The influence of lead indicator strength on the use of nonfinancial measures in performance management: Evidence from CEO compensation schemes

• Published in: Strategic management journal Vol. 35; no. 6; pp. 826 - 844
• Main Authors: Connell, Vincent O', Sullivan, Don O'
• Format: Journal Article
• Language: English
• Published: Chichester, UK John Wiley & Sons, Ltd 01.06.2014; John Wiley & Sons; Wiley Periodicals Inc
• Subjects: Agency theory; CEO compensation; Chief executive officers; Compensation; Corporate strategies; Customer satisfaction; Customer service; Executive compensation; lead indicator strength; Leading indicators; Management science; nonfinancial measures; Performance management; Performance metrics; Profitability; Proxy statements; Satisfaction; Shareholder value; Shareholders wealth; Strategic management; Studies
• ISSN: 0143-2095; 1097-0266
• DOI: 10.1002/smj.2124

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.