Employment Horizon and the Choice of Performance Measures: Empirical Evidence from Annual Bonus Plans of Loss-Making Entities

We examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans. We argue that managers of loss-making firms are likely to voluntarily or forcibly depart in the near future and, consequently, have a shorter employment horizon. Loss-making firms then need to increase the emphasis on forward-looking nonfinancial performance measures to motivate long-term effort of their managers. Thus, we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings. We find consistent support for our hypothesis using different (archival, survey, and field) data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures.