Feedback and incentives on nonfinancial value drivers: Effects on managerial decision making

This paper examines how adding leading nonfinancial measures to a lagging summary financial measure affects managerial decision making in firms where either intangible assets or tangible assets are more important for future financial performance. Using an experiment, I compare a performance evaluation system (PES) with feedback and incentives on only a summary financial measure to a PES with added feedback on nonfinancial measures and a PES with added feedback and incentives on nonfinancial measures. I find that managers increase their decision quality more in intangible assets firms than in tangible assets firms when both feedback and incentives on nonfinancial measures are added, but not when only feedback on nonfinancial measures is added. Within the set of intangible assets firms, managers do not make better decisions with the addition of only feedback on nonfinancial measures; they do so with the addition of both feedback and incentives on nonfinancial measures. However, managers of intangible assets firms with only feedback on nonfinancial measures improve their decisions over time, compared with the lack of improvement when feedback on nonfinancial measures is absent. In contrast, within the set of tangible assets firms, managers do not make better decisions with the adding of only feedback on nonfinancial measures nor with the adding of both feedback and incentives on nonfinancial measures. The results suggest that the benefits of adding nonfinancial measures may vary based on a firm's dependency on tangible versus intangible assets and on whether the nonfinancial measures are explicitly rewarded in the incentive contract.