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

Randolph Sloof, Mirjam Van Praag

    Research output: Contribution to journalJournal articleResearchpeer-review

    Abstract

    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 (Review of Economics and Statistics, 90, 428-441) 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.
    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 (Review of Economics and Statistics, 90, 428-441) 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.
    LanguageEnglish
    JournalJournal of Economics & Management Strategy
    Volume24
    Issue number1
    Pages74-91
    ISSN1058-6407
    DOIs
    StatePublished - 2015

    Cite this

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    title = "Testing for Distortions in Performance Measures: An Application to Residual Income-Based Measures like Economic Value Added",
    abstract = "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 (Review of Economics and Statistics, 90, 428-441) 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.",
    author = "Randolph Sloof and {Van Praag}, Mirjam",
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    Testing for Distortions in Performance Measures : An Application to Residual Income-Based Measures like Economic Value Added. / Sloof, Randolph; Van Praag, Mirjam.

    In: Journal of Economics & Management Strategy, Vol. 24, No. 1, 2015, p. 74-91.

    Research output: Contribution to journalJournal articleResearchpeer-review

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    T1 - Testing for Distortions in Performance Measures

    T2 - Journal of Economics & Management Strategy

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    AU - Van Praag,Mirjam

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    N2 - 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 (Review of Economics and Statistics, 90, 428-441) 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.

    AB - 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 (Review of Economics and Statistics, 90, 428-441) 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.

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    DO - 10.1111/jems.12080

    M3 - Journal article

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    JO - Journal of Economics & Management Strategy

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