An Empirical Investigation of the Performance Consequences of Nonfinancial Measures

Abstract

Firms are increasingly implementing new performance measurement systems to track nonfinancial metrics such as customer and employee satisfaction, quality, market share, productivity, and innovation. This study examines the implications of nonfinancial performance measures included in compensation contracts on current and future performance. Contextual factors, environmental factors, and strategic plans vary across firms and, in turn, adopting appropriate nonfinancial measures determines the performance consequences of such measures. Our findings support the contention that firms that employ a combination of financial and nonfinancial performance measures have significantly higher mean levels of returns on assets and higher levels of market returns. Although we find evidence that the adoption of nonfinancial measures improves firms' current and future stock market performance, we find only partial support for accounting performance improvements. Overall, the results indicate that the association between the use of nonfinancial measures and firm performance is contingent on the firm's operational and competitive characteristics.

Strategic Performance Measurement System, Organisational Capabilities and Competitive Advantage

“…However, not many studies have been conducted that investigate the consequences of SPMS on competitive advantage. Prior studies such as by Henri (2006a), Said et al (2003) examined the effect of SPMS on performance, particularly financial performance. This study operationalise competitive advantage based on the suggestion by Day and Wesley (1988) and Fitzgerald et al (1991).…”

“…According to them, these four elements are each necessary but are not individually sufficient for creating 'positional advantage'. Only collectively can they help an organisation be unique and gain an edge over their competitors (Hult & Ketchen, 2001;Henri, 2006a) Many studies had been done to examine the performance effect of performance measurement system for example Davis and Albright (2004) ;Said, HassabElnaby, and Wier (2003);and Ittner and Larcker (2001). However, not much attention has been given to the performance effect from the perspective of RBV.…”

Assessing the Performance of Business Unit Managers

“…This is a potentially important finding because extant work that models the choice of non-financial measures omits this variable from analysis (e.g., Ittner, Larcker and Rajan 1997;Said, HassabElnaby and Wier 2003). Our theory suggests that non-financial measures are used in response to increasing interdependencies because they are able to reduce the noise in accounting measures.…”

Balanced Scorecard Perspective on Change and Performance: A Study of Selected Indian Companies

“…Ittner (2008) provides an overview of the statistical evidence on the performance consequences of intangible asset measurement. There are some evidences that non-financial performance measures are positively associated with performance (Abernethy an Lillis, 1995;Ittner and Larcker, 1995;1997;Chenhall, 1997;Perera, Harrison and Pole, 1997;Ittner et al, 2003;Kaynak, 2003;Said et al, 2003;Davis and Albright, 2004). It has been suggested that companies adopting performance measurement system would improve their corporate performance and profitability by identifying the causal relationships between actions and performance (Buhaovac and Slapničar (2007).…”