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Distortion and Risk in Optimal Incentive Contracts. George Baker Forthcoming, Journal of Human Resources Abstract ：Performance measurement is an essential part of the design of any incentive system. The strength and value of incentives in organizations are strongly affected by the performance measures available. Yet, the characteristics of valuable performance measures have not been well explored in the agency literature. In this paper, I use a multi-task model to develop a two-parameter characterization of performance measures and show how these two parameters distortion and risk affect the value and use of performance measures in incentive contracts. I show that many complex issues in the design of real world incentive contracts can be fruitfully viewed as trade-offs between these two features of performance measures. I also use this framework to analyze the provision of incentives in several specific environments, including RD labs and non-profit organizations. 1. Introduction The provision of incentives to individuals and groups in organizations is one of the central problems in the economics of the firm. A long and varied literature considers the question of what optimal incentive contracts look like (see Gibbons 1998, for a review). Most of this literature examines the use of risky performance measures, and as a result focuses on what Gibbons calls the much studied trade-off between incentives and insurance. Yet, in most incentive contracts in the real world, risk is not a central issue: with the exception of stock-based plans for top executives, most compensation arrangements in fact impose very little risk on employees. In addition, as Predergast (2000) points out, the data do not confirm the existence of a tra