Managers, consultants, and the financial press assert that compensation plans based
on residual income change managers' behavior. This assertion is empirically tested
by selecting a sample of firms that began using a residual income performance measure
in their compensation plans and comparing their performance to a control sample of
firms that continue to use traditional accounting earnings-based incentives. The
results generally support the adage ‘you get what you measure and reward'.
The results also support many hypothesized managerial actions associated with residual
income-based performance measure incentives.