The effects of non-financial performance measures in a bonus contract

This study examines the association between the association between the weight placed on quality and environmental performance measures in managers' bonus contracts and financial and non-financial performance. Data collected from publicly available sources and through mail surveys to plant managers in the chemical, paper, furniture and plastics industries are used to examine several hypotheses. The results reported here show a positive association between external quality performance levels and the weight placed on internal quality performance and external quality performance in the bonus contracts. There is also a positive association between external quality performance and financial performance when weight is placed on external quality performance in the bonus contracts.; The effects of three additional factors on financial and non-financial performance are also examined. First, I examine whether the association between bonus weight and quality and environmental performance will be more positive when managers report the belief they are experiencing increasing marginal returns to investment. Contrary to predictions, test results suggest a negative (no) association between external quality (environmental) performance levels and high internal and external performance weight in bonus contracts when managers perceive increasing marginal returns to investment.; Second, I examine whether the association between bonus weight and quality and environmental performance is more positive when managers report having capital budgeting decision rights for these measures. The tests reported here do not support this relationship. Finally, I examine whether the association between financial performance and quality and environmental performance is more positive when reliable quality and environmental cost information is available. The results suggest that a negative association between environmental performance and financial performance when environmental cost information is available. Also, the results show a positive association between bonus weight on environmental performance and financial performance.; This study raises several interesting questions regarding the relationship between internal and external quality performance and the relationship between the design of bonus contracts and the design of annual review contracts for managers.