Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation
57 Pages Posted: 26 Jul 2009 Last revised: 5 Aug 2018
Date Written: May 24, 2011
To facilitate managers’ decision-making, firms develop strategic performance measurement systems that translate strategy into performance measures. Ideally, managers see measures for what they are: imperfect proxies for intangible strategic constructs. However, managers may fail to fully appreciate the fact that measures are merely representations of the strategic constructs, and act as though the measures were the construct of interest – a phenomenon we label surrogation. In this paper, we investigate whether and how the use of strategically-linked performance measures for compensation purposes affects managers’ propensity to exhibit surrogation. In accordance with the attribute substitution framework (Kahneman and Frederick 2002), we predict that this tendency is most prevalent when managers are compensated on a single measure of a strategic construct, and that this tendency is less prevalent when managers are compensated on multiple measures of a strategic construct. Via two experiments, we find support for these hypotheses. Our paper contributes to the literature on strategic performance measurement systems by highlighting the tendency of managers to use measures as surrogates for strategy. Moreover, given that surrogation can be detrimental to the implementation of strategy, our study furthers academic and practitioner understanding of factors that affect the extent to which firms incur this cost.
JEL Classification: M41, M40, M49
Suggested Citation: Suggested Citation