The Effect of Career Concerns on the Contracting Use of Public and Private Performance Measures

51 Pages Posted: 14 Sep 2003

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: June 26, 2003

Abstract

We model career concerns in a regime where a linear incentive contract includes a mix of a publicly observed performance measure and a second, correlated, private measure that is not observed by the labor market. Under this "mix" regime, we find that agent effort and total agency payoff levels are higher, and the weight on the public measure is lower, than in regimes with either public-only or private-only performance measures. Intuitively, public measures create career concerns and reduce both the need for explicit incentives and the risk premium the principal must pay to the agent. Private measures enable the principal to reward the agent more efficiently for the higher levels of effort that arise despite lower explicit incentives. The results suggest implicit incentives arising from career concerns may help explain recent empirical evidence of firms using a combination of private and public performance measures as a basis for rewarding executives.

Keywords: career concerns, incentives, performance measures

JEL Classification: J33, J41, D82, M40, M46

Suggested Citation

Autrey, Romana L. and Dikolli, Shane Sami and Newman, Donald Paul, The Effect of Career Concerns on the Contracting Use of Public and Private Performance Measures (June 26, 2003). Available at SSRN: https://ssrn.com/abstract=420880 or http://dx.doi.org/10.2139/ssrn.420880

Romana L. Autrey (Contact Author)

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

Shane Sami Dikolli

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

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