Reducing Strategy Surrogation: The Effects of Performance Measurement System Flexibility and Environmental Dynamism

Abstract

Prior research shows that individuals exhibit a propensity to surrogate performance measures for their underlying strategy, resulting in suboptimal strategic decisions. We investigate whether the incorporation of flexibility in contemporary performance measurement systems (PMS) reduces surrogation propensity in the context of product innovation and whether this effect varies depending on environmental dynamism. We conduct a 2x2 experiment and find that PMS flexibility significantly lowers managers’ surrogation propensity, but this occurs only when the business environment is more dynamic and when the investment decisions have opportunity costs. Our study contributes to the literature by identifying a viable way to reduce managers’ surrogation propensity.