Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation
University of Pittsburgh
University of Illinois at Urbana-Champaign
William B. Tayler
Brigham Young University
August 14, 2010
AAA 2010 Management Accounting Section (MAS) Meeting Paper
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, M49working papers series
Date posted: July 26, 2009 ; Last revised: July 18, 2013
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