On the Use of Nonfinancial Performance Measures in Management Compensation

GEABA Discussion Paper No. 01-17

31 Pages Posted: 17 May 2002

See all articles by Dirk Sliwka

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

It is often claimed that (i) managers work too hard on operational issues and spend not enough effort on strategic activities and (ii) something can be done about this by introducing nonfinancial performance measures as for instance with a balanced scorecard. We give an explanation for both claims in a formal model. The distortion towards operational effort arises, because with financial performance measures strategic effort can only be rewarded in the future. But renegotiation-proof long term compensation plans entail too weak variable components in the future. This problem can be reduced by introducing performance measures that help to disentangle strategic and operational effects.

JEL Classification: M12, M40, M46, J33

Suggested Citation

Sliwka, Dirk, On the Use of Nonfinancial Performance Measures in Management Compensation (January 2002). GEABA Discussion Paper No. 01-17. Available at SSRN: https://ssrn.com/abstract=310078 or http://dx.doi.org/10.2139/ssrn.310078

Dirk Sliwka (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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