Determinants of Performance Measure Choices in Worker Incentive Plans

This study examines some of the factors influencing the choice of performance measures in worker (non-management) incentive plans. Our sample consists of 607 incentive plans covering non-management employees and having a clear, pre-announced performance-payout link. We find that informativeness issues such as those addressed in economic theories are key factors in the selection of performance measures for worker incentive plans. However, we also find that other reasons for adopting the plan (i.e., promoting organizational change, improving the link between pay and firm performance, and upgrading the workforce) also play a role in performance measure choices, as do union representation and management participation in plan design. Moreover, the factors influencing the use of specific measures vary, suggesting that the aggregate performance measure classifications commonly used in compensation research, such as the comparison of financial versus non-financial metrics, provide somewhat misleading inferences regarding performance measurement choices