Incentive Contracts and Performance Measures Based on Accrual Accounting Numbers

Abstract

This paper investigates the suitability of different incentive schemes to evaluate the performance of investment center managers, when intrafirm coordination problems arise between divisional management and headquarters. The considered performance measures are based on available accounting information: cash flows, depreciation, book value and current investment. We characterize the entire class of time-variant linear performance measures that achieve goal-congruence between both parties. Additionally, several important classes of performance measures, like those based on residual income or cash flows, are discussed in detail.