Management Accounting Section Midyear Meeting

Subjective Performance Evaluation and Multitasking

• In Event: Performance Measurement V

Abstract

Managerial incentive plans often combine objective measures of performance relative to beginning-of-year targets with ex post subjective evaluations. Our study examines the economic rationale for the reliance on subjectivity in multitasking settings. We predict that subjective evaluations offset the limitations of target-based rewards and strengthen managerial incentives in areas where targets lose their motivating effects due to unforeseen events. We use detailed data on 2004–2015 subjective and objective performance assessments of Korean state-owned enterprises and find evidence consistent with our predictions. In particular, we find that subjective and objective evaluations of the same performance dimension are only weakly correlated except when performance relative to target is very low. This implies that subjective evaluations impose an additional penalty for failure to meet a target by a wide margin. We also find that such failure is associated with next-period incentive plan adjustments that render areas with poor prior-period performance more important in future evaluations. We discuss how these subjective choices facilitate multi-tasking and strengthen incentives to improve performance even in areas where targets become ineffective.

Authors

• Tae Sik Ahn, Seoul National University

• Jeong-Hoon Hyun, NEOMA Business School

• Michal Matejka, Arizona State University - Tempe

• Peter SH. Oh, McGill University