Effects of Financial Versus Nonfinancial Performance, Financial Measures' Importance, and Presentation Order on Corporate Managers' Performance Evaluations

Abstract

Field research has reported managers tend to favor financial measures and to discount or ignore nonfinancial measures (Ittner et al. 2003). Experimental results indicate managers rate financial measures as more relevant, more reliable, and more comparable than nonfinancial measures (Cauvin et al. 2007). However, in contrast to prior field research, experimental findings indicate financial measures are not weighted more heavily than nonfinancial measures in evaluation judgments (Cauvin et al. 2007). Further, more experienced managers placed more weight on nonfinancial measures than on financial measures when evaluating performance (Cauvin et al. 2007). Recent psychology research has shed new light on cognitive limitations of processing multiple information items: generally, humans can mentally process no more than four items at a time (Halford et al. 2005). In a 2x2x2 experimental design, we find the relative weights managers place on financial and nonfinancial performance measures depend on both presentation order and on the importance of the particular financial measures included in a performance report. When financial measures are presented before nonfinancial measures and the financial measures include items rated as more important, e.g., Net Income Growth instead of Return on Sales and ROI instead of Market Share (in sales dollars), managers who perform better on financial measures are rated higher than managers who perform better on nonfinancial measures. On the other hand, when nonfinancial measures are presented first and the included financial measures are less important, managers who excel on nonfinancial measures are rated higher. Thus, the relative weights superiors place on financial and nonfinancial measures in evaluating corporate managers' performance is substantially influenced both by subconscious cognitive processing limitations as well as by the particular performance measures employed.