Subjective Evaluation, Performance Targets, and Incentives

Abstract

Managerial incentive plans often combine objective measures of performance relative to beginning-of-year targets with ex post subjective evaluations. We argue that one of the roles of subjectivity is to offset the limitations of target-based rewards and strengthen managerial incentives when 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 to empirically examine the role of ex post subjectivity when incentives are based on ex ante targets. We find that subjective and objective evaluations of the same performance dimension are strongly positively correlated but only when performance falls short of the target, which implies that subjective evaluations can discourage 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.