Financial and non-financial performance measures and managerial short-term orientation: the interactive effect of performance targets

Abstract

In this paper, I examine the incentive effects of both performance measures and performance targets and the linkages between these two components of the incentive system. Furthermore, I examine the theoretical claim that non-financial performance measures provide subordinate managers with incentives to be long-term oriented. Finally, I examine the role of risk aversion in setting performance targets. The empirical results show that the short-term orientation of subordinate managers increases (decreases) with the difficulty of financial (non-financial) performance targets but is not related to the use of either financial or non-financial performance measures for incentive purposes. Further, the difficulty of financial (non-financial) performance targets increases with the use of financial (non-financial) performance measures for incentive purposes, which suggests that performance measures have an indirect effect on managerial behavior. Finally, the relationship between the use of performance measures and performance target difficulty is moderated by the risk aversion of the manager. That is, the relationship is less positive the higher the manager’s risk aversion, which implies that superiors take the risk imposed on the manager into account when setting targets.