An Experimental Investigation of the Effects of Contract Frame and Discretion in Performance Evaluation on Effort

Robert Ewing
The design of incentive compensation plans is critical to a company’s success. This study develops and validates a theoretical model to examine how incentive contract framing affects effort. This study uses an experiment to observe the effect of the manipulation of incentive contract frame and the presence or absence of principal discretion in performance evaluation on effort. The results of the experiment show that when principal discretion in performance evaluation is absent, penalty contracts induce...
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