Balancing Financial and Non-Financial Performance Measures

Non-financial performance measures are often used for performance evaluation.They are especially relevant if the available financial performance measures notcompletely reflect the manager’s contribution to the firm’s total value. Then,non-financial performance measures serve as an indicator for the firm’s long-termperformance and may therefore be included in incentive contracts. In the paperwe analyze the incentive weights placed on non-financial performance measuresand the firm’s short-term financial return. We determine the consequences of anon-contractable long-term financial return and of private pre-decision informationfor the incentive weights of non-financial performance measures. We explore theextent to which the strength of the statistical relation between the non-financialperformance and the firm-value, and the limitations of financial data as a measureof total firm performance influence the incentive weights. Specifically, we determineconditions where the incentive weight of the short-term financial return increases,although the firm’s interest in the long-term financial return increases.