Performance Measure Aggregation, Career Incentives, and Explicit Incentives

Posted: 2 Dec 2009

See all articles by Romana L. Autrey

Romana L. Autrey

Willamette University - Atkinson Graduate School of Management

Shane S. Dikolli

Darden School of Business University of Virginia

Paul Newman

University of Texas at Austin - Department of Accounting

Date Written: December 1, 2009

Abstract

We examine a setting in which managers have differential career concerns and firm performance is publicly observed using disaggregated measures that are incrementally informative but costly to contract upon. In such a setting, when do firms contract on aggregated rather than disaggregated performance measures? We show that at intermediate levels of managerial career concerns contracting on an aggregate measure can be welfare-enhancing. In this case, the net cost of both contracting directly on an aggregate measure and exploiting career incentives based on disaggregated measures is smaller than the cost of contracting directly on disaggregate measures. Our findings also imply that detailed performance disclosures will be accompanied by lower incentive weights based on aggregate performance when career incentives mitigate distortions caused by aggregation. Further, if performance measures become noisier due to transient shocks, we find that contractual incentive weights on aggregate performance can be either increasing or decreasing, depending on the magnitude of a manager’s career incentives.

Keywords: aggregation, career concerns, contracting costs

JEL Classification: J33, M41

Suggested Citation

Autrey, Romana L. and Dikolli, Shane Sami and Newman, Donald Paul, Performance Measure Aggregation, Career Incentives, and Explicit Incentives (December 1, 2009). Journal of Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1516673

Romana L. Autrey

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

Shane Sami Dikolli (Contact Author)

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

Donald Paul Newman

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,011
PlumX Metrics