The use of non-financial performance measures for managerial compensation: evidence from SMEs

Abstract

This study explores the relationship between contextual variables—strategy, perceived environmental uncertainty (PEU), and decentralization—and the use of non-financial performance measures (NFPM) for managerial compensation in small and medium enterprises (SMEs). Using questionnaire data from SMEs’ managers, we find that the use of NFPM is positively associated with PEU hostility and decentralization. Furthermore, our study shows that these results are mostly driven by CEO’s compensation (in comparison to non-CEOs compensation) and family firms (in comparison to non-family firms). Finally, our analyses reveal that the use of different types of NFPM (customer-oriented, employee-oriented and operations-oriented) is associated with distinct contextual variables. Particularly, customer-oriented NFPM are negatively related to PEU dynamism and positively related to decentralization, while operations-oriented NFPM are positively related to PEU hostility.