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2 edition of Subjective performance measures in optimal incentive contracts found in the catalog.

Subjective performance measures in optimal incentive contracts

Baker, George P.

Subjective performance measures in optimal incentive contracts

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  • 25 Currently reading

Published by National Bureau of Economic Research in Cambridge, MA .
Written in English

    Subjects:
  • Employees -- Rating of -- Mathematical models.,
  • Employees -- United States -- Rating of -- Mathematical models.

  • Edition Notes

    StatementGeorge Baker, Robert Gibbons, Kevin J. Murphy.
    SeriesNBER working paper series -- working paper no. 4480, Working paper series (National Bureau of Economic Research) -- working paper no. 4480.
    ContributionsGibbons, Robert, 1958-, Murphy, Kevin James, 1957-, National Bureau of Economic Research.
    The Physical Object
    Pagination37 p. :
    Number of Pages37
    ID Numbers
    Open LibraryOL22435671M

    The principal–agent problem, in political science and economics (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent"), is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are.   ABSTRACT: The literature addresses optimal contract design issues that the principal must address to provide proper incentives to the agent. However, there has been limited empirical assessment of how agents actually respond to the performance‐evaluation schemes in the contracts .


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Subjective performance measures in optimal incentive contracts by Baker, George P. Download PDF EPUB FB2

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 by: Subjective Performance Measures in Optimal Incentive Contracts by George Baker, Robert Gibbons, and Kevin J.

Murphy I. Introduction I.A. Motivation Business history is littered with firms that got what they paid for. At the H.J. Heinz Company, for example, division managers received bonuses only if earnings increased from the prior year.

SUBJECTIVE PERFORMANCE MEASURES IN OPTIMAL INCENTIVE CONTRACTS* GEORGE BAKER ROBERT GIBBONS KEVIN J. MURPHY Incentive contracts often include important subjective components that miti-gate incentive distortions caused by imperfect objective measures.

This paper explores the combined use of subjective and objective performance measures in. 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.

Get this from a library. Subjective performance measures in optimal incentive contracts. [George P Baker; Robert Gibbons; Kevin J Murphy; National Bureau of Economic Research.].

We also analyze the use of subjective weights on objective performance measures, and provide case-study evidence consistent with our analyses.

Suggested Citation: Suggested Citation Baker, George P. and Gibbons, Robert S. and Murphy, Kevin J., Subjective Performance Measures in Optimal Incentive Contracts (September ).

Abstract Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures.

This paper explores the combined use of. The optimal contract results in more compressed pay relative to the case with verifiable performance measures. Moreover, discrimination against an individual implies lower pay and performance. performance measures can help to achieve the same incentive effects at lower costs.

The role of performance measures in incentive contracts must be understood before one may reasonably expect positive outcomes. Considerable evidence exists that supports the idea that incentive contracts.

Abstract 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. hence subjective) measures of performance that are possibly correlated with each other.

The optimal contract isstructured to ensure that both parties have an incentive to reveal their private information, with the threat of con‘ ict ensuring that the principal has an incentive to reveal favorable observations that result in higher com.

“Subjective Performance Measures in Optimal Incentive Contracts” (with G. Baker and K.J. Murphy). Quarterly Journal of Economics (): “Incentives in Organizations.” Journal of Economic Perspectives 12 (): “Incentives Between Firms (and.

With moral hazard, optimal contracts involve just two levels of com- pensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance.

(JEL C73, D82, L14) Incentive problems arise in many economic relationships. Key indicators of managerial performance are frequently subjective, that is, they are difficult to specify and/or verify for contracting purposes. When a principal must rely on subjective information to create incentives for a group of agents, discretionary bonus pools are shown to be optimal mechanisms.

This paper studies optimal incentive contracts when workers have career concerns-concerns about the effects of current performance on future compensation. We show that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concerns and the explicit incentives from the compensation.

We would like to show you a description here but the site won’t allow more. Performance measures may be objective, subjective, or some combination thereof. In moving toward performance based/results oriented contracts, the goal is to generally maximize objectivity to the extent it makes sense.

One important factor in their use is that they are not typically linked to monetary rewards and sanctions, but rather to non-monetary rewards and sanctions such as contract extensions. By doing this, the subjective performance measures acts as a point of conversation in the performance exchange between the buyer and seller.

Subjective adjustments to objective performance measures are used to obtain a more accurate representation of a manager’s contribution toward organizational objectives on particular dimensions of performance, mitigate distortions in effort, and. SUBJECTIVE PERFORMANCE MEASURES IN OPTIMAL INCENTIVE CONTRACTS ABSTRACT Objective measures of performance are seldom perfect.

In response, incentive contracts often include importantsubjectivecomponents that mitigate incentive distortions caused by. Contracts: In our setting with unobservable effort and subjective measures of performance, a contract Γ can only be contingent on the reported subjective opinions of the principal and the agent.

