Affiliation:
1. The University of Melbourne
2. University of Colorado Denver
3. University of Greenwich
Abstract
ABSTRACT
We examine how subjectivity in performance measurement and reward systems (PMRS) is used to mitigate incentive contracting risks. Drawing on data from 38 interviews with supervisory and subordinate managers in four firms, we provide a more comprehensive explanation of the role of subjectivity in risk mitigation than is evident in the prior literature. We provide empirical evidence of the importance firms place on the use of subjectivity to mitigate the risk of incentive misalignment and employee sorting errors relative to its well-documented role in mitigating employee compensation risk. We find that incentive misalignment arising from unanticipated behavioral responses to performance measures is a particularly important risk, managed through subjective performance assessments. The extent of subjectivity we observe poses a significant risk of errors and bias. We observe that both vertical and horizontal information gathering and review by calibration panels are key strategies to mitigate the downside risk of subjectivity.
JEL Classifications: M49; M55; M52; M51.
Publisher
American Accounting Association
Subject
Economics and Econometrics,Finance,Accounting
Reference56 articles.
1. Ahn,
T. S.,
Hwang
I.,
and
KimM.
2010.
The impact of performance measure discriminability on rate incentives.
The Accounting Review85 (
2):
389–
417.
https://doi.org/10.2308/accr.2010.85.2.389
2. Anderson,
S. W.,
Dekker
H.,
Sedatole
K. L.,
and
WiersmaE.
2020.
When one size does not fit all: Using ex post subjective ratings to provide parity in risk-adjusted compensation.
Management Accounting Research49:
100706.
https://doi.org/10.1016/j.mar.2020.100706
3. Arshad,
F.,
Cardinaels
E.,
and
DierynckB.
2020.
Facing a calibration committee: The impact on costly information collection and subjective performance evaluation.
Working paper, The University of Manchester, Tilburg University, and KU Leuven.
4. Bailey,
W. J.,
Hecht
G.,
and
TowryK. L.
2011.
Dividing the pie: The influence of managerial discretion extent on bonus pool allocation.
Contemporary Accounting Research28 (
5):
1562–
1584.
https://doi.org/10.1111/j.1911-3846.2011.01073.x
5. Baiman,
S.,
and
RajanM. V.
1995.
The informational advantages of discretionary bonus schemes.
The Accounting Review70 (
4):
557–
579.
Cited by
4 articles.
订阅此论文施引文献
订阅此论文施引文献，注册后可以免费订阅5篇论文的施引文献，订阅后可以查看论文全部施引文献