The informativeness principle tells us that:
A) information is overrated because employees can always lie about their performance, and detecting is costly and counter productive.
B) you must use as much information as possible to develop compensation contracts, evenif the cost of obtaining the information is unreasonable.
C) you must use just sufficient information as possible to develop compensation contracts, as long as the cost of obtaining the information is reasonable.
D) you must use as much information as possible to develop compensation contracts, as long as the cost of obtaining the information is reasonable.

Question

Quizplus · Accepted Answer

The informativeness principle suggests that compensation contracts must use as much information as possible to develop contracts, as long as the cost of obtaining the information is reasonable. This principle ensures that employees are rewarded according to their performance, which can motivate them to perform better. However, there are logistical and economic costs associated with obtaining information, such as time and resources. Therefore, the principle suggests that a reasonable balance must be maintained such that the costs of obtaining the information are not too high compared to the benefits of using that information in the compensation contract.

The Informativeness Principle Tells Us That