Balanced Scorecards: A Relational Contract Approach

Ola Kvaløy and Trond Olsen

No 8922, CESifo Working Paper Series from CESifo

Abstract: Reward systems based on balanced scorecards typically connect pay to an index, i.e. a weighted sum of multiple performance measures. We show that such an index contract may indeed be optimal if performance measures are non-verifiable so that the contracting parties must rely on self-enforcement. Under commonly invoked assumptions (including normally distributed measurements), the optimal self-enforcing (relational) contract between a principal and a multitasking agent is an index contract where the agent gets a bonus if a weighted sum of per-formance outcomes on the various tasks (the index) exceeds a hurdle. The weights reflect a trade-off between distortion and precision for the measures. The efficiency of the contract improves with higher precision of the index measure, since this strengthens incentives. Correlations between measurements may for this reason be beneficial. For a similar reason, the principal may also want to include verifiable performance measures in the relational index contract in order to improve incentives.

Keywords: incentives; performance measures; relational contracts (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cta and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp8922.pdf (application/pdf)

Related works:
Journal Article: Balanced Scorecards: A Relational Contract Approach (2023)
Working Paper: Balanced scorecards: a relational contract approach (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8922

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().