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http://ssrn.com/abstract=1438212
 
 

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Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation


Willie Choi


University of Pittsburgh

Gary Hecht


University of Illinois at Urbana-Champaign

William B. Tayler


Brigham Young University

August 14, 2010

AAA 2010 Management Accounting Section (MAS) Meeting Paper

Abstract:     
To facilitate managers’ decision-making, firms develop strategic performance measurement systems that translate strategy into performance measures. Ideally, managers see measures for what they are: imperfect proxies for intangible strategic constructs. However, managers may increase their focus on measures to the detriment of their consideration of the strategic constructs the measures are intended to represent. As such, managers may fail to fully appreciate the imperfect nature of measures’ representation of strategic constructs – a phenomenon we label surrogation. In this paper, we investigate whether and how the use of strategically-linked performance measures for compensation purposes affects managers’ propensity to exhibit surrogation. Based on a unifying theory from psychology called attribute substitution (Kahneman and Frederick 2002), we predict that this tendency is most prevalent when managers are compensated on a single measure of a strategic construct, and that this tendency is less prevalent when managers are compensated on multiple measures of a strategic construct. Via an experiment, we find support for these hypotheses. Our paper contributes to the literature on strategic performance measurement systems by highlighting the tendency of managers to use measures as surrogates for strategy.

Number of Pages in PDF File: 51

JEL Classification: M41, M40, M49

working papers series


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Date posted: July 26, 2009 ; Last revised: July 18, 2013

Suggested Citation

Choi, Willie and Hecht, Gary and Tayler, William B., Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation (August 14, 2010). AAA 2010 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: http://ssrn.com/abstract=1438212 or http://dx.doi.org/10.2139/ssrn.1438212

Contact Information

Willie Choi
University of Pittsburgh ( email )
United States
Gary Hecht
University of Illinois at Urbana-Champaign ( email )
601 E John St
Champaign, IL 61820
United States
William B. Tayler (Contact Author)
Brigham Young University ( email )
Brigham Young University
519 TNRB
Provo, UT 84602
United States
(801) 422-5972 (Phone)
(801) 422-0621 (Fax)
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