The sensitivity of a performance measure is the rate at which the expected value of the performance measure increases as the manager works harder. Precision, or noise, is the reciprocal of the variance of the performance measure.
Refer to Example 9.6. Calculate the percentage increase in the expected value of reported net income (i. e., its sensitivity) as the manager’s effort increases from shirk ( a2 ) to work hard (a1). Also calculate the precision of net income in this example, given that the man-ager works hard.