Goal Congruence and Evaluation of Performance Measures

The role that congruence between the principal's goals and the agent's incentives plays in the evaluation of alternative performance measures is examined in the context of a multi-task agency model. Rank ordering the value of performance measures requires a distinction between their congruent and incongruent sensitivities, and is found to depend critically on the agent's aversion to risk. Goal congruence is shown to be a relatively more important consideration than the sensitivity and precision of a performance measure for agents, such as senior executives, with lower risk aversion. The incremental value of a adding a second performance measure to the contract and its impact on effort along the different dimensions depend on whether the incongruent sensitivities of the two measures reinforce or offset each other. Application of these results is illustrated in the context of evaluating the labor efficiency variance measure and a quality measure in motivating the optimal allocation of shop floor worker effort between productivity and quality enhancing tasks.