "Performance Measurement in Healthcare Incentive Plans," ETLA Working Papers 18, The Research Institute of the Finnish Economy.
    2. Ján Zábojník, 2014. "Subjective evaluations with performance feedback," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 341-369, June.
    3. Marta De Philippis, 2015. "Multitask Agents and Incentives: The Case of Teaching and Research for University Professors," CEP Discussion Papers dp1386, Centre for Economic Performance, LSE.
    4. Pascal Courty & Gerald Marschke, 2004. "A General Test of Gaming," Economics Working Papers ECO2004/33, European University Institute.
    5. Thiele, Veikko, 2007. "Performance measurement in multi-task agencies," Research in Economics, Elsevier, vol. 61(3), pages 148-163, September.
    6. Kato, Takao & Kauhanen, Antti & Kujansuu, Essi, 2013. "The Performance Effects of Individual and Group Incentives: A Case Study," ETLA Working Papers 19, The Research Institute of the Finnish Economy.
    7. Cindy Zawadzki, 2006. "Indicateurs, acteurs et slack : la gestion de la viabilité hivernale sur les autoroutes," Post-Print halshs-00558405, HAL.
    8. Jed Devaro & Fidan Ana Kurtulus, 2010. "An Empirical Analysis of Risk, Incentives and the Delegation of Worker Authority," ILR Review, Cornell University, ILR School, vol. 63(4), pages 641-661, July.
    9. Fidan Ana Kurtulus, 2011. "What Types of Diversity Benefit Workers? Empirical Evidence on the Effects of Co-Worker Dissimilarity on the Performance of Employees," UMASS Amherst Economics Working Papers 2011-11, University of Massachusetts Amherst, Department of Economics.
    10. Marc-Arthur Diaye & Nathalie Greenan, 2012. "The Economics of Performance Appraisals," Working Papers halshs-00856229, HAL.
    11. Antti Kauhanen & Sami Napari, 2012. "Performance Measurement and Incentive Plans," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 51(3), pages 645-669, July.
    12. Braz Camargo, 2011. "Career Concerns: A Human Capital Perspective," 2011 Meeting Papers 1274, Society for Economic Dynamics.
    13. Kato, Takao & Kauhanen, Antti & Salmi, Julia, 2013. "Empirical Evidence on the Dynamics of Incentive Plans," ETLA Working Papers 20, The Research Institute of the Finnish Economy.
    14. Allan Hansen, 2011. "Relating performative and ostensive management accounting research: Reflections on case study methodology," Qualitative Research in Accounting & Management, Emerald Group Publishing, vol. 8(2), pages 108-138, June.

    More about this item

    Keywords

    incentives; performance measures;

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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