This is not the latest version of this item. The latest version can be found at:

Show simple item record

dc.contributor.authorStringer, Carolynen_NZ
dc.contributor.authorTheivananthampillai, Paulen_NZ
dc.identifier.citationStringer, C., & Theivananthampillai, P. (2009). The Use of Objective and Subjective Measures: Implications for Incentive System Design. Presented at the PMA Conference Otago 2009, Carolyn Stringer & Paul Theivananthampillai.en
dc.description.abstractThis study examines the question, is the use of subjective measures an ex post adjustment of objective measures to take into account three types of risk: target difficulty (after controlling for budget loss), shared risk (after controlling for business unit strategy) and downside risk? We examine this question using data from a sample of 522 managers and professionals in period 0 (and 434 in period 1) from a large Australasian corporation over a two year period. Period 0 is a pre shock period and period 1 is a post shock period. We find that for the overall two years that the subjective is an upward adjustment to the objective to take into account: (1) target difficulty, the spread between upper limit and lower limit of unit performance; (2) shared risk, that is organizational interdependencies; and (3) downside risk, which is the opportunity loss function that the employees faced in not meeting the maximum bonus allowed. However, in examining the pre shock period and post shock period, the results indicate that the subjective evaluation has been used differently for each period for two type of risk (target difficulty, shared risk). (1) With regard to target difficulty for the pre shock period, the subjective makes an upward adjustment to the objective; but for the post shock, the subjective makes a downward adjustment. One plausible explanation is that during the post shock, quite a few managers and professionals were already on the maximum of the objective measures (given that there may have been gamesmanship at setting targets and upper limits for an anticipated poor economic period). Therefore, the subjective can be a downward adjustment to reflect this gamesmanship. (2) In regard to shared risk (the percentage of transfer revenues), for the pre shock period the subjective was a downward adjustment, while for the post shock period the subjective adjustment is an upward adjustment to the objective measure. This implies that for the pre shock or times of economic stability, the subjective could be used to reduce some of the free rider challenges that face incentive systems. Conversely for the post shock period, or during times of economic instability, the subjective adjustment is to encourage resource sharing and greater coordination and communication. Overall, our results indicate that the subjective measure is used as an ex post adjustment to the objective measure. This could be in response to flaws in the objective (financial) performance measures as subjective measures as this enables other factors to be taken into account.en_NZ
dc.publisherCarolyn Stringer & Paul Theivananthampillaien_NZ
dc.subject.lcshHD61 Risk Managementen_NZ
dc.subject.lcshHF5601 Accountingen_NZ
dc.titleThe Use of Objective and Subjective Measures: Implications for Incentive System Designen_NZ
dc.typeConference or Workshop Item (Paper)en_NZ
dc.description.versionUnpublisheden_NZ 21:00:52en_NZ
otago.schoolAccountancy and Business Lawen_NZ
dc.description.refereedNon Peer Revieweden_NZ & Business Lawen_NZ
