DOI: 10.1111/j.1475-679X.2007.00246.x Journal of Accounting Research Vol. 45 No. 3 June 2007 Printed in U.S.A. Performance Measure Congruity and the Balanced Scorecard J ¨ ORG BUDDE * Received 15 September 2005; accepted 20 December 2006 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 con- tract, 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. 1. Introduction The last decade has witnessed the rise of nonfinancial performance mea- sures. Since in a dynamic environment financial measures may not properly represent a firm’s prospects, several methods have been proposed to cap- ture the long-term effects of managerial activities. The balanced scorecard, which is the most prominent of these new concepts, provides a framework in which both financial and nonfinancial success measures are linked by the the firm’s strategy. Following Kaplan and Norton [1992, 1996], the primary objective of the balanced scorecard is to identify, communicate, and implement strategy ∗ University of Bonn, Germany. 515 Copyright C , University of Chicago on behalf of the Institute of Professional Accounting, 2007