Variance analysis and linear contracts in agencies with distorted performance measures

Budde, Jörg

doi:10.1016/j.mar.2008.12.002

Cited by 11 publications

(7 citation statements)

References 21 publications

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“…If the weighted sum of performances exceeds what is expected, then the agent obtains the bonus. 6 Figure 1 below illustrates the structure of the optimal bonus scheme. The index and its hurdle de…nes a hyperplane delineating outcomes "above" the plane from those "below", where the former are rewarded with full and maximal bonus while the latter yield no bonus at all.…”

Section: Scorecards and Distorted Measuresmentioning

confidence: 99%

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Balanced Scorecards: A Relational Contract Approach

Kvaløy

Olsen

2021

SSRN Journal

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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.

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Section: Scorecards and Distorted Measuresmentioning

confidence: 99%

“…To simplify the algebra we will invoke this assumption regarding k. Assume also value-and cost-functions as in (6), with v 0 = 0.…”

Section: Scorecards and Distorted Measuresmentioning

confidence: 99%

Balanced Scorecards: A Relational Contract Approach

Kvaløy

Olsen

2021

SSRN Journal

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“…Blum, 2006;Budde, 2009). The factors were divided into 3 categories: (1) factors related to the company profile (type, size, origin of capital); (2) factors related to the manager profile (education, experience, and managed department); (3) factors related to the operations of the management accounting department (organisation, frequency of reporting and frequency of meetings between managers and management accountants).…”

Section: The Perceived Suitability Of Management Accounting Informatimentioning

confidence: 99%

The perceived suitability of management accounting information: a contingency based investigation

Zarzycka¹,

Dobroszek²,

Circa³

et al. 2017

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“…Christensen and Demski (2007) provides an analysis of accounting regulation. Various types of performance evaluation problems have been analyzed by Baiman and Baldenius (2009), Budde (2009), Demski et al (2009), Dikolli et al (2009), and Drymiotes (2008. More general issues related to using the accounting system to provide incentives are found in Dutta andFan (2009), Fjell andForos (2008), Nagar et al (2009), Pfeiffer and Velthuis (2009), and Rothenberg (2009.…”

Section: Good Researchmentioning

confidence: 99%

Good Analytical Research

Christensen

2011

European Accounting Review

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The purpose of this commentary is to address the issues raised by Ohlson from the point of view of analytical accounting research. The aim is not only to provide some input to young researchers who are going to publish good research using analytical methods, but also to give some hints to help users of analytical accounting research to understand and interpret the findings of this type of research. Ohlson has taken on a task of identifying a set of critical factors which are likely to lead to successful research. Good research is defined as research that makes an impression. Thus, it is not enough to get the research published - not even in a premier journal. The research should have an impact, the community should learn something. As Ohlson notes, there is enough 'ordinary' research. In my view this is the right attitude. Short-term optimization is also widespread in the research community and that is not what we should strive for. With the objective in place, I will continue to analyze the question in relation to analytical research. I start out discussing the aim of analytical research by providing a few examples of good models. The first is the Feltham-Ohlson model and the second is the agency model. Both are simple and elegant models dealing with difficult issues. The analysis proceeds to characterize good models. A good model is a simple model that zooms in on the problem under scrutiny. It is a 'minimal' model that contains the problem and nothing outside the problem. I then proceed to characterize good research in an analytical framework. This is research that tackles a problem that is of interest to the users and the researcher. In this process I also identify current notable analytical research. Finally, I contrast this to the recommendations of Ohlson.

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Variance analysis and linear contracts in agencies with distorted performance measures

Cited by 11 publications

References 21 publications

Balanced Scorecards: A Relational Contract Approach

Balanced Scorecards: A Relational Contract Approach

The perceived suitability of management accounting information: a contingency based investigation

Good Analytical Research

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