The Missing Link between Corporate Performance Measurement Systems (CPMS) and CEO Incentive Plans (CEOIP)

While offering a literature review regarding several aspects and pitfalls of performance measurement and compensation literature and practice, we discuss the separation between corporate performance measurement systems (CPMS) and incentive plans for CEOs (CEOIP). Through performance measurement and compensation, organizations align competing interests and achieve management control. CPMS orient organizational actions towards strategic goals. CEOIP orient CEO’s actions towards shareholders’ value. Despite the common nature (i.e., management control mechanisms) and, thus, purpose (i.e., influence on actions) of CPMS and CEOIP, both literature and practice neglect the link connecting the two mechanisms. In search for an explanation, we develop a framework, which examines the link between CPMS and CEOIP under the three forms of governance proposed by transaction cost economics, namely: markets, hierarchies, and hybrids. Whereas in markets and hierarchies the control problem can be solved with a focus on one mechanism (i.e., CEOIP and CPMS, respectively), hybrid governance structures require the integration of CPMS and CEOIP. By exploring areas of integration between CPMS and CEOIP, we raise researchable questions for future research. We expect that the integration between CPMS and CEOIP could benefit the alignment of interests and lead to more effective management control within modern organizations.