The Retention of Nonfinancial Performance Measure in Compensation Contracts

Posted: 4 May 2005

See all articles by Hassan R. Hassabelnaby

Hassan R. Hassabelnaby

University of Toledo - Department of Accounting

Amal A. Said

Northern Kentucky University

Benson Wier

Virginia Commonwealth University

Abstract

This study empirically investigates firms' decisions to retain the use of nonfinancial performance measures as part of the compensation contracts following their initial implementation. Using three-stage regression and survival analysis, we provide explanations for the decision to retain the use of nonfinancial performance measures after controlling for possible endogeneity. Based on a sample of firms that used nonfinancial measures during the period 1993-1998, we find that the appropriate match of nonfinancial measures and firm characteristics and subsequent enhanced performance are crucial factors in deciding whether or not a firm will retain nonfinancial performance measures in compensation contracts. The analyses provide evidence that the effects of significant firm characteristics on the decision to retain nonfinancial performance measures are time invariant while the effects of performance are time variant during the study period. The results suggest that adverse performance is a reflection of a nonoptimizing initial adoption decision of nonfinancial performance measures while the decision to discard their use in light of the unfavorable performance is an indication of an optimizing decision.

Keywords: Nonfinancial, Compensation contract, Firm performance, Retention, Survival analysis

JEL Classification: J33, M11, M21, M41

Suggested Citation

Hassabelnaby, Hassan R. and Said, Amal A. and Wier, Benson, The Retention of Nonfinancial Performance Measure in Compensation Contracts. Journal of Management Accounting Research, 2005. Available at SSRN: https://ssrn.com/abstract=713082

Hassan R. Hassabelnaby (Contact Author)

University of Toledo - Department of Accounting ( email )

Toledo, OH 43606
United States

Amal A. Said

Northern Kentucky University ( email )

Nunn Drive
Highland Heights, KY 41099
United States
859.572.5499 (Phone)

Benson Wier

Virginia Commonwealth University ( email )

School of Business 301 W. Main St.
Richmond, VA 23284
United States
804-828-7162 (Phone)
804-828-8884 (Fax)

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