Understanding How Incentive Contracts and Non-financial Performance Measures Impact Cost Control

The study endeavours to ascertain whether, when incentivized, managers prefer cost prioritization (CP) over other choices, during times of external volatility (EV). The study probed the mechanism through which such CP choices are legitimized by the managers (agents) in the setting of an emerging market (EM). Primary data were collected through a questionnaire-based survey of 126 divisional managers who were the units of analysis for the study. The quantitative data were analyzed using the partial least squares structural equation modelling (PLS-SEM) method. The study found that non-financial performance measures (NFPMs) mediated the linkage between incentive contracting and managerial CP choice of the managers. It was also observed that during times of high EV, divisional managers, when incentivized, followed the CP agenda by legitimizing their operational choices, citing the firm’s non-financial performance indicators. The study makes three distinct contributions. First, the study establishes the role of incentive contracts (ICs) in shaping managerial choices. Second, the study contributes to the understanding of the mechanism through which managerial choices are legitimized. Finally, the mediating role of the NFPMs is confirmed.