An Empirical Investigation of an Incentive Plan Based on Nonfinancial Performance Measures

Abstract

Recent studies report an increasing use of nonfinancial measures such as product quality, customer satisfaction and market share in performance measurement an compensation systems. A growing literature suggests that nonfinancial performance measures are better predictors of long-term performance and, therefore, are used to help refocus managers on the long-term aspects of their actions. However, little empirical evidence is available on the relation between nonfinancial and financial performance measures, 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 are significantly associated with future financial performance. The results also suggest that nonfinancial measures contain additional information not reflected in the past financial measures. Furthermore, both nonfinancial and financial performance improve following the implementation of an incentive plan which includes nonfinancial measures.