Can a Uniform Performance Evaluation System Be Efficient?: Analysis of a Multi-Period Agency

• In Event: Management Accounting

Abstract

This study analyzes performance evaluation systems in terms of sufficient aggregation of performance measures in a multi-period setting. The results show that the inter-temporal correlations among performance measures restrict the feasibility of a statistically sufficient aggregation and the nature of an economically sufficient aggregation.
When performance measures are inter-temporally correlated, the optimal aggregation is necessarily characterized by the agent's characteristics and the economic situation of the agency. The results imply that when inter-temporally correlated performance measures are used, an optimal performance evaluation system should be individually tailored for each manager in each firm. A uniform performance evaluation system is not optimal in a multi-period setting because the agency problem now includes the compensation risk, which results from the inter-temporally correlated performance measures and depends on the agent's characteristics and the economic situation of the agency.

Author

• Junwook Yoo, Marshall University