Performance Measure Properties and Incentive System Design |
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| Authors: | MICHAEL J GIBBS KENNETH A MERCHANT WIM A VAN DER STEDE MARK E VARGUS |
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| Institution: | 1. Graduate School of Business, University of Chicago, Chicago, IL 60637 and Institute for the Study of Labor (IZA);2. Marshall School of Business, University of Southern California, Los Angeles, CA 90089;3. London School of Economics and Political Science, London WC2A 2AE;4. School of Management, University of Texas–Dallas, Dallas, TX 75083.;5. The authors’ affiliations are, respectively, Graduate School of Business, University of Chicago, Chicago, IL 60637 and Institute for the Study of Labor (IZA);6. Marshall School of Business, University of Southern California, Los Angeles, CA 90089;7. London School of Economics and Political Science, London WC2A 2AE;8. School of Management, University of Texas–Dallas, Dallas, TX 75083. E‐mail: . We are grateful to an unnamed consulting firm for giving us access to their data and clients, and for discussions that helped us understand the auto dealership business and clarify the data. For comments on various drafts, we thank Trond Petersen (the editor), anonymous referees, Jan Bouwens, Mark Bradshaw, Jim Brickley, Jed DeVaro, Leslie Eldenburg, Eva Labro, Joan Luft, Margaret Meyer, Kevin J. Murphy, Walter Oi, Lorenzo Patelli, Canice Prendergast, Michael Raith, Edward Reidl, Bernard Salanié, Marcel van Rinsum, and Sally Widener;9. seminar participants at the Harvard Business School, London School of Economics, RSM Erasmus University, Tilburg University, Universidad de Navarra, Universitat Pompeu Fabra, University of Aarhus, University of Arizona, University of Rochester, University of Southern California;10. and conference participants of AAA, BMAS, CAED, CEPR, and Society of Labor Economists. Liu Zheng provided helpful research assistance. |
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| Abstract: | 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. |
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