Performance Measures and Short-Termism: An Exploratory Study

Abstract

We examine the relationship between performance measurement systems and short-termism. Hypotheses are tested on a sample of senior managers drawn from a major telecommunications company to determine the extent to which the diagnostic and interactive uses of financial and non-financial measures give rise to short-termism. We find no evidence to suggest that the use of financial measures, either diagnostically or interactively, leads to short-term behaviour. In contrast, we find a significant association between the use of non-financial measures and short-termism. Results suggest that the diagnostic use of non-financial measures leads managers to make inter-temporal trade-off choices that prioritise the short term to the detriment of the long term, while we find interactive use is negatively associated with short-termism. We find an imbalance in favour of the diagnostic use over the interactive use of non-financial performance measures is associated with short-termism. Overall, findings highlight the importance of considering the specific use of performance measures in determining the causes of short-termism.