Managerial Myopia and Non-Financial Measures: The Case of Customer Satisfaction Mitigating Hard-Selling

Abstract

Increasingly, firms are augmenting financial measures of performance with non-financial measures of performance with a view to instill a long-run focus and reduce managerial myopia. Thus, in this paper, we utilize an agency-theoretic model to examine closely how financial measures cause managerial myopia and how non-financial measures mitigate managerial myopia. To this effect, we explicitly model a specific myopic behavior within the personal selling function, namely, hard-selling. In this context, we find that incentives based on financial measures (gross profits) do not always cause managerial myopia and that non-financial measures (customer satisfaction) are not always useful in mitigating managerial myopia. However, when non-financial measures are useful, we find that they can serve two different roles, namely, suppressing hard-selling and enhancing the utilization of the financial measure. Moreover, their introduction can either increase or decrease the weight placed on financial measures. Finally, we find that improvements in the precision of non-financial measures increase both the weight placed on non-financial measures as well as the weight placed on financial measures. Key Words: Non-financial measures; Agency theory; Salesforce compensation