Compensation and Financial Performance Measures: The Case of Municipal Managers

Abstract

This study examines associations between financial performance measures in municipal manager compensation contracts. I first examine a variety of accounting and market measures that proxy for financial performance. To gain better understanding of the different drivers that affect the sensitivity of performance measures, I study the weight of these performance measures in specifications of compensation paid to city managers. In particular, I examine the informational properties - noise and controllability - of performance measures, and the governance mechanisms as determinants of associations between performance measures and city manager compensation. I also consider associations with indicators of city corruption.

Results indicate that city manager compensation is associated with a variety of financial performance measures. Further, I find that the informational properties of performance measures affect the sensitivity of performance measures in compensation contracts. Specifically, financial performance measures are weighted less substantially where measures have more noise. One measure– surplus – has less weight where the budget is controllable by the city manager. In addition, I find limited evidence that supports the notion that governance attributes and incentive compensation function as complements. Finally, I find no association between corruption and compensation.