EC 6

Question 1

Target Setting – Bouwens & Kroos (2011)

Answer 1

• Updating targets based on past performance (target ratcheting) induces employees to withhold effort in order to mitigate the increase in next period’s targets (the ratchet effect)
• The ratchet effect strengthens when quarterly bonuses are paid out and when last quarter sales are used to set next year’s targets
• Rotating managers across stores does not reduce the ratchet effect

Question 2

Target Setting – Bol & Lill (2015)

Answer 2

• In a lot of situations, there is an implicit agreement between principals and agents to not ratchet the targets (principal) and not engage in strategic output reduction (agents)
• Such an agreement can only hold over time when the principal can ‘find out’ whether the positive target deviation is not driven by an increase in the true economic capacity.
• The information asymmetry about the underlying driver for the positive target deviation is smaller
• When being a top performer among peers
• When volatility is higher
• When the principal has high trust in the agent

Question 3

Target Setting – Pfister & Lukka (2019)

Answer 3

• There is a common belief that incentives harm performance and destroy intrinsic motivation although academic evidence contradicts this
• Self-determination theory predicts that initially controlled motivation can be internalized leading to autonomous motivation
• This study shows that this process is facilitated by the appropriate combination of personnel and cultural controls (or balance in the three-legged stool)