IS THE SCORECARD BALANCED? AN INVESTIGATION OF THE APPLICATION OF NONFINANCIAL MEASURES IN CEO COMPENSATION CONTRACTS ON FIRM PERFORMANCE

Abstract

ABSTRACT Prior research implies a balance between financial and nonfinancial performance metrics (NFPM) is required to achieve differing dimensions of managerial actions for optimal firm performance. The combination providing a balance between short-term performance and long-term strategic objectives leading to improved financial performance of the firm. However, extant research is inconclusive regarding the way NFPMs influence managerial actions. In this paper, I investigate whether managerial intertemporal decisions are influenced by the application (short-term/long-term) of NFPM used in conjunction with financial measures. The paper finds empirical evidence that using short-term NFPM in conjunction with financial measures in evaluating performance is positively associated with short-term market performance. Although I found no association between long-term NFPM and either accounting-based or market-based long-term firm performance. Notwithstanding the limitations of this study, understanding the corollary between the use of specific NFPM (short-term/long-term) and specific firm performance (short-term or long-term) is important in terms of creating a “balanced scorecard” and should be of interest to firms seeking to better optimize their executive compensation contracts and better align their performance measurement systems. Keywords nonfinancial, performance measures, balanced scorecard, compensation contracts