Optimal Incentives and the Time Dimension of Performance Measurement
Optimal Incentives and the Time Dimension of Performance Measurement

Author: Michael Raith

Publisher:

Published: 2009

Total Pages: 0

ISBN-13:

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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.

Relational Incentive Contracts and Performance Measurement
Relational Incentive Contracts and Performance Measurement

Author: Chang-Koo Chi

Publisher:

Published: 2018

Total Pages: 35

ISBN-13:

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This paper analyzes relational contracts under moral hazard. We first show that if the available information (signal) about effort satisfies a generalized monotone likelihood ratio property, then irrespective of whether the first-order approach (FOA) is valid or not, the optimal bonus scheme takes a simple form. The scheme rewards the agent a fixed bonus if his performance index xceeds a threshold, like the FOA contract of Levin (2003), but the threshold can be set differently. We next derive a sufficient and necessary condition for non-verifiable information to improve a relational contract. Our new informativeness criterion sheds light on the nature of an ideal performance measure in relational contracting.

Performance Measure Properties and the Effect of Incentive Contracts
Performance Measure Properties and the Effect of Incentive Contracts

Author: Jan Bouwens

Publisher:

Published: 2006

Total Pages:

ISBN-13:

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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.

Optimal Information Design and Incentive Contracts with Performance Measure Manipulation
Optimal Information Design and Incentive Contracts with Performance Measure Manipulation

Author: Robert F. Göx

Publisher:

Published: 2019

Total Pages: 49

ISBN-13:

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We study how a firm owner motivates a manager to create value by optimally designing an information system and a compensation contract based on a manipulable performance measure. In equilibrium, the firm either implements a perfect or an uninformative system. The information system and the pay-performance sensitivity (PPS) of the compensation contract can be substitutes in a sense that the firm optimally combines a perfect information system with a low PPS or an uninformative system with a high PPS. Because the information design is endogenous, firms facing relatively high manipulation threat may offer financial incentives that are higher-powered than the ones offered by their peers facing lower manipulation threat. If the manager is in charge of implementing the information system, he chooses a perfect one unless the firm uses the information for internal control. The firm may prefer to commit to an internal control level before observing any information.

Use of Incentives in Performance-Based Logistics Contracting
Use of Incentives in Performance-Based Logistics Contracting

Author: Gregory Sanders

Publisher: Rowman & Littlefield

Published: 2018-04-19

Total Pages: 74

ISBN-13: 1442280662

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Traditional contracting is primarily transactional, rewarding contractors when deliveries are made or certain process milestones are met. Performance-Based Logistic (PBL) contracting seeks to base contractor incentives on ongoing performance measures to achieve reliability and cost savings. Key to the success of these arrangements are the incentives that align the interests of the customer and the vendor. This report describes the incentives used in PBL contracts, identifies best practices, and provides recommendations for effective incentives going forward. The study team interviewed PBL practitioners including defense-unique contractors, defense-commercial contractors, and experts who are knowledgeable in the government perspective in the United States and abroad. The team supplemented these interviews by analyzing a PBL dataset of U.S. Department of Defense contracts. Of the four identified categories of incentives—time-based, financial, scope, and other—interviews found that time-based incentives stood out for their reliable appeal and relative underuse in the United States.

Subjective Performance Measures in Optimal Incentive Contracts
Subjective Performance Measures in Optimal Incentive Contracts

Author: George Pierce Baker

Publisher:

Published: 1994

Total Pages: 31

ISBN-13:

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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.

Subjective Performance Measures in Optimal Incentive Contracts
Subjective Performance Measures in Optimal Incentive Contracts

Author: George P. Baker

Publisher:

Published: 2010

Total Pages: 39

ISBN-13:

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Objective measures of performance are seldom perfect. In response, incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. Naturally, objective and subjective measures often are substitutes, sometimes strikingly so: we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible (because the firm's fallback position after reneging on an implicit contact is too attractive). We also show, however, that objective and subjective measures can reinforce each other: if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures (because the improved objective measures increase the value of the ongoing relationship, and so reduce the firm's incentive to renege). We also analyze the use of subjective weights on objective performance measures, and provide case-study evidence consistent with our analyses.