The problem with such a bonus plan is clear: the project manager's bonus for a particular project depends on many factors over which the project manager has no control, not the least of which is the performance of his successor(s). Yet the benefits are also clear: such a scheme gives the manager incentives to be concerned about the long run profitability of his decisions. Trying to evaluate the project manager on the profitability of the project when he leaves would encourage him to (perhaps literally) bury problems that would not become clear until long after he had left the project. In this case, the benefits of low incentive distortion outweigh the costs of high risk for the project manager.
In both of these examples, the choice of performance measures involves trading off risk and distortion. In both cases, the choice is between a higher risk, lower distortion performance measure (loan performance, final profitability) versus a lower risk, higher distortion measure (loan origination, short term profitability). Which measure is chosen depends on the relative costs of distortion and risk.
B. Level of Aggregation
Compensation design problems frequently involve choosing the level of aggregation at which to measure performance. I examine two examples, one involving the choice of the group size over which to measure performance, and the other involving responsibility accounting.
A key decision in determining an employee's incentive package is the weight to place on individual versus group performance, and if group performance, how large a group.
论文网http://www.youerw.com/ Consider the design of a performance measurement system for a worker who is a member of a work group. Each worker engages in tasks that affect his own measured performance, as well as engaging in cooperative activities that improve the performance of the entire group. Attempts to reward the worker for individual performance may thus reduce teamwork and destroy cooperation. On the other hand, rewarding individuals on the basis of group performance makes their rewards depend
on the performance of the entire group, including all of the uncontrollable events (and actions of others in the group) that affect group output.本文来自优.文~论^文·网原文请找腾讯3249,114
Once again, the choice of whether to use group or individual performance in the incentive contract depends on the trade-off between risk and distortion. Group rewards subject group members to risk by making their rewards depend on uncontrollable events; individual rewards distort incentives to cooperate. How this trade-off gets resolved depends mainly on the value of cooperation (and thus the distortion induced by an individual reward scheme) and the riskiness of group (relative to individual) output.
4. Extensions and Conclusions
This paper provides a simple and intuitive structure for understanding the choices organizations face in the design of incentive contracts. I argue that a performance measure's usefulness in an incentive contract will depend on its distortion and risk: the more distorted and the riskier the measure, the less valuable it will be to the organization and the less it will be used in an incentive contract. Furthermore, organizations rarely have available low risk, low distortion measures, and so are generally making trade-offs between measures that are high risk and low distortion, or low risk and high distortion. As discussed above, many problems in incentive system design can be fruitfully analyzed using this framework.
Of course, much work remains to be done. Questions raised by this analysis include:
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