Choice of performance measures for bonus plan: implications for firm performance and promotions

Abstract

ABSTRACT In this study, we examine the impact of a change in the bonus-based incentives on firm performance and promotions. We use both a proprietary dataset and a field-based survey of a leading bakery chain in Japan that changed its bonus determination from focusing on nonfinancial measures to financial measures. We find that firm performance declines under the new bonus plan due to a misalignment between the choice of performance measures and the bakery’s customer-focused strategy. Moreover, supervisors consider performance measures other than what is intended by the firm for promotions i.e., financial measures) when they perceive these measures to be underweighted from the perspective of temporal alignment of the incentive system. This study contributes to prior literature by documenting the impact of a change in bonus plan on firm performance and promotions decisions, where empirical evidence is limited.