Guiding managerial behavior toward the long term: The role of performance measurement and compensation systems

The 2008–2009 financial crisis has renewed concerns about managerial short-termism and its negative effects. Based on intertemporal choice theory, this chapter aims to identify the role that performance measurement and compensation systems can play in orienting managers toward building long-term performance potential in addition to achieving short-term results.

The findings suggest that certain types of measures used – in particular broader, more inclusive financial indicators, risk-adjusted measures, and key nonfinancial value drivers – as well as the timing of measurement and payment of rewards can lead to reduced time discounting and a lower devaluation of the future, and consequently to a prioritized managerial attention focus on long-term company goals.

This chapter contributes to a better understanding of the institutional determinants of managerial long-term orientation and the influence of organizational systems on goal prioritization in managerial intertemporal choice processes.

The findings have practical relevance for the design of incentive systems that aim to place an emphasis on ensuring long-term value creation.

Systems that guide managerial behavior toward the long term can help to increase economic and societal sustainability.

Despite the emergence of more integrated performance measurement approaches, time horizon has not been in the main focus of research in the field yet. This review provides a first structured overview of the temporal effects of different elements of performance measurement and compensation systems.