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 towards 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.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse29_2001.
Date of creation: Aug 2001
Date of revision:
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Performance Measurement; Nonfinancial Measures; Balanced Scorecard; Incentives; Renegotiation;
Other versions of this item:
- Dirk Sliwka, 2002. "On the Use of Nonfinancial Performance Measures in Management Compensation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 487-511, 09.
- 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; Executives; Executive Compensation
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