Distorted Performance Measures And Dynamic Incentives
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| Author | : Oddvar Kaarboe |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2008 |
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| ISBN | : |
Incentive contracts must typically be based on performance measures that do not exactly match the agents' true contribution to the principals' objectives. Such misalignment may pose difficulties for effective incentive design. We analyze the extent to which implicit dynamic incentives, such as career concerns and ratchet effects, alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects in that stronger ratchet effects or greater distortion may increase optimal monetary incentives, and that distortion affects the optimality of different promotion rules.
| Author | : Jan Bouwens |
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| Total Pages | : |
| Release | : 2006 |
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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.
| Author | : Michael Gibbs |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2009 |
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We analyze effects of performance measure properties (controllable and uncontrollable risk, distortion, and manipulation) on incentive plan design, using data from auto dealership manager incentive systems. Dealerships put the most weight on measures that are "better" with respect to these properties. Additional measures are more likely to be used for a second or third bonus if they can mitigate distortion or manipulation in the first performance measure. Implicit incentives are used to provide ex post evaluation, to motivate the employee to use controllable risk on behalf of the firm, and to deter manipulation of performance measures. Overall, our results indicate that firms use incentive systems of multiple performance measures, incentive instruments, and implicit evaluation and rewards as a response to weaknesses in available performance measures.
| Author | : George Pierce Baker |
| Publisher | : |
| Total Pages | : 31 |
| Release | : 1994 |
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Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined used of subjective and objective performance measures in implicit and explicit incentive contracts. It shows that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. It also shows, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit, but an appropriate combination of the two does. Finally, subjective weights on objective measures are considered.
| Author | : George Baker |
| Publisher | : |
| Total Pages | : 31 |
| Release | : 1993 |
| Genre | : |
| ISBN | : |
Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined used of subjective and objective performance measures in implicit and explicit incentive contracts. It shows that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. It also shows, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit, but an appropriate combination of the two does. Finally, subjective weights on objective measures are considered.
| Author | : Margaret A. Meyer |
| Publisher | : |
| Total Pages | : 33 |
| Release | : 1995 |
| Genre | : Incentive awards |
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| Author | : Andrew Clausen |
| Publisher | : |
| Total Pages | : 125 |
| Release | : 2012 |
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| Author | : Naomi Rothenberg |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2013 |
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This paper links the quality (i.e. noise and bias) of information available for production decisions and performance evaluation to the choice of whether or not production should occur in teams. The information system provides agents with access to an early but imprecise signal about productivity and consists of a performance evaluation system that measures agents' performance with both error and bias. The use of teams depends critically on the presence of an imprecise information system, on the incentive problem, and on whether or not the principal has knowledge of the productivity signal. If the principal can also observe the imprecise signal about productivity, then team production will always be optimally employed because aggregation reduces error in the performance measures, thus reducing the cost of the incentive problem. When the agents privately observe the productivity signal, teams are not always preferred, and the threshold for teamwork, or the level of precision of the agents' information for which teams are preferred, depends inversely on the amount of measurement error in the performance measure. Further, the impact of a biased performance measurement system depends on the precision of the biased system compared to the unbiased system, and the direction of the bias.
| Author | : Jeffrey C. Ely |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2023 |
| Genre | : Employees |
| ISBN | : |
We study the joint design of dynamic incentives and performance feedback for an environment with a coarse (all-or-nothing) measure of performance. Using a novel approach to incentive compatibility, we derive a two-phase solution that begins with a “silent phase” where the agent is given no feedback and is asked to work nonstop, and ends with a ”full-transparency phase” where the agent stops working as soon as a performance threshold is met. Hiding information leads to greater effort but comes at a cost because an ignorant agent is more expensive to motivate. The two-phase solution -- where the agent’s ignorance is fully frontloaded -- stems from a “backward compounding effect” that raises the cost of hiding information as time passes. Whenever the agent’s hazard rate of success falls sufficiently over time, the principal should eventually give up on them, as occurs in practice with up-or-out promotion policies.
| Author | : Michael Raith |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2009 |
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| ISBN | : |
In many occupations, the consequences of agents' actions become known only over time. Firms can then pay agents based on early but noisy performance measures, or later but more accurate ones. I study this choice within a two-period model in which an agent's action generates an output with delay, and a noisy signal of output early. While the signal is useful for early consumption decisions, it is not clear that the signal is useful for incentive contracting if the agent has access to credit. I show, however, that under very general conditions the optimal contract depends on the early signal as well as on output even if the signal is uninformative of effort, given output, and even if the agent has perfect access to credit. An important characteristic of any performance measure, therefore, is the time at which it is generated. The results shed light on the use of forward-looking performance measures such as stock returns in managerial incentive contracts.
