This paper characterizes optimal pay-performance sensitivities of compensation contracts for managers who have private information about their skills, and those skills affect their outside employment opportunities. The model presumes that the rate at which a manager's opportunity wage increases...

This paper analyzes a dynamic moral hazard problem in which the agent's unobservable effort in each period affects both current and future cash flows. For incentive contracting purposes, the principal can rely on realized and projected future cash flows. We find that a properly structured...

We examine alternative performance measures for a manager who has superior information about the profitability of an investment project and who contributes to periodic operating cash flows through his efforts. We find that residual income based on a suitably chosen depreciation schedule is an...

In this article we develop a multiperiod agency model to study the role of leading indicator variables in managerial performance measures. In addition to the familiar moral hazard problem, the principal faces the task of motivating a manager to undertake "soft" investments. These investments are...

We study a setting wherein a divisional manager undertakes personally costly effort to improve the profitability of an investment project. The manager's choice of innovation effort is subject to a holdup problem because of the ex post opportunism on the part of headquarters. We analyze and...

This survey advocates the use of dynamic models to examine the incentive properties of commonly used accounting performance metrics. Drawing from recent work in this emerging field, the survey illustrates how one can use tractable multiperiod models to shed light on questions of fundamental...

This paper develops a multiperiod principal-agent model in which a manager must be given incentives to undertake investments and to exert personally costly effort. Investments are "soft" (e.g., intangible assets) and therefore entail measurement errors for the accounting system as it seeks to...

This paper develops a multiperiod agency model to study the use of leading indicator variables in managerial performance measures. In addition to the familiar moral hazard problem, the principal faces the task of motivating a manager to undertake "soft" investments. These investments are not...