The Role of Subjectivity in Mitigating Incentive Contracting Risks

• 成果类型: Article
• 署名作者: Lillis, Anne M.; Malina, Mary A.; Mundy, Julia
• 署名单位: University of Melbourne; University of Colorado System; University of Colorado Denver; University of Greenwich
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/TAR-2017-0652
• 发表日期: 2022
• 页码: 365-388
• 关键词: PERFORMANCE EVALUATION; calibration committees; EMPLOYEE PERFORMANCE; COMPENSATION; DISCRETION; diversity; CHOICE; IMPACT; BIAS

摘要

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.