Performance Measure Properties and Delegation

Posted: 29 May 2004

See all articles by Frank Moers

Frank Moers

Maastricht University School of Business and Economics; European Centre for Corporate Engagement (ECCE)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2005

Abstract

In this paper, I extend the organizational design literature by examining how the delegation choice is affected by the ability to resolve the incentive problem caused by this delegation. Based on the seminal papers by Grossman and Hart (1986) and Holmstrom and Milgrom (1994), I argue that the ability to resolve the incentive problem depends on the contractibility of financial performance measures versus non-financial performance measures, where the contractibility depends on the performance measure properties sensitivity, precision, and verifiability. The empirical results show that, if financial performance measures are "good" ("poor") incentive measures, i.e., high (low) on sensitivity, precision, and verifiability, then using these measures for incentive purposes increases (decreases) delegation. Overall, the results are consistent with the argument that firms design their organizational structure around the quality of contractible performance measures.

Keywords: Delegation, performance measure properties, contractibility, financial vs. non-financial performance measures, simultaneity

JEL Classification: D23, L22, M12, M40, M46

Suggested Citation

Moers, Frank, Performance Measure Properties and Delegation (August 2005). Available at SSRN: https://ssrn.com/abstract=551621

Frank Moers (Contact Author)

Maastricht University School of Business and Economics ( email )

Maastricht, Limburg

HOME PAGE: http://www.maastrichtuniversity.nl/sbe

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM
Netherlands

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