Management Accounting Section Midyear Meeting

Strategic Role of Revenue Performance Target Difficulty

• In Event: Performance Targets

Abstract

Prior research on performance targets has mainly focused on their incentive role and finds that setting difficult but achievable targets motivate employees to exert greater effort. We argue that sales target difficulty depends on the relative importance of the incentive vs. strategic role of sales targets, such that firms would set difficult targets to communicate within the firm aggressive product market strategies but reduce the difficulty when there are higher retention concerns or the benefits of using sales measures as an incentive increase. Moreover, we posit that firms complement the use of difficult sales targets by setting easy-to-achieve earnings targets to balance strategic and motivational outcomes. Using a sample of 400 firms between 2007 to 2020, we find that firms are more likely to set difficult sales targets and easy earnings targets when the relative importance of the strategic role of sales measures increases. The results suggest that sales measures serve multiple roles in the firm and that different elements of the performance plan are used to incentivize CEOs and direct strategies.

Authors

• Dave (Young Il) Baik, University of Illinois at Urbana-Champaign

• Minjeong Kim, University of Wisconsin–Madison

• Hari Ramasubramanian, Frankfurt School of Finance and Management