Using a sample of 140 managers, we investigate the use of various performance metrics in determining the periodic assessment, bonus decisions, and career paths of business unit managers. We show that the weight on accounting return measures is associated with the authority of these managers, and we document that both disaggregated measures (expenses and revenues), and nonfinancial measures play a greater role as interdependencies between business units increase. The results suggest separate and distinct roles for different types of performance measures. Accounting return measures are used to create the proper incentives for managers with greater authority, while disaggregated and nonfinancial measures are employed in response to interdependencies.

We explore how a supervisor's hierarchical rank affects the extent to which employees’ targets reflect their past performance. Literature documents that supervisors do not fully ratchet targets for past performance, arguably because the commitment not to penalize successful employees with more difficult targets alleviates the severity of the ratchet effect. We argue that commitment is less credible in organizational hierarchies where a middle manager sets employees’ targets. Using data from an organization comprised of three hierarchical layers, we consistently find that a middle manager's exposure to performance pressure is positively associated with the ratcheting of the employees’ targets. Moreover, we show that management at headquarters reduces a middle manager's performance pressure when most of her employees missed their targets in the previous period. Overall, the results imply that the hierarchical rank is an important determinant of the credibility of a supervisor's commitment to deemphasize past performance in target setting.

We study principals’ use of performance information to allocate human capital development resources to underperforming agents. We use proprietary data from a retail firm that sets uniform, noncalibrated performance targets to ensure consistent quality and customer experience across all stores. Unlike calibrated targets, uniform, noncalibrated targets do not account for heterogeneity in local conditions. Given that human capital development is costly, we predict and find that principals do not support all agents who underperform on noncalibrated targets. Instead, they use relative performance information and concentrate support on underperforming agents who outperform their geographical peers. In contrast, for calibrated targets, we find no evidence that principals rely on relative performance; agents who underperform calibrated targets are generally eligible for human capital support. Consistent with our assumption that relative performance is informative about returns to human capital investment, we find that support for underperforming agents who outperform their peers improves performance.

We study theoretically and empirically the relation between altruism and incentive contract design. Theoretically, we extend Fischer and Huddart (2008) to investigate how social norms reinforce managers’ altruistic preferences, thus affecting the optimal contract design related to incentive strength and performance measurement. Empirically, we draw on the notion of an organization’s work climate to capture managers’ altruistic preferences. Using data collected from a sample of 557 managers, we find that in a work climate where managers are mostly out for themselves, firms have lower pay-for-performance sensitivity and place a greater weight on aggregate performance measures. In addition, respondents report that they engage more in undesirable actions that are unproductive and costly to firm owners. In contrast, in a work climate where managers care about others (including peers in their organizational unit), firms place lower weights on aggregate performance measures. At the same time, respondents report that they supply more effort and engage less in undesirable actions.

We examine how audit firms changed their policies regarding audit partner performance measurement, career development, and compensation during a period of heightened public scrutiny of audit quality (2007 to 2017). We theorize how implementing policy changes requires a delicate transition in the organizational design and internal processes of the firms and may not effectively translate into their day-to-day practices. Our access to proprietary performance management policies and individual partner performance and compensation data from the eight largest Dutch audit firms allows us to gain an in-depth understanding of the evolution of performance management for audit partners. We find that most of the policy changes have real consequences. For example, audit quality becomes more consequential to career development, whereas profit sharing becomes better linked to quality and long-term performance. We conclude that audit firms appear effectively responsive to public scrutiny, increasingly aligning partner incentives with societal expectations of audit quality.