Asymmetric information in the workplace is associated with moral hazard problems since individuals
are assumed to act in their own self-interest (Baiman, 1982; Holstrum, 1979). Owners are unable to
perfectly observe individuals’ actions and thus cannot contract on the basis of those actions (Holstrum,
1979). Instead, owners must monitor and control individuals’ actions by collecting appropriate information
in an attempt to align objectives between parties. The informativeness principle suggests that
principles, when designing executive compensation, will include non-financial measures if they provide
information beyond that provided by traditional financial accounting measures. This is consistent with
Holstrum (1979) who analytically demonstrates that an optimal contract can include multiple measures,
regardless of the measure’s noise, as long as each measure provides incremental information.