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Testing the optimality of a performance evaluation measure for a gainsharing contract

Author

Listed:
  • RAJIV D. BANKER
  • SRIKANT M. DATAR
  • MARK J. MAZUR

Abstract

. Recent attention on labor productivity has resulted in many manufacturing concerns negotiating incentive contracts with the labor force. Such incentive contracts provide for management and the work force to share monetary benefits generated by productivity gains. These gain†sharing contracts require a benchmark level of labor productivity from which to assess productivity gains. This paper examines gain†sharing contracts in an agency setting, deriving conditions under which contracts using a performance evaluation measure of a ratio of total labor hours to standard direct labor hours might be optimal. These optimality conditions are characterized in terms of the fixed and variable cost components of the total labor requirement and the standard direct labor requirements. An observed gain†sharing contract based on such a measure is then evaluated using actual production data. The generalized method of moments is employed to estimate the key production parameters, indicating that the optimality conditions are violated. The characterization of optimal gain†sharing contracts thus clarifies the manner in which productivity must be measured if these programs are to provide the proper incentives to the work force. Résumé. L'attention récemment accordée à la productivité de la main†d'oeuvre a donné lieu à la négociation de contrats de rémunération au rendement dans de nombreuses entreprises de fabrication. Ces contrats de rémunération au rendement prévoient un partage des bénéfices monétaires résultant des gains de productivité, entre la direction et la main†d'oeuvre. Les contrats de participation aux bénéfices nécessitent la détermination d'un point de repère en ce qui a trait à la productivité de la main†d'oeuvre à partir duquel on puisse évaluer les gains de productivité. Les auteurs analysent les contrats de participation aux bénéfices dans le contexte d'une relation de mandataire, en dérivant les conditions dans lesquelles le contrat prévoyant une mesure du rendement fondée sur le rapport des heures de main†d'oeuvre totales aux heures de main†d'oeuvre directe standard peut être optimal. Ces conditions d'optimalité sont définies sous forme d'éléments de coûts fixes et de coûts variables des besoins en heures de main†d'oeuvre totales et en heures de main†d'oeuvre directe standard. Les auteurs analysent un contrat de participation aux bénéfices basé sur ce genre de mesure et l'évaluent ensuite à partir des données réelles de production. Ils recourent à la méthode généralisée des moments pour estimer les principaux paramètres de production indiquant que les conditions d'optimalité sont transgressées. La définition du contrat optimal de participation aux bénéfices éclaire ainsi la manière dont la productivité doit être mesurée pour que de tels contrats offrent à la main†d'oeuvre les stimulants appropriés.

Suggested Citation

  • Rajiv D. Banker & Srikant M. Datar & Mark J. Mazur, 1990. "Testing the optimality of a performance evaluation measure for a gainsharing contract," Contemporary Accounting Research, John Wiley & Sons, vol. 6(2), pages 809-824, March.
  • Handle: RePEc:wly:coacre:v:6:y:1990:i:2:p:809-824
    DOI: 10.1111/j.1911-3846.1990.tb00788.x
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    References listed on IDEAS

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