Performance measurement, expectancy and agency theory: An experimental study

Abstract

Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. An important implication of this model is that, for a given compensation scheme, the agent's optimal e¤ort choice is unrelated to the amount of noise in the performance measure. In contrast, expectancy theory as developed by psychologists predicts that e¤ort levels are increasing in the signal-to-noise ratio. We conduct a real e¤ort laboratory experiment to assess the relevance of this prediction in a setting where all key assumptions of the linear agency model are met. Moreover, our experimental design allows us to control expectancy exactly as in Vroom's (1964) original expectancy model. In this setting, we …nd that e¤ort levels are invariant to changes in the distribution of the noise term, i.e. to expectancy. Our results thus con…rm standard agency theory and reject this particular aspect of expectancy theory.

Risk aversion and effort under an incentive pay scheme with multiplicative noise

“…Intuitively, all else equal, more riskaverse agents, and in particular those with a greater dislike for earnings uncertainty, will face higher marginal costs of effort and will therefore put in less of it. This theoretical prediction was anticipated in Baker and Jorgensen (2003) and Sloof and van Praag (2008), and will be further developed here.…”

“…As in Holt and Laury (2002), Cadsby et al (2007Cadsby et al ( , 2009), Sloof and van Praag (2008) and many other studies, we assume the worker to have an exponential utility function [2] which is increasing and concave in total earnings. We further assume, for analytical convenience, that the worker's utility is separable in the total earnings and effort costs.…”

Alternative Performance Measures and ESMA Guidelines: Improving Stakeholders’ Communication

“…The use of this or other incentive methods is predicated on the method by which performance is calculated, as performance measurement is a central problem in agency theory (Baker, 1992;Franco-Santos, 2009;Sloof & Van Praag, 2007).…”

The Effect of Noise in a Performance Measure on Work Motivation

“…2 In the often used linear version of the agency model, noise does not directly a¤ect e¤ort incentives at all; for a given incentive intensity the incentive compatibility constraint is independent of the presence and the type of noise (see Sloof and van Praag (2008) for a full discussion). In more general speci…cations noise may have a direct impact, but under the standard assumptions typically made about the agent's preferences, it always strengthens e¤ort incentives (cf.…”

“…In fact, the present experiment was inspired by an earlier one in which we also found little evidence that e¤ort-performance expectancy plays a major role in work motivation (cf. Sloof and van Praag, 2008). In that experiment we used an arguably much more abstract and complicated e¤ort allocation task, in order to introduce a monetary opportunity cost of e¤ort.…”