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Balancing Performance Measures
Author(s) -
Datar Srikant,
Kulp Susan Cohen,
Lambert Richard A.
Publication year - 2001
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00004
Subject(s) - measure (data warehouse) , principal–agent problem , action (physics) , sensitivity (control systems) , outcome (game theory) , compensation (psychology) , agency (philosophy) , contrast (vision) , computer science , econometrics , microeconomics , actuarial science , economics , finance , artificial intelligence , psychology , data mining , social psychology , engineering , corporate governance , philosophy , physics , epistemology , quantum mechanics , electronic engineering
This paper uses an agency theory model in which the agent's actions are multi‐dimensional to analyze the optimal weights to apply to performance measures in a compensation contract. We show how the optimal contract trades off the congruity of the overall performance measure with the desire to minimize the risk imposed upon the agent. In contrast to the single action case, we find that an increase in the sensitivity of a performance measure to an agent's action does not necessarily increase the weight placed on that performance measure, even if that measure is perfectly congruent with the firm's outcome.