Strategy, Incentive Design and Performance: Empirical Evidence
48 Pages Posted: 16 Aug 2010 Last revised: 15 Dec 2010
Date Written: May 3, 2010
Firms pursuing different business strategies should align these strategies to incentive design. This study uses both archival and survey data on 110 stores of a Japanese high-end bakery chain to provide empirical evidence that misalignment between an organization’s business strategy and incentive design (i.e., weights for financial and non-financial performance measures) adversely affects firm performance. Our results suggest that a decline in the firm performance may be caused by managers’ shifting their focus toward financial measures that are inconsistent with a customer-oriented strategy. Although the firm requires the exclusive usage of non-financial measures in determining promotions, as expected, our results show that financial measures affect managers’ promotions. Additional analyses show that the influence of non-financial measures in promotion decisions becomes less pronounced after the firm shifts to a primarily financial-focused bonus plan.
Keywords: Business Strategy, Compensation Scheme, Financial Measure, Non-Financial Measure, Promotion
JEL Classification: M40, L21
Suggested Citation: Suggested Citation