Journal article
The Role of Subjectivity in Mitigating Incentive Contracting Risks
AM Lillis, MA Malina, J Mundy
Accounting Review | AMER ACCOUNTING ASSOC | Published : 2022
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 well-documented role in mitigating employee compensation risk. We find that incentive misalignment arising from unanticipated behavioral responses to performance measur..
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Funding Acknowledgements
We are grateful to Elaine G. Mauldin (editor) and two anonymous referees for their constructive comments. We also thank Margaret Abernethy, Jan Bouwens, Mandy Cheng, Henri Dekker, Jennifer Grafton, Graeme Harrison, Michelle Hoggan, Kerry Humphreys, Chung Yu Hung, Xue Jia, Katherine Schipper, Paula Van Veen-Dirks, participants at the 2015 European Institute for Advanced Studies in Management (EIASM) Performance Measurement and Control Conference, Nice, and workshop participants at ESSEC Business School, Vrije Universiteit Amsterdam, and Macquarie University. Julia Mundy gratefully acknowledges financial support from the ICAEW's charitable trusts. Finally, we are grateful to the participating firms and managers for their time, insights and interest in the project.