The Use of Financial Incentives in SMEs

Abstract

Despite the importance of SMEs in the economy, both in terms of employment and value created, management accounting research in SMEs has been sparse (Mitchell and Reid 2000). Other authors have studied the adoption of MCS and the use of HR practices in early stage/startup companies (Barron et al. 1996, 1999; Hellman and Puri 2002; Davila 2005; Davila and Foster 2007), but no evidence has been collected on the use of financial incentives on managers’ compensation schemes. Hence, I contribute to the literature by analyzing i) the determinants of the use of financial incentives, defined as a percentage of the total compensation; ii) the performance metrics used on those financial incentives; iii) the determinants of the use of nonfinancial measures; and iv) the importance of incentives to its recipients. Using data from 1,039 questionnaires answered by CEOs and CFOs of SMEs from a European country, I find no evidence that the use of incentives is significantly related with firm size and presence of venture capital. I find evidence that the use of incentives is significantly and positively related with family-own, use of MCSs, individual performance and firm performance. Firm age has a negative and statistically significant effect on the use of incentives. The majority of the respondents have an incentive scheme that includes an evaluation by their supervisors. I find that the measures more widely used in the incentive scheme are Net Income and Sales, and the least used are EVA and ROE. I find that individual performance is not associated with the use of nonfinancial measures but firm performance is. Finally, I find that there is a positive and significant relationship between the level of incentives and the importance attributed to those incentives.