ACCT30002 Chap.6 Performance Incentives and Rewards
Performance Incentives and Rewards
Incentives align effort and decisions when actions cannot be observed perfectly, but any rewarded measure can distort attention. This chapter balances goal congruence, line of sight and controllability; separates bonus-pool funding from allocation; and diagnoses gaming, intrinsic motivation and the problem of rewarding one outcome while hoping for another. It also covers deferral, executive pay and clawbacks.
Line of sight asks whether employees can influence and understand the measure. Goal congruence asks whether improving it advances organisational objectives. Controllability asks whether evaluation distinguishes the manager's decisions from external conditions.
Local measures often provide stronger influence but encourage suboptimization, while firm-wide measures internalise broader consequences but can feel remote and invite free-riding. A blended plan may combine individual, team and firm evidence across different time horizons. Shared bonus plans require two distinct calculations: a rule that funds the pool and a rule that allocates it.
Transparency helps employees understand the signal, while verification protects data quality. Gaming occurs when reported performance improves without the intended objective, through timing, classification, target negotiation or effort shifted away from unmeasured work. Deferral allows later quality information to enter evaluation; malus reduces unvested awards; clawback seeks recovery after payment.
Financial and nonfinancial rewards interact with intrinsic motivation and leader behaviour, so the answer must trace the full mechanism rather than assuming more variable pay produces better performance.
What this chapter covers
- 01
Incentive purpose and agency
- 02
Global and local performance measures
- 03
Bonus-pool funding and allocation
- 04
Gaming and proxy distortion
- 05
Intrinsic and extrinsic motivation
- 06
Executive pay, deferral and clawback
Worked example · free
Calculate a shared bonus pool
- 1Excess profit is $6.5m minus $4m, or $2.5m.
- 1Multiply $2.5m by 8%.
- 1The pool is $200,000.
- 1Evaluate the separate allocation rule before judging behaviour.
Key terms
- Line of sight
- The perceived connection between an employee's actions and rewarded outcomes.
- Gaming
- Improving a reported measure without improving the underlying organisational objective.
- Clawback
- Recovery of paid remuneration when specified later evidence or misconduct triggers apply.
Performance Incentives and Rewards FAQ
Why combine local and firm-wide measures?
Local measures strengthen line of sight but can reward suboptimization. Firm-wide measures support goal congruence but may feel remote and create free-riding. A focused blend can balance the two, provided employees understand how each component works.
How can an incentive cause gaming?
People find timing, classification, selection or effort-allocation actions that improve the rewarded proxy. Diagnose the easiest route to a higher score, then adjust scope, timing, verification or balanced evidence so that route also advances the real objective.
What do deferral and clawback achieve?
Deferral leaves time for later evidence to reveal whether results are sustainable. Malus can reduce an unvested award, while clawback seeks recovery after payment. Clear triggers and governance are necessary for credibility.
How do I diagnose gaming in an incentive plan?
Name the rewarded measure, the easiest way to improve it and the omitted consequence that matters to the organisation. Look for timing, classification, threshold clustering or changed customer mix. Distinguish manipulation from a legitimate response, then repair the specific route through scope, timing, verification or balanced evidence while preserving accountability for deliberate misstatement.
Exam move
For each incentive case, state the desired behaviour, rewarded measure, controllability and gaming route. Recompute the funding and allocation separately. Finish with one governance feature tied to the information lag. Draw a triangle labelled goal congruence, line of sight and controllability, then place the proposed measure inside it. Explain which corner is strongest and which trade-off remains.
For a bonus pool, calculate the threshold or funding percentage before applying team, equal and individual allocation tranches. Check that the pieces reconcile to the total pool. Build a gaming table with the rewarded target, easiest manipulation, omitted consequence and repair. Repairs may change scope, timing, verification or the balance of evidence; each should address a named distortion rather than add generic complexity.
Compare local and global measures for the same role and explain how blended weighting changes behaviour. For executive pay, distinguish annual incentives, long-term awards, deferral, malus and clawback. Test the design under weak demand, acquisition-led growth and a later control failure. End by naming who authorises judgment and how exceptions are documented.
Add one practice case where the measured result improves but the real objective deteriorates. Trace how timing, classification or customer selection created the gap. Rebuild the plan with a delayed outcome measure and state how long payment should remain at risk. Compare cash reward with recognition, autonomy and professional identity so the response does not assume motivation is purely financial.
In every calculation, label the funding rule and allocation rule separately, then confirm that team shares do not exceed the pool. In every evaluation, state the information window needed before success can be judged.
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