Performance Measure Congruity and Diversity in Multi-Task Principal/Agent Relations
01 Jan 2007-
TL;DR: In this article, the authors explored the implications of the nonobservability of the manager's actions and the fact that performance measures are influenced by unobservable, uncontrollable events.
Abstract: SYNOPSIS AND INTRODUCTION: Accounting numbers are frequently used in evaluating management performance, and performance evaluation is an important ingredient in motivating managers. Three significant factors generally create difficulties in developing performance measures for a given manager. First, the actions and strategies implemented by the manager are not observable directly, so the manager cannot be compensated directly for his input into the firm. Second, the full consequences of the manager's actions are not observable, in large part because the impact of those actions extend beyond his subunit of the firm and beyond his time as managerof that subunit. Third, uncontrollable events influence the consequences that are observed. The agency theory literature has explored extensively the implications of the nonobservability of the manager's actions and the fact that performance measures are influenced by unobservable, uncontrollable events. However, this literature has given only limited attention to the fact that performance measures frequently are incomplete or imperfect representations of the economic consequences of the manager's actions.1 On the other hand, discussions of performance evaluation in management accounting texts often raise issues regarding the incompleteness and imperfectness of the accounting numbers that are used as performance measures. For example,
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TL;DR: The main purpose of this paper is to develop a conceptual framework for understanding the literature on the consequences of contemporary performance measurement (CPM) systems and the theories that explain these consequences.
Abstract: The main purpose of this paper is to develop a conceptual framework for understanding the literature on the consequences of contemporary performance measurement (CPM) systems and the theories that explain these consequences. The framework is based on an in-depth review of 76 empirical studies published in high-quality academic journals in the areas of accounting, operations, and strategy. The framework classifies the consequences of CPM into three categories: people’s behaviour, organizational capabilities, and performance consequences. This paper discusses our current knowledge on the impact of CPM, highlighting inconsistencies and gaps as well as providing direction for future research.
524 citations
TL;DR: In this article, the authors investigated to what extent eco-control influences environmental and economic performance in Canadian manufacturing firms and found that eco-management has no direct effect on economic performance.
Abstract: Eco-control is the application of financial and strategic control methods to environmental management. In this study, we investigate to what extent eco-control influences environmental and economic performance. Using survey-data from a sample of Canadian manufacturing firms, the results suggest that eco-control has no direct effect on economic performance. A mediating effect of environmental performance on the link between eco-control and economic performance is observed in different contexts. More specifically, eco-control indirectly influences economic performance in the context of (i) higher environmental exposure, (ii) higher public visibility, (iii) higher environmental concern, and (iv) larger size. This study contributes to the management accounting literature by providing insight into the roles and contributions of management accounting in the context of sustainable development.
505 citations
Book•
01 Jan 2007
TL;DR: The Handbooks of Management Accounting Research (HOMAR) as discussed by the authors is a collection of three volumes of management accounting research, including three volumes from the American Accounting Association (AAMA) notable contribution to management accounting literature.
Abstract: Winner of the Management Accounting section of the American Accounting Association notable contribution to Management Accounting Literature Award Volume One of the Handbook of Management Accounting Research series sets the context for the Handbooks, with three chapters outlining the historical development of management accounting as a discipline and as a practice in three broad geographic settings. Volume Two provides insights into research on different management accounting practices. Volume Three features contributions from some of the most influential researchers in various areas of management accounting research, consolidates the content of volumes one and two, and concludes with examples of management accounting research from around the world. Volumes 1, 2 and 3 are also available as individual product. * ISBN Volume 1: 978-0-08-044564-9 * ISBN Volume 2: 978-0-08-044754-4 * ISBN Volume 3: 978-0-08-055450-1 * Three volumes of the popular Handbooks of Management Accounting Research series now available in one complete set * Examines particular management accounting practices and specific organizational contexts * Adopts a global perspective of management accounting practices Award: "Winner of the Management Accounting section of the American Accounting Association notable contribution to Management Accounting Literature Award."
482 citations
TL;DR: In this article, a conceptual framework for understanding the literature on the consequences of contemporary performance measurement (CPM) systems and the theories that explain these consequences is developed. But this framework is based on an in-depth review of 76 empirical studies published in high-quality academic journals in the areas of accounting, operations, and strategy.
479 citations
TL;DR: In this article, the authors stress the need for a sound conceptual specification of research constructs prior to fitting them to explanatory models and highlight the importance of such a specification especially in the case of practice-defined variables.
