An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures

Abstract

Recent studies report an increasing use of nonfinancial measures such as product quality, customer satisfaction, and market share in performance measurement and compensation systems. A growing literature suggests that because current nonfinancial measures are better predictors of long-term financial performance than current financial measures, they help refocus managers on the long-term aspects of their actions. However, little empirical evidence is available on the relation between nonfinancial measures and financial performance, and even less is known about performance impacts of incorporating nonfinancial measures in incentive contracts. Using time-series data for 72 months from 18 hotels managed by a hospitality firm, this study provides empirical evidence on the behavior of nonfinancial measures and their impact on firm performance. The results indicate that nonfinancial measures of customer satisfaction are significantly associated with future financial performance and contain additional information not reflected in the past financial measures. Furthermore, both nonfinancial and financial performance improve following the implementation of an incentive plan that includes nonfinancial performance measures.

Value Relevance of Financial and Non-Financial Information to Investor Decision

“…Short-and long-term strategies bringing the company into better condition will be published concurrently with the company's annual report. Non-financial information studied for its relationship to the company performance will result in some authentications, indicating that non-financial measure has significant relationship to the future company performance (Banker, et al,2000;Ittner, et al, 2003;Hussain, et al,2002). Based on the statement above, the following hypotheses can be formulated.…”

Customer Satisfaction in the Mobile Telecom Industry in Bahrain: Antecedents and Consequences

“…When perceived performance matches or exceeds expectations, the customer becomes satisfied. Conversely, when perceived performance is below expectations, the customer becomes dissatisfied (Oliver, 1993;Mittal, Kumar, & Tsiros, 1999;Westbrook & Oliver, 1991;Banker, Potter, & Srinivasan, 2000). Satisfied customers will repeat the purchase, be brand loyal, convey positive word-of-mouth advertising, and all these will enhance sales (Dispensa, 1997;Aaker, 1992;Fornell, 1992;Oliver, 1997).…”

Development of a questionnaire for assessing work unit performance

“…However, research on the link between non-financial performance measures and financial performance produced mixed results. Three studies reported positive associations between customer satisfaction and financial performance (Anderson, Fornell & Lehmann, 1994;Banker, Potter & Srinivasan, 2000;Ittner & Larcker, 1996). Further research supported claims that customer satisfaction is a leading indicator of future consumer purchase behaviour, and growth in customers and current market values.…”