TreasureX Researchnber.wpManagers Misjudge the Incentive Plans That Work Best
Francis Annan, Collin B. Raymond · October 30, 2026
New research by Francis Annan and Collin B. Raymond asks a deceptively simple question: when companies pick pay-for-performance schemes, do managers actually know which ones work? They surveyed managers' beliefs about several widely used incentive contracts, then ran a large field experiment assigning workers at the market level to expenditure-equivalent schemes — plans costing the firm the same but structured differently.
The gap between belief and reality was striking. The contract that performed best in the field lifted weekly firm profit by more than 55% versus the status quo, yet managers ranked it low. The worst contract did about as badly as managers expected. In other words, managers are good at spotting losers but systematically underestimate winners.
Standard contract theory, by contrast, came closer: a textbook principal ordering the contracts would have picked the profit leader, or nearly so, and its misses resembled managers' misses for similar reasons. The authors trace performance differences to a mix of labor-supply and risk responses, and find that predictability worsens with contract complexity and across managerial hierarchy.
The practical takeaway is that incentive design is a real lever on profitability — and that managerial intuition, while useful for screening out bad plans, is not a reliable guide to the best one. Firms may benefit from testing contracts empirically rather than relying on judgment alone.
Attribution: based on National Bureau of Economic Research working paper w35788, https://www.nber.org/papers/w35788#fromrss
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