Balanced Scorecards: A Relational Contract Approach

Abstract

Reward systems based on balanced scorecards typically connect pay to an index, i.e. a weighted sum of multiple performance measures. However, there is no formal incentive model that actually describe this kind of index contracts as an optimal solution. In this paper, we show that an index contract may indeed be optimal if performance measures are non-veri…able so that the contracting parties must rely on self-enforcement. Under standard assumptions, the optimal selfenforcing (relational) contract between a principal and a multitasking agent is an index contract where the agent gets a bonus if a weighted sum of performance outcomes on the various tasks (the index) exceeds a hurdle. For a parametric (multinormal) speci…cation, the e¢ ciency of the contract improves with higher precision of the index measure, since this strengthens incentives. Correlations between measurements may for this reason be bene…cial. For a similar reason, the principal may also want to include veri…able performance measures in the relational index contract in order to improve incentives.We have received valuable comments and suggestions from Jurg Budde, Bob Gibbons and conference and seminar participants at the 3rd Workshop on Relational Contracts at Kellog School of Management, the 30th EALE conference in Lyon, the 11th Workshop on Accounting Research in Zurich and the EARIE 2019 conference in Barcelona.

Relational incentive contracts for teams of multitasking agents

“…Relational contracting papers considering multiple agents also restrict attention to the single task case. They include Levin (2002) Olsen (2006, 2019), Rayo (2007) Ishihara (2016) and Kvaløy and Olsen (2022). However, these papers do not consider multiple agents.…”

“…However, these papers do not consider multiple agents. In this paper we combine and extend Kvaløy and Olsen (2008, 2022 to analyze the more realistic case with multiple agents having multiple tasks.…”