On the Use of Nonfinancial Performance Measures in Management Compensation
AbstractIt is often claimed that (i) managers work too hard on operational issues and do not spend enough effort on strategic activities, and (ii) something can be done about this by introducing nonfinancial performance measures, as for instance with a balanced scorecard. We give an explanation for both claims in a formal model. The distortion toward operational effort arises because with financial performance measures strategic effort can only be rewarded in the future. But renegotiation-proof long-term compensation plans entail too weak variable components in the future. This problem can be reduced by introducing performance measures that help to disentangle strategic and operational effects. Copyright (c) 2002 Massachusetts Institute of Technology.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.
Volume (Year): 11 (2002)
Issue (Month): 3 (09)
Contact details of provider:
Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/
Other versions of this item:
- Dirk Sliwka, 2001. "On the Use of Nonfinancial Performance Measures in Management Compensation," Bonn Econ Discussion Papers bgse29_2001, University of Bonn, Germany.
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmidt, Klaus M. & Schnitzer, Monika, 1995.
"The interaction of explicit and implicit contracts,"
Elsevier, vol. 48(2), pages 193-199, May.
- Monika Schnitzer, 1994. "The Interaction of Explicit and Implicit Contracts," Discussion Paper Serie A 452, University of Bonn, Germany.
- Narayanan, M P, 1985. " Managerial Incentives for Short-term Results," Journal of Finance, American Finance Association, vol. 40(5), pages 1469-84, December.
- Hermalin, Benjamin E. & Katz, Michael L., 1990.
"Moral Hazard and Verifiability: The Effects of Renegotiation in Agency,"
Department of Economics, Working Paper Series
qt1678w3w9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-53, November.
- Benjamin E. Hermalin and Michael L. Katz., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Economics Working Papers 90-141, University of California at Berkeley.
- Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 655-69, November.
- Ma, C.A., 1991.
"Renegotiation and Optimality in Agency Contracts,"
29, Stanford - Institute for Thoretical Economics.
- Bushman, Robert M. & Indjejikian, Raffi J. & Smith, Abbie, 1996. "CEO compensation: The role of individual performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 161-193, April.
- Chen, Yongmin, 1994. "Conflicting interests in information disclosure and short-term orientation of firms," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 211-225, June.
- Fudenberg, Drew & Tirole, Jean, 1990.
"Moral Hazard and Renegotiation in Agency Contracts,"
Econometric Society, vol. 58(6), pages 1279-1319, November.
- Drew Fudenberg & Jean Tirole, 1988. "Moral Hazard and Renegotiation in Agency Contracts," Working papers 494, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bengt Holmstrom & Paul R. Milgrom, 1985.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Cowles Foundation Discussion Papers
742, Cowles Foundation for Research in Economics, Yale University.
- Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
- John R. Hauser & Duncan I. Simester & Birger Wernerfelt, 1994. "Customer Satisfaction Incentives," Marketing Science, INFORMS, vol. 13(4), pages 327-350.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Jens Robert Schöndube, 2007. "Early versus late effort in dynamic agencies with learning about productivity," FEMM Working Papers 07026, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
- Dutta, Sunil & Reichelstein, Stefan J., 2002. "Leading Indicator Variables, Performance Measurement and Long-Term versus Short-Term Contracts," Research Papers 1756, Stanford University, Graduate School of Business.
- Dutta, Sunil & Reichelstein, Stefan J., 2004. "Stock Price, Earnings and Book Value in Managerial Performance Measures," Research Papers 1873, Stanford University, Graduate School of Business.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.