Gaming Nonfinancial Performance Measures

2002 ◽  
Vol 14 (1) ◽  
pp. 119-133 ◽  
Author(s):  
Michael J. Smith
Keyword(s):  
Customer Satisfaction ◽  
Performance Measures ◽  
Performance Measure ◽  
Optimal Contract ◽  
Dual Nature ◽  
Agency Model ◽  
Current Period ◽  
Incremental Value ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures

This multitask agency model examines the use of nonfinancial performance measures. The first effort affects only current-period profit. The second effort affects only customer satisfaction, which increases future profits. The third effort (shifting effort) simultaneously affects both performance measures, increasing one and decreasing the other. In some cases, shifting increases the principal's expected surplus. In others, the agent uses it to “arbitrage” the contract by shifting units into the more heavily weighted performance measure. Shifting's dual nature implies that it can either increase or decrease the incremental value of customer satisfaction as a performance measure. The optimal contract may entail a negative weight on customer satisfaction.

An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures

2000 ◽  
Vol 75 (1) ◽  
pp. 65-92 ◽  
Author(s):  
Rajiv D. Banker ◽  
Gordon Potter ◽  
Dhinu Srinivasan
Keyword(s):  
Customer Satisfaction ◽  
Financial Performance ◽  
Empirical Evidence ◽  
Performance Measures ◽  
Financial Measures ◽  
Nonfinancial Measures ◽  
Nonfinancial Performance ◽  
Incentive Plan ◽  
Nonfinancial Performance Measures

Recent studies report an increasing use of nonfinancial measures such as product quality, customer satisfaction, and market share in performance measurement and compensation systems. A growing literature suggests that because current nonfinancial measures are better predictors of long-term financial performance than current financial measures, they help refocus managers on the long-term aspects of their actions. However, little empirical evidence is available on the relation between nonfinancial measures and financial performance, and even less is known about performance impacts of incorporating nonfinancial measures in incentive contracts. Using time-series data for 72 months from 18 hotels managed by a hospitality firm, this study provides empirical evidence on the behavior of nonfinancial measures and their impact on firm performance. The results indicate that nonfinancial measures of customer satisfaction are significantly associated with future financial performance and contain additional information not reflected in the past financial measures. Furthermore, both nonfinancial and financial performance improve following the implementation of an incentive plan that includes nonfinancial performance measures.

The Effect of Competition Intensity and Competition Type on the Use of Customer Satisfaction Measures in Executive Annual Bonus Contracts

2014 ◽  
Vol 90 (1) ◽  
pp. 229-263 ◽  
Author(s):  
Clara Xiaoling Chen ◽  
Ella Mae Matsumura ◽  
Jae Yong Shin ◽  
Steve Yu-Ching Wu
Keyword(s):  
Customer Satisfaction ◽  
Interactive Effect ◽  
Joint Effect ◽  
Performance Measure ◽  
Two Dimensions ◽  
Data Availability ◽  
Competition Intensity ◽  
Nonfinancial Performance ◽  
Alternative Measures ◽  
Satisfaction Measures

ABSTRACT This paper empirically examines the interactive effect of competition intensity and competition type on the use of customer satisfaction measures in executives' annual bonus contracts. Specifically, we predict a stronger association between competition intensity in an industry and the use of customer satisfaction measures in executives' annual bonus contracts when the competition is non-price-based than when the competition is price-based. Using hand-collected data from Standard & Poor's (S&P) 1500 firms' disclosures of the use of customer satisfaction measures in executive bonus contracts in 2006 and 2010 proxy statements, we find results consistent with our prediction. Our results are robust to alternative measures of competition type and competition intensity. We also find similar results when we use the weight on customer satisfaction measures in executive bonus contracts as the dependent variable. Our study extends the literature on the effect of competition on the design of managerial incentives by distinguishing between competition intensity and competition type, and providing the first large-sample empirical evidence on the joint effect of these two dimensions of competition on the incentive use of an important nonfinancial performance measure. Data Availability: Data used in this study are obtained from publicly available sources.

