Article | Journal of Management Accounting Research | 2006

Performance Measure Properties and the Effect of Incentive Contracts

by J. Bouwens and L. van Lent

Abstract

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 improved employee selection and better-directed effort. Specifically, (1) an increase in the cash bonus increases the perceived selection effects of incentive contracts, but does not independently affect the perceived amount and direction of 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.

Keywords: Motivation and Incentives; Data and Data Sets; Problems and Challenges; Performance Evaluation; Compensation and Benefits; Netherlands;

Citation:

Bouwens, J., and L. van Lent. "Performance Measure Properties and the Effect of Incentive Contracts." Journal of Management Accounting Research 18 (2006): 55–75.