Non-Financial Performance Measures as Coordination Devices

59 Pages Posted: 6 Jul 2008

See all articles by Stanley Baiman

Stanley Baiman

University of Pennsylvania - Accounting Department

Tim Baldenius

Columbia Buiness School

Date Written: June 20, 2008

Abstract

This paper investigates how non-financial performance measures (NPMs) can be used to encourage cooperation across divisions. The implementation of a project often requires joint efforts by multiple divisions. However, privately informed division managers sometimes find it in their self-interest to forgo profitable joint projects or to underinvest in relationship-specific assets that would increase the projects' profitability. By treating the implementation of a joint project (e.g., a major process improvement or new product development) as an NPM, we show that paying the division managers discrete bonuses tied to this NPM improves the efficiency of project implementation and upfront investments. We derive in detail how the optimal implementation bonus trades off distortions in ex-post implementation and ex-ante investments. In a dynamic version of the base model with learning-by-doing, we develop a fast-track theory of bonus payments: conditional on a project being implemented early on, the implementation bonus in subsequent periods will be higher than if the earlier project had not been implemented.

JEL Classification: M40, M46, J33, G31

Suggested Citation

Baiman, Stanley and Baldenius, Tim, Non-Financial Performance Measures as Coordination Devices (June 20, 2008). Available at SSRN: https://ssrn.com/abstract=1155562 or http://dx.doi.org/10.2139/ssrn.1155562

Stanley Baiman

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6782 (Phone)
215-573-2054 (Fax)

Tim Baldenius (Contact Author)

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

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