Subjective and objective performance evaluation

Abstract

We study executive compensation in an environment in which firms compete offering contingent contracts to managers with private information about their ability. We ask whether equilibrium executive compensation depends on subjective evaluations, i.e., on assessments made by the firm which are based on noncontractible information. We also allow for objective (i.e., contractible) performance measures and we depart from the rest of the literature on the topic by assuming that subjective evaluations are made before the uncertainty on the objective performance measures is resolved. We find that even in this case, equilibrium contracts ignore subjective evaluations regardless of their informativeness.