Observability and Subjective Performance Measurement

30 Pages Posted: 3 Jun 2015

See all articles by Neale Gilbert O'Connor

Neale Gilbert O'Connor

Monash University Malaysia; Monash University Malaysia

F. Johnny Deng

California State University, Sacramento - College of Business Administration

Pan Xiao Fei

Shanghai University of Finance and Economics

Date Written: June 2015

Abstract

Accounting research provides theory and evidence on the choice and use of subjective performance measures for evaluating managerial performance. However, accounting research does not focus on the subjective performance measurement of managerial behaviour once measures have been chosen. We extend accounting research by investigating the factors that influence the subjective performance measurement decision. We predict that the level of subjective performance measurement is influenced by the informativeness of financial performance measures and by the verifiability of the nonfinancial measures in a formula‐based incentive plan. We expect that the measures' informativeness and verifiability depends on the observability of both the managerial behaviour being subjectively measured and the reliability of the financial and nonfinancial performance measures. More specifically, we hypothesize that the influence of the levels of the financial performance measures on the level of subjective performance measurement is moderated by the observability of either the managerial behaviour being measured (for the financial measures) or the performance measures' reliability (for the nonfinancial measures). Data from a firm provide support for our hypotheses.

Keywords: Nonfinancial performance measures, Observability, Performance measurement, Performance measures, Subjective performance measurement

Suggested Citation

O'Connor, Neale Gilbert and O'Connor, Neale Gilbert and Deng, F. Johnny and Fei, Pan Xiao, Observability and Subjective Performance Measurement (June 2015). Abacus, Vol. 51, Issue 2, pp. 208-237, 2015, Available at SSRN: https://ssrn.com/abstract=2613713 or http://dx.doi.org/10.1111/abac.12050

Neale Gilbert O'Connor (Contact Author)

Monash University Malaysia ( email )

Petaling Jaya, Selangor 46150
Malaysia
60122005964 (Phone)

Monash University Malaysia ( email )

Malaysia
0122005964 (Phone)
47500 (Fax)

F. Johnny Deng

California State University, Sacramento - College of Business Administration ( email )

School of Business Administration
Sacramento, CA 95819-6081

Pan Xiao Fei

Shanghai University of Finance and Economics

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