An Empirical Investigation of an Incentive Plan that Includes Nonfinancial Performance Measures

TLDR

Recent research shows growing use of nonfinancial measures such as product quality, customer satisfaction, and market share, which are better predictors of long‑term financial performance, yet empirical evidence linking them to financial outcomes and incentive contracts remains scarce. The study aims to provide empirical evidence on how nonfinancial measures behave and affect firm performance using 72‑month time‑series data from 18 hotels. The authors analyze 72‑month time‑series data from 18 hotels to examine the behavior of nonfinancial measures and their impact on firm performance. Customer‑satisfaction measures predict future financial performance beyond past financial indicators, and an incentive plan incorporating nonfinancial measures improves both nonfinancial and financial performance.

Abstract

Recent studies report an increasing use of nonfinancial measures such as product quality, customer satisfaction, and market share in performance measurement and compensation systems. A growing literature suggests that because current nonfinancial measures are better predictors of long-term financial performance than current financial measures, they help refocus managers on the long-term aspects of their actions. However, little empirical evidence is available on the relation between nonfinancial measures and financial performance, and even less is known about performance impacts of incorporating nonfinancial measures in incentive contracts. Using time-series data for 72 months from 18 hotels managed by a hospitality firm, this study provides empirical evidence on the behavior of nonfinancial measures and their impact on firm performance. The results indicate that nonfinancial measures of customer satisfaction are significantly associated with future financial performance and contain additional information not reflected in the past financial measures. Furthermore, both nonfinancial and financial performance improve following the implementation of an incentive plan that includes nonfinancial performance measures.