Abstract: This paper stresses the need for a sound conceptual specification of research constructs prior to fitting them to explanatory models It emphasizes that in addressing the conceptual level of the predictive validity framework [Libby, R, Bloomfield, R, & Nelson, M (2002) Experimental research in financial accounting Accounting, Organizations and Society, 27, 775–810], special attention must be paid to two issues: (1) the production of a specific agreed-upon meaning and domain for each construct of interest; and (2) the specification and conceptual justification of the nature and direction of the epistemic relationships between constructs, dimensions and indicators (ie, reflective vs formative models; latent vs emergent models) The paper highlights the importance of both issues especially in the case of practice-defined variables, and it provides guidelines on how to address both aspects of conceptual specification While the issues raised are pertinent to many research areas, the paper concentrates on the implications for management accounting and control systems (MACS) research, using interactive use of control systems [Simons, R (1995a) Levers of control Boston: Harvard Business School Press] to illustrate how researchers should go about specifying meaning and epistemic relationships in MACS research
409 citations
References
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TL;DR: In this article, a principal-agent model that can explain why employment is sometimes superior to independent contracting even when there are no productive advantages to specific physical or human capital and no financial market imperfections to limit the agent's borrowings is presented.
Abstract: Introduction In the standard economic treatment of the principal–agent problem, compensation systems serve the dual function of allocating risks and rewarding productive work. A tension between these two functions arises when the agent is risk averse, for providing the agent with effective work incentives often forces him to bear unwanted risk. Existing formal models that have analyzed this tension, however, have produced only limited results. It remains a puzzle for this theory that employment contracts so often specify fixed wages and more generally that incentives within firms appear to be so muted, especially compared to those of the market. Also, the models have remained too intractable to effectively address broader organizational issues such as asset ownership, job design, and allocation of authority. In this article, we will analyze a principal–agent model that (i) can account for paying fixed wages even when good, objective output measures are available and agents are highly responsive to incentive pay; (ii) can make recommendations and predictions about ownership patterns even when contracts can take full account of all observable variables and court enforcement is perfect; (iii) can explain why employment is sometimes superior to independent contracting even when there are no productive advantages to specific physical or human capital and no financial market imperfections to limit the agent's borrowings; (iv) can explain bureaucratic constraints; and (v) can shed light on how tasks get allocated to different jobs.
5,678 citations
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TL;DR: In this paper, the authors study moral hazard with many agents and focus on two features that are novel in a multiagent setting: free riding and competition, and show that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally.
Abstract: This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.(This abstract was borrowed from another version of this item.)
4,125 citations
TL;DR: In this article, the authors study moral hazard with many agents and focus on two features that are novel in a multiagent setting: free riding and competition, and show that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally.
Abstract: This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.
3,991 citations
TL;DR: In this paper, the authors consider the problem of providing incentives over time for an agent with constant absolute risk aversion, and find that the optimal compensation scheme is a linear function of a vector of accounts which count the number of times that each of the N kinds of observable events occurs.
Abstract: We consider the problem of providing incentives over time for an agent with constant absolute risk aversion. The optimal compensation scheme is found to be a linear function of a vector of N accounts which count the number of times that each of the N kinds of observable events occurs. The number N is independent of the number of time periods, so the accounts may entail substantial aggregation. In a continuous time version of the problem, the agent controls the drift rate of a vector of accounts that is subject to frequent, small random fluctuations. The solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule. If the principal can observe only coarser linear aggregates, such as revenues, costs, or profits, the optimal compensation scheme is then a linear function of those aggregates. The combination of exponential utility, normal distributions, and linear compensation schemes makes computations and comparative statics easy to do, as we illustrate. We interpret our linearity results as deriving in part from the richness of the agent's strategy space, which makes it possible for the agent to undermine and exploit complicated, nonlinear functions of the accounting aggregates.
2,843 citations
TL;DR: In this article, the authors show that the optimal way of implementing an action by an agent can be found by solving a convex programming problem, and they use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.
Abstract: Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent’s utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative procedure. If the agent’s preferences over income lotteries are independent of action, we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem. We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.
2,743 citations
"Performance Measure Congruity and D..." refers methods in this paper
...Appendix B Minimum Cost Contracts for the Set of Implementable Actions Grossman and Hart [GH] (1983) use a two step approach to solve the principal's problem in a standard agency problem....
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