dc.description.referencesAlchian, A. and Demsetz, H. (1972). Production, Information Costs and Economic Organization, The American Economic Review, 62 (5), p.777-795). Anthony, R. and Govindarajan, V. (2007), Management Control Systems, 12th Edition, Irwin, Singapore. Arvey, R.D. and Murphy, K.R. (1998). Performance Evaluation in Work Settings, Annual Review of Psychology, 49, p. 141-68. Arya, A., Fellingham, J., and Glover, J., (1997). Teams, repeated tasks, and implicit incentives. Journal of Accounting and Economics, 23, p.7-30. Baiman, S. (1982). Agency Research in Managerial Accounting: A Survey, Journal of Accounting Literature, Spring, p.154-213. Baker, G.P., Jensen, M.C., and Murphy, K.J. (1988). Compensation and incentives: practice vs. theory. The Journal of Finance, 43 (3), 593-616. Balakrishnan, R., Nagarajan, N.J., and Sivaramakrishnan. (1998). The effect of property rights and audit information quality on team incentives for inventory reduction. Management Science, 44, p.1193-1204. Bol, J.C. (2008), The Determinants and Performance Effects of Supervisor Bias, Bommer, W.H., Johnson, J.L., Rich, G.A., Podsakoff, P.M. and MacKenzie, S.B. (1995). On the interchangeability of objective and subjective measures of employee performance: a meta-analysis, Personnel Psychology, 48. Broadbent, M. and Cullen, J. (2005). “Divisional control and performance,” In Management Control: Theories, Issues and Performance, Berry, A.J., Broadbent, J. and Otley, D., (Eds), Palgrave Macmillan: Hampshire, pp. 137-166. Campbell, J. P. (1990). Modeling the performance prediction problem in industrial and organizational psychology. In Handbook of Industrial and Organizational Psychology, Vol. 1, 2nd edition, edited by M. D. Dunnette, and L. M. Hough, 687–732. Palo Alto, CA: Consulting Psychologists Press. Campbell, D. (2008). Nonfinancial Performance Measures and Promotions-Based Incentives, Journal of Accounting Research, 46 (2), p267-. Eisenhardt, K.M. (1985). Control: Organizational and Economic Approaches, Management Science, 31 (2) Feb, 124-149. Farnsworth, H and Taylor, J. (2006). Evidence of the Compensation of Portfolio Managers. The Joural of Financial Research, XXIX (3), 305-324. Fisher, J and Govindarahan, V. (1993). Incentive compensation design, strategic business unit mission, and competitive strategy. Journal of Management Accounting Research, 1993, p. 129- Fisher, J.G., Peffer, S.A. and Sprinkle, G.B. (2003). Budget-Based Contracts, Budget Levels, and Group Performance. Journal of Management Accounting Research, 15, 51-74. Frederickson, J.R. (1992) Relative Performance Information: The Effects of Common Uncertainty and Contract Type on Agent Effort, The Accounting Review, 67 (4), 647-669. Gibbs, M. (2008). Discussion of Nonfinancial Perfomance Measures and Promotion-Based Incentives, Journal of Accounting Research, 46 (2), p.333-. Gibbs, M., Merchant, K.A. and Van der Stede, W., and Vargas, M.E. (2004). Determinants and Effects of Subjectivity in Incentives. The Accounting Review, 79 (2), 409-436. Gibbs, M., Merchant, K.A., Van der Stede, W., and Vargas, M.E. (2005). The Benefits of Evaluating Performance Subjectively, Performance Improvement, May/June 2005, 44,5. Gray, S.R. and Cannella, A.A. (1997). The Role of Risk in Executive Compensation. Journal of Management. 23 (4)., p.517-540. Heneman, R.L., (1986). The Relationship between supervisory ratings and results-oriented measures of performance: A Meta-Analysis, Personnel Psychology. 39. Heneman, R.L., Fay, C.H. and Wang, Z. (2002a). Compensation Systems in the Global Context, 5-34. In Heneman, R.L. (ed.), Strategic reward Management: Design, Implementation, and Evaluation, Information Age Publishing: Connecticut. Heneman, R.L., Ledford, G.E. Jr. and Gresham, M.T. (2002b). The changing nature of work and its effects on compensation design and delivery, 35-73. In Heneman, R.L. (ed.), Strategic reward Management: Design, Implementation, and Evaluation, Information Age Publishing: Connecticut. Holthausen, R. W., Larcker, D. F., and Sloan, R. G. (1995). Annual bonus schemes and the manipulation of earnings. Journal of Accounting and Economics, 19 (1), 29–74. Itoh, H. (1991). Incentives to help in multi-agent situations. Econometrica, 59, p.611-636. Ittner, C. D., Larcker, D. F. and Meyer, M.W. (2003a). Subjectivity and the weighting of performance measures: Evidence from a balanced scorecard, The Accounting Review, 78 (3), 725-759. Jensen, M., 2001, “Corporate Budgeting is Broken – Let’s Fix It,” Harvard Business Review, Vol. 70, No. 10, 2001, pp. 95-101. Jensen, M., Murphy, K.J.and