Romana Autrey
The University of Texas at Austin
Shane Dikolli
The University of Texas at Austin
D Paul Newman
The University of Texas at Austin
Abstract: We show analytically that the presence of employee career concerns decreases the contracting weight on an incrementally informative performance measure that is publicly available to the labor market. Further, in settings where the employee is more concerned about career prospects than ratchet effects, we show that effort levels are higher if the incentive contract includes a publicly observed performance measure and a second, correlated performance measure that is kept private from the labor market. We also present the optimal (linear) incentive weights on performance measures in settings where (1) only private (2) only public and (3) a mix of private and public measures are available for contracting. The results imply that tradeoffs between different types of implicit incentives (i.e. career concerns versus ratchet effects) are important determinants of why firms use different degrees of private versus public performance measures to reward executives.
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