This paper uses an agency theory model in which the agent's actions are multi‐dimensional to analyze the optimal weights to apply to performance measures in a compensation contract. We show how the optimal contract trades off the congruity of the overall performance measure with the desire to minimize the risk imposed upon the agent. In contrast to the single action case, we find that an increase in the sensitivity of a performance measure to an agent's action does not necessarily increase the weight placed on that performance measure, even if that measure is perfectly congruent with the firm's outcome.

Jeffrey Cohen, Thomas Kida, The Impact of Analytical Review Results, Internal Control Reliability, and Experience on Auditors' Use of Analytical Review, Journal of Accounting Research, Vol. 27, No. 2 (Autumn, 1989), pp. 263-276

Inventories, LIFO, Inventories orders, Tax liabilities

ABSTRACT Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of incorporating Environmental, Social, and Governance (ESG) metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm levels in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management's objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance.