Sensitivity of CEO Cash Compensation to Financial Performance Measures for Firms Using Nonfinancial Performance Measures in Compensation Contracts

2012 ◽  
Author(s):  
Myojung Cho ◽  
Salma Ibrahim
Keyword(s):  
Financial Performance ◽  
Performance Measures ◽  
Compensation Contracts ◽  
Nonfinancial Performance ◽  
Cash Compensation ◽  
Nonfinancial Performance Measures ◽  
Financial 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.

The Retention of Nonfinancial Performance Measures in Compensation Contracts

2005 ◽  
Vol 17 (1) ◽  
pp. 23-42 ◽  
Author(s):  
Hassan R. HassabElnaby ◽  
Amal A. Said ◽  
Benson Wier
Keyword(s):  
Survival Analysis ◽  
Performance Measures ◽  
Firm Characteristics ◽  
Compensation Contracts ◽  
Adoption Decision ◽  
Nonfinancial Measures ◽  
Initial Implementation ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures ◽  
Time Invariant

This study empirically investigates firms' decisions to retain the use of nonfinancial performance measures as part of the compensation contracts following their initial implementation. Using three-stage regression and survival analysis, we provide explanations for the decision to retain the use of nonfinancial performance measures after controlling for possible endogeneity. Based on a sample of firms that used nonfinancial measures during the period 1993–1998, we find that the appropriate match of nonfinancial measures and firm characteristics and subsequent enhanced performance are crucial factors in deciding whether a firm will retain nonfinancial performance measures in compensation contracts. The analyses provide evidence that the effects of significant firm characteristics on the decision to retain nonfinancial performance measures are time invariant while the effects of performance are time variant during the study period. The results suggest that adverse performance is a reflection of a nonoptimizing initial adoption decision of nonfinancial performance measures while the decision to discard their use in light of the unfavorable performance is an indication of an optimizing decision.

The Effect of Positive and Negative Financial and Nonfinancial Performance Measures on Analysts' Recommendations

2012 ◽  
Vol 24 (2) ◽  
pp. 47-64 ◽  
Author(s):  
Dipankar Ghosh ◽  
Anne Wu
Keyword(s):  
Financial Performance ◽  
Performance Measures ◽  
Differential Effect ◽  
Financial Analysts ◽  
Data Availability ◽  
Financial Measures ◽  
Nonfinancial Measures ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures ◽  
Number Of Firms

ABSTRACT This research experimentally examines the favorable/unfavorable outcomes of a firm's financial and nonfinancial performance measures on financial analysts' recommendation to divest or invest in a firm. The participants were financial analysts who made recommendations ranging from “definitely sell” to “hold” to “definitely buy.” The results show that financial and nonfinancial performance measures and their favorableness have an interactive impact on analysts' recommendations. To be precise, the recommendations were very close to the “definitely sell” anchor when the performance was unfavorable, irrespective of whether the measures presented were financial or nonfinancial. Further, favorableness of performance on nonfinancial measures appears to be irrelevant when performance on financial measures is unfavorable. However, when performance on financial measures is favorable, the effect of nonfinancial performance had a differential effect on analysts' recommendations depending on whether these measures indicated favorable or unfavorable performance. Specifically, when nonfinancial performance was unfavorable, the recommendations were closer to “hold” on average, but the recommendations were closer to “definitely buy” on average when nonfinancial performance was favorable. These results are consistent with our expectations. Overall, given that more and more firms are disclosing nonfinancial measures along with the traditional financial measures, and with an increasing number of firms reporting unfavorable financial performance, the results of this research underline the importance of considering both financial and nonfinancial measures and their outcomes—favorable and unfavorable—on analysts' recommendations. Data Availability: Please contact the authors.

Nonfinancial Performance Measures and Physician Compensation

2010 ◽  
Vol 22 (1) ◽  
pp. 31-56 ◽  
Author(s):  
John Harry Evans ◽  
Kyonghee Kim ◽  
Nandu J. Nagarajan ◽  
Sukesh Patro
Keyword(s):  
Performance Measures ◽  
Value Chain ◽  
The United States ◽  
Control Mechanisms ◽  
Fixed Rate ◽  
Compensation Contracts ◽  
Physician Compensation ◽  
Nonfinancial Measures ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures

ABSTRACT: This study utilizes a national survey of physicians in the United States, administered four times between 1996 and 2005, to examine the use of nonfinancial performance measures in physician compensation contracts. Consistent with agency theory, we find that nonfinancial measures are used more frequently when the measures are more informative; when alternative control mechanisms are complements rather than substitutes; and when external pressures for quality of care and cost containment are greater. Further, we find that contractual relationships in the health care value chain are interrelated; nonfinancial measures are more likely to be used to evaluate physician performance when the physicians’ practice is compensated based on fixed rate payments (i.e., capitation). We also find that physicians’ compensation contracts are more likely to incorporate nonfinancial performance measures when productivity in revenue generation is also used to evaluate performance. Taken together, the results suggest that nonfinancial performance measures play a significant role in physician compensation, acting to balance incentives tied to individual physician productivity.

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.

Audit-Planning Judgments and Client-Employee Compensation Contracts

2004 ◽  
Vol 16 (1) ◽  
pp. 45-61 ◽  
Author(s):  
Shane S. Dikolli ◽  
Susan A. McCracken ◽  
Justin B. Walawski
Keyword(s):  
Performance Measures ◽  
Employee Compensation ◽  
Level Of Evidence ◽  
Audit Risk ◽  
Compensation Contracts ◽  
Audit Planning ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures ◽  
The Impact ◽  
Planning Judgments

This paper investigates, in a laboratory setting, the impact of different types of client-employee compensation contracts on auditors' audit-planning judgments. Self-interested client-executive actions (motivated by executive incentive pay) have been claimed to be at the core of a recent large public company failure and the associated demise of the company's global auditors (Byrne et al. 2002). However, we know relatively little about how client-employee compensation contracts affect the planning choices of auditors. Our main result is that audit-planning judgments are greater (i.e., audit risk is assessed higher and the level of evidence required to perform the audit is assessed higher) if the bonuses are based on financial performance measures rather than nonfinancial performance measures. We also find that audit-planning judgments are greater (i.e., audit risk is assessed higher, internal controls are assessed weaker, and more substantive evidence is required) if client-employee compensation comprises a fixed salary plus bonuses, based on either financial or nonfinancial performance measures, rather than comprises a fixed salary only; however, we find only partial support for the finding with respect to nonfinancial measures. An important implication of these findings is that audit firms may need to pay careful attention to how auditors are trained in strategic systems auditing approaches that rely more on understanding a client's nonfinancial performance measures and less on transaction-based testing.

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