Performance measure properties and efficacy of incentive contracts: perceptions of U. S. employees

Abstract

This paper examines how employees perceive the impact of performance measure properties (noise and distortion) on the efficacy of incentive contracts in the United States. It surveys 98 employees at middle and lower levels of U. S. firms across different industries. The survey results show that employees perceive noise and distortion in performance measures to significantly influence the overall efficacy of incentive plans. Specifically, employees perceive that incentive plans with less noisy or distorted measures attract better employees to their firms. However, employees do not perceive lower noise or distortion in performance measures to motivate more effort in their work after controlling for the selection effect of incentive plans. These results illustrate the importance of performance measure properties in the U. S. incentive contracts and provide evidence regarding cross-national differences in management practices.

Keywords::

• cross-national differences
• efficacy of incentive contracts
• employee perceptions
• performance measure properties
• United States

Acknowledgements

An earlier version of this paper was presented at the 2011 American Accounting Association, Ohio regional meeting.