성과평가시스템에서의 목표설정

초록

How to set targets is a crucial factor in the successful implementation of performance-evaluation and compensation plans. The primary use of targets is to coordinate the allocation of resources and to evaluate performance (Ittner and Larcker 2001; Leone and Rock 2002). Targets are also a key component of management control systems; the way firms set targets, the way they revise them over time, and the ease with which ratees achieve those targets affect their incentives to increase firm value (Indjejikian and Nanda 2002). More challenging targets lead higher performance by motivating employee to be more productive (Stedry 1960; Stedry and Kay 1966; Rockness 1977; Chow 1983). The first-best strategy to maximize firm value may be to set a target that approximates employees’ true capability. Though target-setting is important and pervasive in performance-evaluation system, evidence concerning target-setting practice is scant because researchers rarely have access to such inherently firm-specific and often confidential internal information (Ittner and Larcker 2001). This paper investigates how targets are set by using a variety of empirical models coupled with performance evaluation data of the Korean Government-owned enterprises (GOEs). First, we follow the simple framework developed by Indjejikian and Nanda (2002), which assume that a firm’s executive works for two periods and the firm rewards the executive based on a measure of his performance evaluated relative to a target. This framework also assume that a target depends only past targets and past performance. Thus, under the framework, if the firm does not adjust the target for the executive’s past performance, then target at any period is timeless and does not depend on prior period’s performance. We provide empirical evidence that ratees’ chance of achieving their targets depend on whether the ratees’ performance exceeded their targets in the previous year. This findings suggest that raters do not adjust targets to fully reflect ratees’ past performance. Second, we examine whether the ratchet principle is implemented in the performance evaluation system of Korean GOEs. The ratchet principle is the well-known tendency of raters to use current performance as a criterion for determining future targets (Weitzman 1980). Given the uncertainty about the true performance capability of ratees, raters regard the performance in any period as the revealed minimal level of their capabilities in the next period (Berliner 1976). Therefore, in a principal- agent setting, the ratchet principle is adopted if contracts explicitly or implicitly reflect past performance information because performance information reduces the variance with which future performance is measured (Milgrom and Roberts 1992). We find a symmetric ratchet principle for performance measures of which targets are revised by a formula, and a super-variable ratchet principle for performance measures of which targets are set by ratees’ participation. Surprisingly, targets for the next year increases rather than decreases when ratees miss targets at any period for performance measures of which targets are endowed by raters. Finally, we investigate the determinants of next period’s targets in order to establish that firms design targets to motivate their executives optimally. Leone and Rock (2002) consider two determinants, whether or not and how much ratees' beat (or meet) targets. Besides them, we additionally examine how much performance at any period increase compared to prior period’s performance and how much targets at any period change compared to prior period’s targets. We find that whether or not and how much ratees’ beat (or meet) targets are significant determinants of target-setting, while change in target is insignificant. In addition, change in performance has an influential effect on the next period’s target-setting when the fact whether ratees’ beat (or meet) targets or not is considered. However, we find that change in performance is no longer significant when the fact how much ratees’ beat(or meet) targets is additionally included in the regression model. Our findings that ratcheting pattern depends on the degree of ratee’s participation in the target-setting process suggest that the more ratees participate in target- setting, the more easily achievable targets seem to be set. They also imply that the current GOEs’ target-setting mechanism may induce temporarily improved performance rather than persistent innovation in performance.