Abstract

The vast majority of companies today use fixed performance contracts to drive performance improvement. The core elements of this contract are fixed annual targets reinforced by financial incentives. It is the intense pressure placed on meeting these contracts that leads to "gaming the numbers" as managers at every level of the firm fight tooth and nail to meet their targets and earn their bonuses. Not only is this process often stressful, but it can also lead to actions that destroy value for the firm. There are, however, a number of companies that have broken free from the reliance on contracts and incentives. They have typically changed their evaluation and rewards processes from fixed to relative measures. This article explores the problems of fixed contracts and how alternative rewards programs can be used to avoid gaming and provide managers with more honest numbers.