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 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.

Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness

2008 ◽  
Vol 20 (2) ◽  
pp. 55-71 ◽  
Author(s):  
Chong M. Lau ◽  
Antony Moser
Keyword(s):  
Performance Measures ◽  
Evaluation Criteria ◽  
Performance Criteria ◽  
Financial Measures ◽  
The United Kingdom ◽  
Nonfinancial Measures ◽  
Nonfinancial Performance ◽  
Employee Behaviors ◽  
Nonfinancial Performance Measures

Recent suggestions that nonfinancial measures are essential to overcome the inadequacies of traditional financial measures have led to the widespread adoption of such measures. It is, however, unclear how employees react to these new measures. This study hypothesizes that favorable employee behaviors will only occur if employees perceive performance evaluation criteria as fair. It is therefore important to ascertain if the use of nonfinancial measures as performance criteria is procedurally fair. Based on a sample of 149 managers from the United Kingdom, the results indicate that the use of nonfinancial performance measures was perceived as procedurally fair. We also find that such perceptions are associated with higher organizational commitment which, in turn, enhances employee job performance.

On the Association between Current Period Budget Target Achievability and the Properties of Nonfinancial Measures

2016 ◽  
Vol 29 (2) ◽  
pp. 47-62 ◽  
Author(s):  
Jizhang Huang ◽  
Ramji Balakrishnan ◽  
Fei Pan
Keyword(s):  
Performance Metrics ◽  
Incentive Payment ◽  
Positive Interaction ◽  
Financial Measures ◽  
Current Period ◽  
Nonfinancial Measures ◽  
Nonfinancial Performance ◽  
Incentive Contracting ◽  
Future Outcomes

ABSTRACT Firms usually employ nonfinancial performance metrics (NFPMs) to measure progress toward long-term outcomes. They also often evaluate current performance by comparing outcomes on financial measures with budgeted targets. Thus, they can motivate actions that sacrifice current profit for favorable future outcomes directly by increasing the rewards for such actions and indirectly by reducing their opportunity cost. Combining these arguments, we examine the relation between the properties (congruity and measurability) of NFPMs used in incentive contracting and the achievability of the current period budget target, where achievability is the probability of obtaining the incentive payment tied to current period performance. Survey data from 179 divisions in Chinese firms support our prediction of a positive (negative) association between the congruity (measurability) of NFPMs and budget achievability. We also document an expected positive interaction effect between congruity and measurability.

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.

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.

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.

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.

Nonfinancial Performance Measures and Physician Compensation

2010 ◽  
Vol 22 (1) ◽  
pp. 57-64
Author(s):  
Shane S. Dikolli
Keyword(s):  
Empirical Evidence ◽  
Survey Data ◽  
Performance Measures ◽  
Pay For Performance ◽  
Clear Definition ◽  
Physician Compensation ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures ◽  
Definition Of

ABSTRACT: The Evans et al. (2010; hereafter EKNP) study maps rich survey data into plausible proxies for an array of conceptual variables of interest. It documents novel empirical evidence of determinants of the use of contractible performance measures and demonstrates the importance of nonfinancial performance measures (NPMs) in compensating physicians. The study also highlights the importance to future NPM researchers of a clear definition of NPMs and the application of that definition consistently throughout a given study. In addition, it is conceivable that the variables the EKNP study uses as moderators of the pay-for-performance relation might also moderate pay-for-complexity and pay-for-size relations. Finally, a further path forward from the study’s context is that physician attributes, which can be measured in creative ways, likely affect physician compensation.

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