Match!

Effects of Ambiguous Common Uncertainty on Employee Preference for Relative Performance Contracts

Published on Jan 1, 2016
· DOI :10.11640/tjar.6.2016.02
Ge Bai10
Estimated H-index: 10
,
Ranjani Krishnan
Abstract
We distinguish ambiguous common uncertainty (with unknown probability distribution) from risky common uncertainty (with known probability distribution) and examine how employee preference for relative performance contracts differs between the two conditions. Using economics and psychology theory in decision making under uncertainty, we hypothesize that (i) preference for relative performance contracts is low (high) when common uncertainty is ambiguous (risky); and (ii) confidence mediates the relation between ambiguity and preference for relative performance contracts. Results from a controlled laboratory experiment support these predictions. A follow-up experiment provides evidence that the direct effect of ambiguity and the mediating effect of confidence disappear if the contract is based on independent performance measures. Our study contributes to the literature on performance measurement, employee contract preference, and decision making under uncertainty.
  • References (81)
  • Citations (0)
📖 Papers frequently viewed together
15 Citations
1 Citations
1 Citations
78% of Scinapse members use related papers. After signing in, all features are FREE.
References81
Newest
#1Jason BrownH-Index: 3
#2Patrick R. MartinH-Index: 3
Last. Roberto A. WeberH-Index: 1
view all 4 authors...
ABSTRACT: Firms frequently attempt to increase profits by replacing some existing workers with new lower-wage workers. However, this strategy may be ineffective in an incomplete-contract environment because the new workers may provide lower effort in response to their lower wages, and hiring new lower-wage workers may damage the remaining original workers' reciprocal relationship with the firm. We conduct an experiment to examine this issue and find that when new lower-wage workers become availa...
4 CitationsSource
#1Dow Scott (LUC: Loyola University Chicago)H-Index: 6
#2Michelle Brown (University of Melbourne)H-Index: 18
Last. Stephen J. Perkins (London Metropolitan University)H-Index: 6
view all 8 authors...
Companies are managing more diverse work forces, and pay systems must be designed to attract, retain and motivate employees who may have very different pay preferences from employees of even a decade ago. This study examines how employee characteristics (i.e., gender, age, education, work experience, annual pay and number of dependents) are related to pay preferences. We found that older respondents with more education and more dependents had a stronger preference for variable pay than did respo...
4 CitationsSource
#1Barna Bakó (Corvinus University of Budapest)H-Index: 3
#2András Kálecz-Simon (Corvinus University of Budapest)H-Index: 2
Theoretical articles on incentive systems almost exclusively focus on linear compensations, while, in practice, nonlinear elements, such as quota bonuses, are not uncommon. Our article tries to bridge that gap; it shows how the use of quotas can increase the owners’ profits, which agents are targeted by these incentives, and which factors determine the optimal bonus.
4 CitationsSource
#1R. Lynn Hannan (Tulane University)H-Index: 6
#2Gregory P. McPhee (FIU: Florida International University)H-Index: 1
Last. Ivo D. Tafkov (GSU: Georgia State University)H-Index: 6
view all 4 authors...
ABSTRACT : This study investigates how relative performance information (RPI) affects employee performance and allocation of effort across tasks in a multi-task environment. Based on behavioral theories, we predict that the social comparison process inherent in RPI induces both a motivation effect that results in increased effort as well as an effort distortion effect that results in the distortion of effort allocations across tasks away from the firm-preferred allocations. We also predict that ...
62 CitationsSource
ABSTRACT: This study investigates the conditions under which providing relative performance information to employees has a positive effect on performance when compensation is not tied to peer performance. Specifically, I investigate, via an experiment, the effect of relative performance information (present or absent) on performance under two compensation contracts (flat-wage or individual performance-based). Given the presence of relative performance information, I examine the effect of the typ...
66 CitationsSource
#1Victor S. MaasH-Index: 9
#2Marcel van RinsumH-Index: 6
Last. Kristy L. TowryH-Index: 16
view all 3 authors...
ABSTRACT: This paper investigates managerial discretion in compensation decisions in a team setting, in which a measure of the team's aggregate performance is readily available from the accounting system. Specifically, we examine the willingness of managers to obtain additional, costly information that would supplement this measure and allow the managers to more accurately assess individual contributions to team output. Using theory from behavioral economics that incorporates social preferences ...
46 CitationsSource
SUMMARY: I model unilateral auditor liability under the assumption that the auditor has an aversion to uncertainty about probability (ambiguity aversion). A vaguely defined negligence standard imp...
9 CitationsSource
#1Keith M. Marzilli Ericson (Harvard University)H-Index: 13
#2Andreas Fuster (Harvard University)H-Index: 15
While evidence suggests that people evaluate outcomes with respect to reference points, little is known about what determines them. We conduct two experiments that show that reference points are determined, at least in part, by expectations. In an exchange experiment, we endow subjects with an item and randomize the probability they will be allowed to trade. Subjects that are less likely to be able to trade are more likely to choose to keep their item. In a valuation experiment, we randomly assi...
172 CitationsSource
#1Hela Maafi (PSE: Paris School of Economics)H-Index: 1
Preference reversals have been widely studied using risky or riskless gambles. However, little is known about preference reversals under ambiguity (unknown probabilities). Subjects were asked to make a binary choice between ambiguous P-bets (big likelihood of giving small prize) and ambiguous $-bets (small likelihood of giving large prize) and their willingness to accept was elicited. Subjects then performed the same two tasks with risky bets, where the probability of winning for a given risky b...
25 CitationsSource
This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. Subjects face the choice between a fixed and a variable payment scheme. Depending on the treatment, the variable payment is a piece rate, a tournament or a revenue-sharing scheme. We find that output is higher in the variable pay schemes (piece rate, tournament, and revenue sharing) compared to the fixed payment scheme. This difference is largely driven by productivity sorting. In addition...
451 CitationsSource
Cited By0
Newest