Accounting Information Use in Performance Based Compensation Systems

Abstract

This research investigates the nuanced and often overlooked role of accounting information within performance-based compensation systems, moving beyond traditional
agency theory frameworks to propose a novel, multi-dimensional model of information
utility. While extant literature predominantly treats accounting metrics as neutral,
verifiable inputs for incentive alignment, this paper posits that their function is fundamentally interpretive, socially constructed, and contextually contingent. We argue
that accounting information does not merely measure performance but actively shapes
it through three distinct, interlocking mechanisms: as a constitutive script that defines
what ’performance’ means within an organizational narrative, as a relational token
that mediates power dynamics and trust between principals and agents, and as a cognitive frame that channels managerial attention and strategic choice. Our methodology
employs a qualitative, longitudinal case study of a multinational corporation transitioning to a complex, multi-metric performance scorecard, combined with a computational
simulation model that explores the emergent system dynamics of metric interaction
over time. This hybrid approach allows us to capture both the rich, lived experience
of actors engaging with the compensation system and the systemic, often unintended
consequences of metric interdependence. Findings reveal that the perceived fairness
and effectiveness of the compensation system are less dependent on the technical accuracy of the accounting metrics and more on their narrative coherence, their consistency
with informal organizational values, and their capacity to accommodate legitimate but
unmeasured contributions. We identify a critical phenomenon termed ’metric myopia
convergence,’ where agents and principals, despite conflicting interests, collaboratively
narrow their focus to a subset of manipulable, short-term accounting indicators, thereby
undermining the long-term strategic goals the system was designed to promote. The
study concludes by proposing a shift from designing compensation systems based on
metric selection to designing them as adaptive information ecosystems, emphasizing
transparency in metric construction, forums for interpretive negotiation, and dynamic
weighting mechanisms that respond to strategic evolution. This research contributes

original theoretical insights to management accounting, behavioral economics, and organizational theory by re-conceptualizing accounting information from a passive input
to an active, agential force in the performance management process