Performance Measure Congruity and Diversity in Multi-Task Principal/Agent Relations

SYNOPSIS AND INTRODUCTION: Accounting numbers are frequently used in evaluating management performance, and performance evaluation is an important ingredient in motivating managers. Three significant factors generally create difficulties in developing performance measures for a given manager. First, the actions and strategies implemented by the manager are not observable directly, so the manager cannot be compensated directly for his input into the firm. Second, the full consequences of the manager's actions are not observable, in large part because the impact of those actions extend beyond his subunit of the firm and beyond his time as managerof that subunit. Third, uncontrollable events influence the consequences that are observed. The agency theory literature has explored extensively the implications of the nonobservability of the manager's actions and the fact that performance measures are influenced by unobservable, uncontrollable events. However, this literature has given only limited attention to the fact that performance measures frequently are incomplete or imperfect representations of the economic consequences of the manager's actions.1 On the other hand, discussions of performance evaluation in management accounting texts often raise issues regarding the incompleteness and imperfectness of the accounting numbers that are used as performance measures. For example,

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