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Investment Incentives from Goal-Incongruent Performance Measures: Experimental Evidence

In: Operations Research Proceedings 2006

Author

Listed:
  • Markus C. Arnold

    (University of Göttingen)

  • Robert M. Gillenkirch

    (University of Göttingen)

  • Susanne A. Welker

    (University of Göttingen)

Abstract

We analyze investment incentives of goal incongruent performance measures in an experiment in which ‘managers’ make one-period investment decisions and ‘owners’ predict these decisions. Three alternative performance measures are considered: earnings, ROI, and residual income. These measures serve as archetypes for a wide variety of measures used in practice. Standard theoretical predictions with respect to the investment incentives of earnings, ROI, and residual income are well documented, and they have become part of the management accounting education (e.g., [5]). They illustrate one of the basic principles of management accounting: ‘you get what you pay for’. As is well known, neither earnings nor ROI is a goal congruent performance measure, whereas residual income is goal congruent due to its conservation property.

Suggested Citation

  • Markus C. Arnold & Robert M. Gillenkirch & Susanne A. Welker, 2007. "Investment Incentives from Goal-Incongruent Performance Measures: Experimental Evidence," Operations Research Proceedings, in: Karl-Heinz Waldmann & Ulrike M. Stocker (ed.), Operations Research Proceedings 2006, pages 381-386, Springer.
    • Handle: RePEc:spr:oprchp:978-3-540-69995-8_62
    DOI: 10.1007/978-3-540-69995-8_62
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