Team Incentives and Bonus Floors in Relational Contracts

2020 ◽  
Vol 95 (6) ◽  
pp. 181-212
Author(s):  
Jonathan C. Glover ◽  
Hao Xue
Keyword(s):  
Performance Measures ◽  
Team Performance ◽  
Performance Measure ◽  
Relational Self ◽  
Relational Contracts ◽  
Optimal Contract ◽  
Agent Model ◽  
Strategic Complementarity ◽  
Multi Agent ◽  
The Individual

ABSTRACT Teamwork and team incentives are increasingly prevalent in modern organizations. Performance measures used to evaluate individuals' contributions to teamwork are often non-verifiable. We study a principal-multi-agent model of relational (self-enforcing) contracts in which the optimal contract resembles a bonus pool. It specifies a minimum joint bonus floor the principal is required to pay out to the agents, and gives the principal discretion to use non-verifiable performance measures to both increase the size of the pool and to allocate the pool to the agents. The joint bonus floor is useful because of its role in motivating the agents to mutually monitor each other by facilitating a strategic complementarity in their payoffs. In an extension section, we introduce a verifiable team performance measure that is a noisy version of the individual non-verifiable measures, and show that the verifiable measure is either ignored or used to create a conditional bonus floor.

Recommendations on Disclosure of Nonfinancial Performance Measures

2002 ◽  
Vol 16 (4) ◽  
pp. 353-362 ◽  
Author(s):  
Laureen A. Maines ◽  
Eli Bartov ◽  
Patricia M. Fairfield ◽  
D. Eric Hirst ◽  
Teresa E. Iannaconi ◽  
...  
Keyword(s):  
Performance Measures ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures

Performance Measure Properties and Delegation

2006 ◽  
Vol 81 (4) ◽  
pp. 897-924 ◽  
Author(s):  
Frank Moers
Keyword(s):  
Decision Making ◽  
Financial Performance ◽  
Performance Measures ◽  
Organizational Design ◽  
Performance Measure ◽  
Decision Making Process ◽  
Nonfinancial Performance ◽  
Incentive Problem ◽  
Financial Performance Measures

In this paper, I extend the organizational design literature by examining how the delegation choice is affected by the ability to resolve the incentive problem caused by this delegation. Based on the seminal papers by Grossman and Hart (1986) and Holmstrom and Milgrom (1994), I argue that the ability to resolve the incentive problem depends on the contractibility of financial performance measures versus nonfinancial performance measures, where the contractibility depends on the performance measure properties sensitivity, precision, and verifiability. The empirical results show that, if financial performance measures are “good” (“poor”) incentive measures, i.e., high (low) on sensitivity, precision, and verifiability, then using these measures for incentive purposes increases (decreases) delegation. Overall, the results are consistent with the argument that firms design their decision-making process around the quality of contractible performance measures.

An Empirical Investigation of the Performance Consequences of Nonfinancial Measures

2003 ◽  
Vol 15 (1) ◽  
pp. 193-223 ◽  
Author(s):  
Amal A. Said ◽  
Hassan R. HassabElnaby ◽  
Benson Wier
Keyword(s):  
Performance Measures ◽  
Accounting Performance ◽  
Performance Improvements ◽  
Future Performance ◽  
Nonfinancial Measures ◽  
Stock Market Performance ◽  
Nonfinancial Performance ◽  
Performance Consequences ◽  
Nonfinancial Performance Measures ◽  
Performance Measurement Systems

Firms are increasingly implementing new performance measurement systems to track nonfinancial metrics such as customer and employee satisfaction, quality, market share, productivity, and innovation. This study examines the implications of nonfinancial performance measures included in compensation contracts on current and future performance. Contextual factors, environmental factors, and strategic plans vary across firms and, in turn, adopting appropriate nonfinancial measures determines the performance consequences of such measures. Our findings support the contention that firms that employ a combination of financial and nonfinancial performance measures have significantly higher mean levels of returns on assets and higher levels of market returns. Although we find evidence that the adoption of nonfinancial measures improves firms' current and future stock market performance, we find only partial support for accounting performance improvements. Overall, the results indicate that the association between the use of nonfinancial measures and firm performance is contingent on the firm's operational and competitive characteristics.

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