The Interplay Between Forward-Looking Measures and Target Setting

Abstract

We examine whether financial targets are based on both forward-looking and financial information, rather than on financial information only. We collect sales and performance appraisal data of store managers in a retail chain. The firm issues directives focused on the provision of excellent customer service and assesses store managers’ compliance with these directives subjectively. We demonstrate that, controlling for current sales, compliance with directives scores predicts future sales performance. We find that, next to objective sales information, this forward-looking information is impounded in the next year’s sales target. Finally, we find some evidence that suggests that incorporating forward-looking information improves the accuracy of sales targets. This paper was accepted by Mary Barth, accounting.