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The influence of lead indicator strength on the use of nonfinancial measures in performance management: Evidence from CEO compensation schemes
Author(s) -
O'Connell Vincent,
O'Sullivan Don
Publication year - 2014
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.2124
Subject(s) - business , compensation (psychology) , profitability index , customer satisfaction , weighting , lead (geology) , agency (philosophy) , industrial organization , marketing , psychology , finance , medicine , philosophy , epistemology , radiology , geomorphology , psychoanalysis , geology
Nonfinancial measures ( NFMs ) are a common feature of strategic performance management frameworks. We examine the role of one widely used NFM : customer satisfaction, in one aspect of strategic performance management: CEO compensation schemes. Drawing on agency theory precepts, we hypothesize that the extent to which firms link CEO compensation to customer satisfaction is influenced by satisfaction's ability to act as a leading indicator of future profitability (lead indicator strength). We further hypothesize that the extent to which customer satisfaction's lead indicator strength influences the weighting of satisfaction in CEO compensation schemes has a positive influence on future shareholder value. Our empirical results offer strong support for both hypotheses and extend research on the use and efficacy of NFMs in CEO compensation schemes . Copyright © 2013 John Wiley & Sons, Ltd.