The Measurement Gap in Paying for Performance: Actual and Preferred Measures

Abstract

What is measured gets managed - especially if rewards depend on it. For this reason many companies (over seventy percent in this survey) have upgraded their performance measurement systems so as to include a mix of financial and non-financial metrics. This study compares how companies currently measure performance for compensation purposes with how their managers think performance should be measured. We find significant measurement gaps between actual and preferred measures, and we find that larger measurement gaps are related to lower overall performance. The choice of performance measures for compensation purposes is also related to the attitudes of managers towards manipulation of reported results.

Keywords: performance measurement, ethics

JEL Classification: M41, M43, J33