An empirical investigation of an incentive plan that includes nonfinancialperformance measures

Recent studies report an increasing use of nonfinancial measures such as pr oduct quality, customer satisfaction, and market share in performance measu rement and compensation systems. A growing literature suggests that because current nonfinancial measures are better predictors of long-term financial performance than current financial measures, they help refocus managers on the long-term aspects of their actions. However, little empirical evidence is available on the relation between nonfinancial measures and financial p erformance, and even less is known about performance impacts of incorporati ng nonfinancial measures in incentive contracts. Using time-series data for 72 months from 18 hotels managed by a hospitality firm, this study provide s empirical evidence on the behavior of nonfinancial measures and their imp act on firm performance. The results indicate that nonfinancial measures of customer satisfaction are significantly associated with future financial p erformance and contain additional information not reflected in the past fin ancial measures. Furthermore, both nonfinancial and financial performance i mprove following the implementation of an incentive plan that includes nonf inancial performance measures.