The paper is organized as follows. In Section 2, I develop the model and derive the optimal slope first for a risky but undistorted performance measure, and then for a risky and distorted performance measure, when no other performance measure is available. The main intuition of the model is evident from this derivation: incentives are optimally weaker when performance measures are either riskier or more distorted. In Section 3, I derive the optimal incentive contract when both a distorted performance measure and a risky but undistorted measure are used. I derive many of the same results as in the single performance measure case, along with some new results on relative performance evaluation. Section 4 examines the trade- off presented by the choice between risky and distorted performance measures, showing how many issues in the design of incentive contracts are fruitfully viewed as a choice between distortion and risk in performance measurement. Section 5 concludes with a discussion of future work, as well as a discussion of incentives for innovation and the design of incentive programs in organizations without well-defined objectives, such as non-profit institutions.
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3. The Trade-Off Between Distortion and Risk
It is a contention of this paper that the trade-off between distortion and risk modeled here is at the core of the problem of incentive design in many organizations. Viewed in this way, the objective of incentive system design is to discover or create low distortion, low risk performance measures. In what follows, I discuss several examples of incentive plan design problems, showing how the choice of performance measures can be usefully viewed as a trade-off between distortion and risk.本文来自优.文~论^文·网原文请找腾讯32-49114
A. Timing of Measurement
Decisions about performance measurement often revolve around issues of timing: should employees be evaluated on short run or long run results? Two examples help to illustrate how this choice involves trading off distortion and risk.
The typical incentive plan for loan officers in a bank involves "origination fees," in which the loan officer is paid for lending money. A feature of this type of incentive is that it gives the loan officer no incentive to search for and write "good" loans that is high interest rate loans that are likely to be repaid. Instead, loan officers have incentives to make any loan, and banks typically have credit committees (made up of higher-level bank officers) whose job it is to determine the credit-worthiness of the potential debtor, and approve or deny the loan.
The question in this scheme is why loan officers are not paid on the eventual profitability of the loan, rather than on its origination.'4 Bonuses based on loan profitability would have the advantage of giving loan officers incentives to search out good credit risks, and sell loans with higher expected value. In other words, such a performance measure would provide less distorted incentives to the loan officers. However, such a scheme would also give the loan officers greater risk, since many things can happen to debtors that are essentially unknowable when a loan is written. In this case, it appears, the trade-off between risk and distortion is made in favor of lower risk and higher distortion.
The opposite choice is often made in the design of bonus plans for project managers in large construction projects. Construction managers often leave one project and move to a second before the first project is completed. Frequently, the project manager will be paid a bonus based the final profitability of the project when it is completed. Thus the project manager might have two or three "contingent" unpaid bonuses to his credit, whose payment awaits the completion of a project that he worked on months or even years earlier.
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