ABSTRACT: Managerial bonus payments are frequently determined by both objective and subjective indicators of managerial performance. By its very nature, subjective information is not verifiable for contracting purposes. The inclusion of such information in managerial bonus schemes therefore requires a principal to retain discretion in authorizing actual bonus payments. At the same time, the principal must be able to commit to an overall bonus pool that will be paid out either inside or outside the agency. Our analysis examines the structure of optimal bonus pool arrangements. The non‐verifiability of the subjective indicators changes many of the predictions obtained in traditional agency settings with verifiable performance indicators. In particular, our results address the contractual value of additional information variables, the desirability of compressed incentive schemes, and the nature of relative performance evaluation in settings with multiple agents.
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Research Article| January 01 2009
Objective versus Subjective Indicators of Managerial Performance
The Accounting Review (2009) 84 (1): 209–237.
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Madhav V. Rajan, Stefan Reichelstein; Objective versus Subjective Indicators of Managerial Performance. The Accounting Review 1 January 2009; 84 (1): 209–237. doi: https://doi.org/10.2308/accr.2009.84.1.209
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