The Role of Subjectivity in Mitigating Incentive Contracting Risks

Abstract

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 welldocumented 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.

Religiosity and accountants' ethical decision-making in a religious country with a high level of corruption

“…Because this is an interpretive, qualitative study, our goal was “theoretical generalisation” (see for example Lillis et al , 2022), which “pays attention to social structures and processes and the context they create for individual and organisational beliefs and behaviours” (Parker and Northcott, 2016, p. 1111). We do this by comparing our evidence and findings to the existing literature to contribute to knowledge.…”

Multi-Rater Performance Evaluations and Incentives

“…Moreover, based on qualitative interviews with managers from four companies,Lillis et al (2022) find evidence for the role of calibration in the ranking of employees and in reducing errors and biases in assessments within three of these companies. At the same time, the authors also document potential biases introduced within the calibration process.…”