This thesis contains three essays, where I conduct my research using data and managerial practice from the field, and through the lens of economic theory to shed light on a broader understanding of the information contained in performance measures.
Chapter 2 puts forward the idea that company’s use of performance measures can contain information about the desired direction of effort that the principal expects the agent to exert. In this chapter we provide theoretical and empirical evidence that the introduction of an additional performance measure works effectively as communicating the principal’s desired direction of effort to the agents, while the effect is mainly driven by the less experienced agents. For more experienced agents however, the introduction of this performance measure infringes their authority of doing things “in their own way”. Consistent with this message, we are aware that conditional on the agent’s seniority in the firm, the universal performance measure can be imperfect in picking up the agent’s overall contribution to the firm. We provide evidence in
Chapter 4 that the principal resorts to making ex-post adjustment in (senior) agent’s bonus to account for the incompleteness of the pre-set performance measure. Apart from directing and recognizing the agent’s effort, performance measures also serve the role of identifying and gauging agent’s overall value of human capital.
In Chapter 3 I communicate the idea that performance measures, if used properly, can contain information about the extent to which principal distinguishes her assessment of the agents’ current performance from their future potential.