Target Ratcheting in Common and Unique Performance Measures

50 Pages Posted: 18 Aug 2017

See all articles by Byung Hyun Choi

Byung Hyun Choi

LG Economic Research Institute

Simon Jonghwan Kim

University of Manchester - Division of Accounting and Finance

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting

Date Written: August 17, 2017

Abstract

While most performance measurement systems use multiple measures, research on target revision in multi-measure systems is rare. Examining the target-setting practice in such a system, we hypothesize that the performance variances in common and unique measures are differentially informative of an agent’s effort level and this, in turn, affects a principal’s decision on the degree of commitment to incomplete incorporation of past performance information into new targets. We analyze proprietary data on the performance evaluation of strategic unit managers in a Korean conglomerate to report (1) intertemporal serial correlations of target achievement in both types of measures and (2) partial (full) target difficulty revision in common (unique) measures. We also confirm the results, while classifying measures into financial and nonfinancial ones. With the findings from outside an experimental setting, we contribute to the accounting literature on a common measures bias as well as on target ratcheting.

Keywords: performance target, performance measures, target difficulty, target revision, ratchet effect

Suggested Citation

Choi, Byung Hyun and Kim, Jonghwan and Merchant, Kenneth A., Target Ratcheting in Common and Unique Performance Measures (August 17, 2017). AAA 2018 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=3021294 or http://dx.doi.org/10.2139/ssrn.3021294

Byung Hyun Choi

LG Economic Research Institute ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States
714-515-0939 (Phone)

Jonghwan Kim (Contact Author)

University of Manchester - Division of Accounting and Finance ( email )

Booth Street West
Manchester, M13 9SS
United Kingdom

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4842 (Phone)
213-747-2815 (Fax)

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