Wruck 2004, Remuneration: where we’ve been, how we got to here, what are the problems, and how to fix them” Finance Working Paper, European Corporate Governance Institute. Kaplan, R.S. and Norton, D.P. (1996). Translating strategy into action, The Balanced Scorecard, Harvard Business School Press: Boston, Massachusetts. Kaplan, R.S. and Norton, D.P. (2008). Mastering the Management System. Harvard Business Review 86 (1), January, 63-77. Langfield-Smith, K. (2007). A review of quantitative research in management control systems and strategy. In Chapman, Hopwood and Shields (Eds.), Handbook of Management Accounting Research. Elsevier, Oxford, 753-784. Lawler, E. E. III. (2000). Rewarding Excellence, Pay Strategies for the New Economy, Jossey-Bass Inc: San Francisco. Lipe, M.G. and Salterio, S.E. (2000). The balanced scorecard: Judgemental effects of common and unique performance measures. The Accounting Review, 75 (3), 283-298. MacLeod, W.B. (2003). Optimal Contracting with Subjective Evaluation. The American Economic Review. 93 (1). P.216-240. Mandel, B.J. (1969). The Regression Control Chart. Journal of Quality Technology. 1(1), p.1. Matejka, M., Merchant, K.A., Van der Stede, W.A. (2005). Performance Measurement and Evaluation Practices in Loss-Making Entities: Field and Survey Evidence. Working paper. Matsumura, E.M. and Shin, J.Y. (2006) An Empirical Analysis of an Incentive Plan with Relative Performance Measures: Evidence from a Postal Service. The Accounting Review, 81 (3), 533-566. Merchant, K.A. (1989) Rewarding Results: Motivating Profit Centre Managers, Harvard Business School Press, Boston, M. Merchant, K.A. (1990). How Challenging Should Budget Targets Be? Management Accounting, November, p.46-48. Merchant, K.A. and Manzoni J. (1989). The Achievability of Budget Targets in Profit Centres: A Field Study, The Accounting Review, LXIV (3), 539-558. Merchant, K. A., Van der Stede, W. and Zheng, L. (2003). Disciplinary constraints on the advancement of knowledge: the case of organizational incentive systems. Accounting, Organizations and Society, 28, 251-286. Miceli, M.P. and Heneman, R.L. (2002). Contextual determinants of variable pay plan design: a proposed research framework. In Strategic reward Management: Design, Implementation, and Evaluation, Heneman, R.L. (ed.) Information Age Publishing: Connecticut, 213-231. Moers, F. (2005). Discretion and bias in performance evaluation: the impact of diversity and subjectivity, Accounting, Organizations and Society, 30, 67-80. Murphy, K.J. (2001) Performance standards in incentive contracts, Journal of Accounting and Economics, 30(3), 245-278. Rajan, M.V. and Reichelstein, S. (2006). Subjective Performance Indicators and Discretionary Bonus Pools. Journal of Accounting Research, 44 (3), p.585-. Ramakrishnan, R.T.S. and Thakor. (1991) Cooperation versus competition in agency. The Journal of Law, Economics, and Organization, 7, 248-283. Stringer, C. P. (2006). Performance management: An empirical study. Dunedin, New Zealand: University of Otago, 465p. Unpublished PhD Thesis. Reference Number: 0020060331. Stringer, C.P. (2009). Performance evaluation. Paper to be presented at the Performance Measurement Association Conference, Dunedin, 14-17 April, 2009. Tae Sik Ahn (2008). The Effects of Subjective Measures on Ratee Incentive, presented at American Accounting Association Conference, Anaheim, 3-6 August. Walsh, P. (2000). Targets and how to assess performance against them. Benchmarking: An International Journal, 7 (3), p.183-. Woods, A. (2008) Subjective adjustments to objective performance measures: An empirical examination of the economic benefits and social costs in complex work settings, Paper presented at AAA Annual Conference, Anaheim, US 4-6 August.en_NZ
otago.event.dates14 -17 April 2009en_NZ
otago.event.placeOtago University, Dunedin, New Zealanden_NZ
otago.event.titlePMA Conference Otago 2009en_NZ
 Find in your library

Files in this item


This item appears in the following Collection(s)

Show simple item record


*Selected version