Testing for Distortions in Performance Measures: An Application to Residual Income Based Measures like Economic Value Added

Arbeitspapier

Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based performance measures —such as Economic Value Added (EVA)— is distorted, leading to unintended agent behavior. The paper uses a difference-in-differences approach to account for changes in economic circumstances and the self-selection of firms using EVA. Our findings indicate that EVA is a distorted performance measure that elicits the gaming response.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 14-056/V

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Theory ; Payout Policy ; Compensation Packages; Payment Methods ; Business Objectives of the Firm ; Personnel Management; Executives; Executive Compensation ; Accounting and Auditing: General ; Personnel Economics: Compensation and Compensation Methods and Their Effects
• Subject: Residual Income ; Economic Value Added ; distortion ; performance measurement ; incentive compensation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sloof, Randolph ; van Praag, Mirjam
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/98892
• Last update: 10.03.2025, 11:44 AM CET