Measuring Delivered Performance

Working Paper FR 96-07

Posted: 8 Sep 1997

See all articles by Michael J. Barclay

Michael J. Barclay

University of Rochester - Simon School (Deceased)

Dhananjay (Dan) K. Gode

New York University (NYU) - Department of Accounting

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: Undated

Abstract

We show that compensation contracts based on measures of Delivered performance are less costly to shareholders. We compare stock-price changes, earnings, and cash flows as performance measures, and predict that each measure's use in contracts will increase in its contemporaneous correlation with delivered performance. We discuss settings in which each measure has higher contemporaneous correlation with delivered performance than the others. Earnings-based compensation plans are sometimes superior to price-based plans because prices confound delivered performance with expected future performance, and they are sometimes inferior to price-based plans because earnings can lag delivered performance. If mark-to-market accounting causes these expectations to be incorporated in book values, then accounting numbers will be less useful for contracting purposes.

JEL Classification: G39

Suggested Citation

Barclay, Michael J. and Gode, Dhananjay (Dan) K. and Kothari, S.P., Measuring Delivered Performance (Undated). Working Paper FR 96-07, Available at SSRN: https://ssrn.com/abstract=11126

Michael J. Barclay (Contact Author)

University of Rochester - Simon School (Deceased)

N/A

Dhananjay (Dan) K. Gode

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States
212-998-0021 (Phone)
212-995-4004 (Fax)

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

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