The Performance Measurement Trap

This paper investigates the effect of performance measurement on the optimal effort allocation by salespeople when firms are concerned about retention of salespeople with higher abilities. It shows that introducing a salesperson performance measurement may result in productivity, profit, and welfare losses when all market participants opti-mally respond to the expected information provided by the measurement and the (ex post) optimal retention efforts of the firm cannot be (ex ante) contractually prohibited. In other words, the dynamic inconsistency of the management problems of inducing the desired effort allocation by the salespeople and the subsequent firm objective to retain high-ability salespeople may result in performance measurement yielding an inferior outcome. ©2019 INFORMS.