Incentive schemes for executive officers when forecasts matter

This paper develops a new perspective on results-based incentive schemes for non-CEO managers. It shows that it is possible to establish incentive schemes that take into account both the actual output obtained and the forecast figure previously established as a target, without the negative consequences derived from the perverse loop of hiding-ratchet effects. A general linear two-staged scheme is proposed. In addition, relevant properties of this incentive system are stated that show how principals (corporate management) may determine the expected forecasting behavior of agents (executive officers) by suitably choosing the scheme parameters according to a simple set of rules. © 2009 John Wiley & Sons, Ltd.