Improving Performance Measures through Managerial Rotation

Abstract

In this study, we examine conditions under which business unit (BU) managers improve performance measures upon which they are evaluated. BU managers often have more information about improving performance measures than corporate managers because they are closer to the actions that cause distortion in performance measures. Consequently, they can either exploit their information advantage and extract rents from inflated performance measure realizations or improve their performance measures and receive implicit rewards from corporate managers. Using a laboratory experiment, we predict and find that improvements to performance measures are higher for BU managers who rotate across business units because managerial rotation lowers the value of BU managers’ information advantage making expected implicit rewards more attractive. By varying the amount of distortion that business unit managers uncover and the value of performance measure improvements to corporate managers, we also examine performance measure improvements under varying circumstances. Our study extends previous research on the involvement of business unit managers in the design of their performance measurement system by documenting that managerial rotation can have beneficial effects.