Management and CEOs? I'd Rather Measure Them in the Same Way

Five trends of the modern business environment call for a concerted effort on behalf of scholars and practitioners to integrate corporate performance measurement systems (CPMS) and chief executive officer incentive plans (CEOIP), Andrea Dossi (Department of Accounting and SDA Bocconi), Lorenzo Patelli (Benedictine College and SDA Bocconi) and Laura Zoni (Università Cattolica and SDA Bocconi) write in The Missing Link between Corporate Performance Measurement Systems and Chief Executive Officer Incentive Plans (Journal of Accounting, Auditing and Finance, Volume 25, Issue 4, September 2010, pages 531-558).

Despite the apparent affinity between the two management control mechanisms, CPMS and CEOIP are historically detached both in literature and in practise. "CPMS are designed to identify and connect the organization's strategic objectives and align the individual's behaviour toward them", Dossi and his colleagues write, "while CEOIP are designed and implemented to attract and retain the best talents, provide incentives and motivation to perform in both crafting and executing strategy, and align management interests with shareholders' interests".

While CPMS are widely used and rely on measurement diversity (i.e. balanced systems of financial and nonfinancial measures), CEOIP are especially relevant for listed companies and rely on financial markets metrics. The poor association found between compensation systems and shareholder value in the long term seems to be a clue of the need for a link currently missing.

In many contexts, the scholars argue, the omission is anyway legitimate. In their interpretative framework the design of CPMS and CEOIP is contingent on the form of governance that shapes the relationship between the ownership and the management. Following transaction cost economics, they single out markets, hierarchies and hybrids as forms of governance and assess that CEOIP are the primary control mechanism in market-based governance structures (typically firms characterized by dispersed ownership, effective financial markets and a key leadership role of the CEO) and CPMS are the primary control mechanism in hierarchy-based governance structures (typically firms characterized by the presence of a dominant shareholder, in which the CEO follows and executes the ownership's plan, as happens in regulated industries, family businesses and state-owned companies).

In the case of hybrid governance, though, CPMS and CEOIP need to be effectively integrated and should not be designed independently. Due to the increasing diffusion of hybrid governance, the authors imply, the need for integration is widespread.

The five trends supporting the adoption of hybrid governance are the emergence of new markets, whose firms have both strong ties with other national economies and with local public authorities; the corporate restructuring and turnaround processes following the recent financial crisis, often led by government intervention and by radical innovation in the regulatory framework; the increasing role of network-based multinational corporations in strong need of strategic alignment; the emergence of social entrepreneurship with social goals adding onto the financial ones; the presence of venture capitalists in the governance structure of many firms, which makes traditional governance ineffective.

Dossi and his colleagues conclude with some remarks on an integrated design of CPMS and CEOIP, starting from the organizational actors in charge of the process. CPMS being now designed by the chief financial officer, while CEOIP being established by a remuneration committee with the help of external consultants, the involvement of the CFO in the committee is advisable. The time frame of the two mechanisms is different: CPMS is continuously monitored, while the committees in charge of CEOIP meet a few times a year, so that the scholars suggest establishing a simple planning and control cycle encompassing three phases: target-setting, performance reviews and feedback. The metrics, too, are to be integrated, overcoming the neglect of stock market performance by CPMS and of operations measures by CEOIP.