Managerial Retention Cost, Manager Specific Effort and the Use of Leading Indiactors

This study examines the role of leading indicators in a managerial contracting setting. For the purpose of incentive provision when the outcome of the manager's activities are in the long run, the use of leading indicators such as customer satisfaction is often observed. In the two-period contract setting in this paper, I focus on the setting where those activities are manager-specific and the firm can gain the outcome of the manager's activities only when the manager stays at the firm in the second period. Under this setting, I show the equilibrium cost to induce the manager to stay at the firm and describe the role of leading indicators. Furthermore, I show the relationship between manager-specific effort exerted in the first period and the effort incentive in the second period. I show, in equilibrium, complementarity between the two kinds of efforts above does not necessarily help improve the incentive of the manager-specific effort in the first period.