Dynamic performance measurement with intangible assets

The increasing importance of intangible assets in modern economies is driving companies to include measures of intangible assets in managerial performance evaluations. For the multiperiod principal-agent model analyzed in this paper, a manager must be motivated to invest in intangible assets like customer satisfaction or product quality. The intangible asset is not verifiable for contracting purposes, but the parties can rely on a noisy indicator of the current asset value. I derive a class of value added performance measures, which effectively aggregate the current cash flow and consecutive realizations of the noisy indicator of the intangible asset. This class of performance measures is shown to be optimal for different scenarios regarding contract commitment and observability of the actual investment decisions. Long-term contracts are examined as a baseline. However, in practice firms usually adopt shorter medium-term contracts that are periodically renegotiated. I show that this more realistic contracting scenario yields the same investment patterns and efficiency levels as those obtained under long-term commitment.