Hence, a contract fixes payments for all configurations of reports t P and t A and reads Γ = { w kl | k ∈ S P, l ∈ S A }. Subjective Performance Measures in Optimal Incentive Contracts (with G. Baker and K.J. Murphy). Quarterly Journal of Economics, (): Incentives in Organizations Journal of Economic Perspectives, 12 (): Incentives Between Firms (and.

This paper studies optimal incentive contracts when workers have career concerns--concerns about the effects of current performance on future compensation. We show that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concerns and the explicit incentives from the compensation.

In the optimal contract, it may be optimal to ignore signals that are informative of the worker™s e⁄ort. Introduction In modern labor markets, most workers perform jobs where objective performance mea-sures are hard to obtain (Prendargast, ).

Consequently, –rms often rely on subjective performance measures to provide work incentives. Baker, George P., Robert Gibbons, and Kevin J. Murphy. "Subjective Performance Measures in Optimal Incentive Contracts." Quarterly Journal of Economicsno. 4 (November of adding new performance measures to an incentive contract decrease with the difficulty of or should be based on subjective performance measures or evaluations where the weight to achieve an optimal improvement in managerial effort.

Similarly, Baker et al.'s () theoretical analysis indicates that the use of. What Is a Subjective Performance Evaluation?. While objective metrics are usually used to determine how well employees are performing, many businesses base part or all of their performance evaluations on subjective measures.

This replaces a focus on numbers with a more nuanced view of an employee’s value. It gives you. They will vary from contract to contract and are subject to discussion during a source selection. Care must be taken to ensure that the incentive structure reflects both the value to the government of the various performance levels, and a meaningful incentive to the contractor.

Performance incentives should be challenging yet reasonably attainable. Focusing on the use of non-financial performance measures, we predict and find that the demand for discretion increases as measurability decreases. Furthermore, congruity amplifies the rate of increase in the demand for discretion.

Our findings add to the literature on the use of. A subjective assessment based on qualitative performance criteria is unlikely to improve the quality of performance evaluations. Also, there are unintended consequences of adding qualitative criteria into a CEO’s bonus contract, namely reduced productivity and lower firm value.

In environments with subjective performance measures, termination contracts are optimal among all contracts with the full review property. The logic is by now familiar.

Rather than using varied continuation behavior to provide incen- tives, the parties can use a combination of imrne. there, even if there are many fewer dollar-denominated incentive contracts. 3 R. Gibbons Lecture Note 1: Agency Theory To be more precise about rewards, effort, and incentives, we turn now to the in later notes we will discuss subjective performance measures.

(2) The action the Agent takes to produce output, a: The most straightforward. Based on this definition, subjective performance measures seems better at measuring outcomes such as customer performance, behaviours and culture that rely on perceived performance.

In measuring outcomes that are inherently subjective, it is easier to use qualitative descriptions of performance (e.g. good, fair and poor, etc.) as opposed to. Abstract. We examine the role of discretion in executive incentive contracts, and explore the trade-offs firms face in choosing among imperfect objective measures of individual performance, potentially more accurate but non-verifiable subjective measures, and overly broad objective measures of company-wide performance that include the performance of all agents in the firm.

Baker, George; Gibbons, Robert and Murphy, Kevin J. "Subjective Performance Measures in Optimal Incentive Contracts." Quarterly Journal of Economics, November(), pp. 1 Bertsekas, Dimitri P. "Necessary and Sufficient Conditions for Existence of an Optimal Port- folio." Journal of Economic Theory, June8(2), pp.

With hidden information, it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions. With moral hazard, optimal contracts involve just two levels of compensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance.

The other crucial element in an incentive contract is the performance measure(s) that determine(s) whether the employees get a reward or that determine(s) the size of the reward. The measure can be financial, non-financial or even the subjective judgment by a superior.

For instance, it might be optimal to include measures in a contract that. Baker, George.,Gibbons, Robert.,Murphy, Kevin. () "Subjective Performance Measures in Optimal Incentive Contracts", Quarterly Journal of Economics,Murphy, Kevin.

() "Governance, Behavior, and Performance of State and Corporate Pension Funds", Harvard University. ABSTRACT: Managerial bonus payments are frequently determined by both objective and subjective indicators of managerial performance.

By its very nature, subjective information is not verifiable for contracting purposes. The inclusion of such information in managerial bonus schemes therefore requires a principal to retain discretion in authorizing actual bonus payments.

Objective and subjective performance measures are used to classify the various different types of performance measures. Objective performance measures are independent of the observer.

That means the measurement is done using something other than the person observing. This independent measure can include: a stop-watch, measuring tape or record of goals.

The objectivity of the performance. (November ) - In many jobs, the worker generates only subjective performance measures privately observed by the employer, and contracts must rely on employer reports about these measures.

This setting is a game with private monitoring, and prior work suggests that the optimal contract may be complex and non-recursive.Kellogg School of Management | Northwestern University.I show that contracts based on such performance measures will not in general provide first-best incentives, even when the agent is risk neutral.

The form of the optimal contract and the efficiency of this contract depend on the relationship between the performance measure used and the .