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Effects of Target Timing and Contract Frame on Individual Performance

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  • Xiaotao (Kelvin) Liu
  • Yue (May) Zhang

Abstract

This study experimentally examines the effects of target timing and contract frame on individual performance. We study four target-based incentive contracts, categorised by when participants learn the performance target ( ex ante , or before production starts, vs. ex post , or after production ends) and how the incentive contract is framed (bonus vs. penalty). The performance target in this study is determined by a peer group's average productivity. We find that performance is significantly higher for bonus-framed contracts when the performance target is revealed ex post , as opposed to ex ante . In contrast, revealing the peer-based performance target ex ante or ex post has no impact on performance for penalty-framed contracts. We also find that the ex post , bonus-framed contract significantly outperforms the other three contracts. This finding supports practitioners' claim that employers should reward (as opposed to punish) individuals based on their performance, relative to that of their peers, ex post .

Suggested Citation

  • Xiaotao (Kelvin) Liu & Yue (May) Zhang, 2015. "Effects of Target Timing and Contract Frame on Individual Performance," European Accounting Review, Taylor & Francis Journals, vol. 24(2), pages 329-345, June.
    • Handle: RePEc:taf:euract:v:24:y:2015:i:2:p:329-345
    DOI: 10.1080/09638180.2014.942337
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    Cited by:

    1. Kampkötter, Patrick & Maier, Patrick, 2020. "The effect of appraisal interviews and target agreements on employee effort - New evidence using representative data," University of Tübingen Working Papers in Business and Economics 136, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    2. Libby, Theresa & Olczak, Wioleta, 2023. "Narcissism in the workforce: How employees respond to contract frame," Accounting, Organizations and Society, Elsevier, vol. 106(C).

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