Choosing performance measures for incentive compensation: experimental evidence

Abstract

Purpose – The purpose of this paper is to explain how two task characteristics and two individual differences influence which heuristics individuals use, and as a results explain their decision performance when choosing performance measures (PMs) for incentive compensation. Design/methodology/approach – In total, 76 MS accounting students volunteered to participate in an experiment. A between-subjects experimental design was used to test the hypotheses. Findings – The experimental evidence suggests that individuals, while using high-complexity heuristics, can choose an incorrect PM when PM attribute conflict is present and the difference between PM attribute differences is small. Individuals with high goal commitment are more likely to make the correct choice than individuals with low goal commitment, because they focus more on the PMs’ goal congruence than on the PMs’ noise when making tradeoffs between the conflicting PMs’ attributes. Research limitations/implications – The social context can stimulate individuals’ empathic concern and/or goal commitment and thus explain individuals’ performance when PM attribute conflict is present and the difference between PM attribute differences is small. Practical implications – The results of this study are important to those responsible for designing incentive systems give greater importance to considering not just congruency attributes in PM but precision attributes as well. Originality/value – This paper develops predictions and provides experimental evidence on two task characteristics that influence individuals’ use of heuristics when choosing PMs for incentive compensation. In addition, it provides evidence that individual differences can affect individuals’ PM choice performance when tradeoffs between PMs’ congruity and precision are required.