Properties Of Performance Measures And The Demand For Discretion In Incentive Contracts

We examine how the congruity and the measurability of performance measures affect the demand for discretion in incentive contracting. We test our hypotheses using survey data from 179 profit center managers in China. Focusing on the use of non-financial performance measures, we predict and find that the demand for discretion increases as measurability decreases. Furthermore, congruity amplifies the rate of increase in the demand for discretion. Our findings add to the literature on the use of discretion in incentive contracting.