ABSTRACT This paper studies the incentive effects of a balanced scorecard within a multitask agency framework under both formal and relational contracts. First, the main characteristics of the balanced scorecard are analyzed with respect to performance measure congruity. It is shown that under complete verifiability, a properly designed balanced scorecard is capable of perfectly aligning the interests of owners and employees by means of an explicit contract. I then investigate whether subjective performance evaluation is beneficial when not all the scorecard measures are contractible. It emerges that congruity of the contractible scorecard measures constrains a purely implicit incentive contract, but the first‐best solution may still be obtained through a combination of formal and relational contracts. Furthermore, a purely explicit contract in most cases can be improved by incorporating subjective rewards.

ABSTRACT We study the properties of long-term bonus pools (BPs) with rollover provision in a multiperiod moral hazard setting, where the principal uses subjective information to privately assess the agent’s performance and the agent is protected by limited liability (LL). To provide incentives, the principal funds a multiperiod BP with a fixed payment that may be distributed over time to the agent and a third party. We find that the optimal long-term BP contract features performance targets that are contingent on past performance. Specifically, high subjective performance implies an easy target, and low subjective performance implies a difficult target. To implement the long-term BP contract, the principal provides nondichotomous performance reports. The study contributes to the literature that discusses the mechanisms that make subjective performance information useful for incentive contracting. JEL Classifications: D82; M52; M54.