On the effects of the degree of discretion in reporting managerial performance

DOI10.1007/S00291-010-0220-5MaRDI QIDQ538488zbMATH OpenOpenAlexFDO

Authors Anja De Waegenaere, Jacco L. Wielhouwer

Publication date 25 May 2011

Published in OR Spectrum (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial 4.0 International

Full work available at URL https://doi.org/10.1007/s00291-010-0220-5

zbMATH Keywords

compensationoptimal contractprincipal-agent modelreporting flexibility

Mathematics Subject Classification ID

Management decision making, including multiple objectives (90B50)

Review text

The authors consider a principal-agent model in which the agent's compensation depends on a noisy performance signal and the agent has the right to choose the measurement method. It is shown that a limited level of reporting flexibility is necessary for an optimal contract to exist. Results on the effect of increased flexibility on the level of compensation, on the manager's expected utility and the expected cost of compensation are derived. These results are further used to investigate implications of increased reporting flexibility for principal and manager and the effect of high costs of reporting flexibility.

Recommendations

• Career concerns and performance reporting in optimal incentive contracts
• Discretionary rewards as a feedback mechanism
• Voluntary ambiguity in incentive contracts
• The Optimal Amount of Discretion to Allow in Disclosure
• A variational approach to contracting under imperfect observations

Cites work

• An Analysis of the Principal-Agent Problem
• Managerial reporting discretion and the truthfulness of disclosures

Cited in

(3)

• Discretionary rewards as a feedback mechanism
• Discretion in managerial bonus pools
• Managing with Style: The Effect of Managers on Firm Policies

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