Gaming Nonfinancial Performance Measures

Abstract

This multitask agency model examines the use of nonfinancial performance measures. The first effort affects only current-period profit. The second effort affects only customer satisfaction, which increases future profits. The third effort (shifting effort) simultaneously affects both performance measures, increasing one and decreasing the other. In some cases, shifting increases the principal's expected surplus. In others, the agent uses it to “arbitrage” the contract by shifting units into the more heavily weighted performance measure. Shifting's dual nature implies that it can either increase or decrease the incremental value of customer satisfaction as a performance measure. The optimal contract may entail a negative weight on customer satisfaction.