Objective Versus Subjective Indicators of Managerial Performance

Posted: 23 Sep 2008

See all articles by Madhav V. Rajan

Madhav V. Rajan

Booth School of Business, University of Chicago

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 30, 2008

Abstract

Managerial bonus payments are frequently determined by both objective and subjective indicators of managerial performance. By its very nature, subjective information is not verifiable for contracting purposes. The inclusion of such information in managerial bonus schemes therefore requires a principal to retain discretion in authorizing actual bonus payments. At the same time, the principal must be able to commit to an overall bonus pool which will be paid out either inside or outside the agency. Our analysis examines the structure of optimal bonus pool arrangements. The non-verifiability of the subjective indicators changes many of the predictions obtained in traditional agency settings with verifiable performance indicators. In particular, our results address the contractual value of additional information variables, the desirability of compressed incentive schemes and the nature of relative performance evaluation in settings with multiple agents.

Keywords: discretion, bonus pools, subjective performance measurement

JEL Classification: J33, G34, M40, M49

Suggested Citation

Rajan, Madhav V. and Reichelstein, Stefan J., Objective Versus Subjective Indicators of Managerial Performance (August 30, 2008). Accounting Review, 2009. Available at SSRN: https://ssrn.com/abstract=1270168

Madhav V. Rajan (Contact Author)

Booth School of Business, University of Chicago

1101 East 58th Street
Chicago, IL 60637-1561
United States

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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