The Effect of Competition Intensity and Competition Type on the Use of Customer Satisfaction Measures in Executive Annual Bonus Contracts

Posted: 15 Aug 2011 Last revised: 19 Jun 2014

See all articles by Clara Xiaoling Chen

Clara Xiaoling Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Jae Yong Shin

Seoul National University - College of Business Administration

Steve Wu

The University of Hong Kong - School of Business

Date Written: June 17, 2014

Abstract

This paper empirically examines the interactive effect of competition intensity and competition type on the use of customer satisfaction measures in executives’ annual bonus contracts. Specifically, we predict a stronger association between competition intensity in an industry and the use of customer satisfaction measures in executives’ annual bonus contracts when the competition is non-price-based than when the competition is price-based. Using hand-collected data from S&P 1500 firms’ disclosures of the use of customer satisfaction measures in executive bonus contracts in 2006 and 2010 proxy statements, we find results consistent with our prediction. Our results are robust to alternative measures of competition type and competition intensity. We also find similar results when we use the weight on customer satisfaction measures in executive bonus contracts as the dependent variable. Our study extends the literature on the effect of competition on the design of managerial incentives by distinguishing between competition intensity and competition type and providing the first large-sample empirical evidence on the joint effect of these two dimensions of competition on the incentive use of an important nonfinancial performance measure.

Keywords: Managerial incentives; competition; nonfinancial performance measures; customer satisfaction

JEL Classification: M41, M52, J33, L11

Suggested Citation

Chen, Clara Xiaoling and Matsumura, Ella Mae and Shin, Jae Yong and Wu, Steve, The Effect of Competition Intensity and Competition Type on the Use of Customer Satisfaction Measures in Executive Annual Bonus Contracts (June 17, 2014). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1910170 or http://dx.doi.org/10.2139/ssrn.1910170

Clara Xiaoling Chen (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

Jae Yong Shin

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Steve Wu

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

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