The performance impact of using measurement diversity in executives’ annual incentive systems

The purpose of this research is twofold. Firstly, it examines therelationship between the use of financial and non-financial performancemeasures in executives’ annual incentive systems and firm performance.Secondly, it looks at the extent to which this relationship is influenced byfive different organisational contingencies (business risk, ownershipstructure, organisational culture, the quality of the performance measuresused in executives’ annual incentives and the effectiveness of theexecutives’ reward system).Agency theory and contingency theory are used to develop thetheoretical framework that underpins this study. The research design isbased on survey and archival data from 132 private and publicly quotedorganisations based in the UK. Data is studied using multivariate analysis,in particular, multiple regression analysis with main and interaction effects.Contrary to expectations, the study finds that the relationship betweenthe use of financial and non-financial performance measures in executives’annual incentives and economic firm performance (measured by return onassets and sales annual growth) is negative rather than positive. However,this relationship is not universalistic. Results suggest that whenorganisations operate in high or low business risk environments or whenorganisations have clan or adhocracy cultural values the use of multi-criteriaperformance measures in executives’ annual incentives is beneficial as itfacilitates the achievement of business goals. Results also suggest thatownership structure, the quality of performance measures and theeffectiveness of executives’ reward systems are organisational contingenciesthat do not influence the performance impact of using multi-criteriaperformance measures in executives’ annual incentive systems.This thesis contributes to the management literature; in particular, tothe literature that looks at the use of non-financial performance measures inmanagement control systems. It contributes to agency-based research byproviding empirical evidence that refutes some of its premises regarding theuse of multi-criteria performance measures in incentive systems. This thesisalso contributes to contingency-based research as it supports the notion thatthere is no universally appropriate management control system –in this case,the executive incentive system– which applies equally to all organisations inall circumstances.