Contracting on Contemporaneous versus Forward‐Looking Measures: An Experimental Investigation *

We experimentally examine how employees' employment horizons (long or short) and the performance measures in their incentive contracts (forward-looking or contemporaneous) affect employee effort allocation and performance. Consistent with economic theory, we find that the decision-influencing benefits of forward-looking contracts decrease as employees' employment horizons increase toward the firm's profitability horizon. Importantly, we extend this theory to predict decision-facilitating benefits for employees with long employment horizons. Holding feedback constant, we find that employees with long employment horizons exert more farsighted effort and are more efficient in task execution when they are compensated with contracts that incorporate forward-looking measures rather than those with only contemporaneous measures. Further analysis indicates that this increase in efficiency is mediated by a reduction in experimentation across various task strategies. Thus, contracting on forward-looking performance measures provides benefits to firms regardless of employment horizons.