the principal distorts incentives when differences in measurement accuracy lead them to focus risk averse agents more on some tasks than others. Baker shows that even when agents are risk neutral, the constraint that the principal generally cannot pay for what she really cares about leads to effort distortion.
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In accounting, Feltham-Xie (1994) build a model (very similar to the one developed in this paper) that demonstrates how the incompleteness of most managerial compensation contracts leads to distorted incentives. In their model, the fact that agents take many more actions than the firm can measure leads to inefficiency in agent effort levels across all tasks. They also show how additional performance measures can mitigate, but generally not eliminate, this problem. A recent paper in this literature, Datar, Kulp and Lambert (forthcoming) asks explicitly about how principals should weight multiple, distorted performance measures.
In this paper, I build on both strands in this multi-tasking literature to develop a simple two-parameter characterization of performance measures that captures many of the problems, and clarifies much of the intuition, in the use of incentive contracting in organizations. The contribution of the paper is twofold. One is an intuitive geometric interpretation of and trigonometric expression for distortion in performance measures. The second contribution is to show how this two-parameter characterization and its interpretations can capture and explain many of the issues that plague actual incentive plans.本文来自优.文~论^文·网原文请找腾讯3249.114
2. Distortion Relative to What?
In order to characterize a distorted performance measure, it is necessary to define an undistorted performance measure. One particular performance measure plays a crucial role in this paper: the total value of the organization. This performance measure (labeled V) should be thought of as capturing the present value of all future net benefits to the residual claimant of the organization. For publicly traded companies, V represents the market value of equity; in this case, firm value is an observable, contractible, and frequently used performance measure in incentive contracts. All types of stock-based compensation plans, including bonuses based on stock price, as well as executive stock grants, option grants, Employee Stock Ownership Plans, phantom stock, and stock appreciation rights are examples of incentive plans based on firm value. I make two assumptions about the nature of firm governance and equity markets that affect the performance measure V: (1)the objective of a publicly traded firm is to maximize the value of the firm to shareholders; and (2) the stock price accurately reflects this value. Thus, in this paper, incentives plans based on equity value are undistorted: by definition they provide incentives that are perfectly aligned with the organization's objective.’
In many organizations the total value of the organization cannot be used in an incentive plan. In privately held firms, not only is the financial value of the organization unknown, it is likely not be the owner's objective. Rather, the objective is to maximize the owner's utility, and her utility is clearly not a contractible performance measure.
This problem of non-contractible organization value is even more acute in non-profit organizations and government agencies. In organizations of this type, it may not even be possible for managers to agree on and specify the organization's objective. Such organizations are often characterized by particularly difficult incentive problems; they cannot use stock based incentive devices, and the absence of a well-articulated organizational objective hampers the design of an efficient performance measurement system. If the top level objectives are not known, then how is the organization to measure the performance of individual employees? I will argue below that the difficulty in defining "good" performance measures in non-profit organizations is one reason for the weak incentives that so often characterize organizations of this type, and for the dysfunctional consequences that often arise when these types of organizations try to use strong incentives.
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