You Learn From What You Measure-Financial and Nonfinancial Performance Mens Multi Companies

Long Range Planning 43 (2010) 498e526 http://www.elsevier.
com/locate/lrp
You Learn From What You

Measure: Financial and Non-
financial Performance Measures
in Multinational Companies
Andrea Dossi and Lorenzo Patelli
According to recent studies in international management, relationships between head-

quarters and subsidiaries in the global economy are characterised simultaneously by
elements of organisational interdependence and local autonomy. These characteristics
challenge the traditional design and use of performance measurement systems (PMSs).
Contemporary approaches to PMSs emphasise the role of performance indicators for
strategy implementation and advocate the adoption of non-financial indicators in addition
to traditional financial metrics. We investigated the factors associated with the inclusion of
non-financial indicators in PMSs used in relationships between headquarters and
subsidiaries. Our empirical study is based on 141 questionnaires collected from Italian
subsidiaries of foreign companies and 13 interviews with respondents. Non-financial per-
formance indicators contained in PMSs refer equally to customer, internal processes and
people measurement perspectives. Furthermore, we find that the inclusion of non-financial
indicators is positively associated with relative performance evaluation, interactive use of
PMSs, subsidiary size, headquarters nationality and subsidiary participation in the design of
PMSs. Information gathered through interviews provides explanations of our results, and
suggests that the inclusion of non-financial perspectives in PMSs contributes to the
strategic alignment of international organisations by supporting learning and dialogue
within relationships between headquarters and subsidiaries.
Ó 2010 Elsevier Ltd. All rights reserved.
0024-6301/$ - see front matter Ó 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.lrp.2010.01.002
Introduction
The global economy has radically changed the way in which international organisations achieve
their economic success. Headquarters are no longer the sole source of competitive advantage,
and local subsidiaries are not just the implementers of assignments from headquarters. Studies
in international management have demonstrated that subsidiaries act as semi-autonomous entities,
capable of making their own decisions and of generating distinctive competitive advantages. They
develop unique capabilities in different local environments and create knowledge with benefits for
their parent companies. Headquarters emphasise social control and employ coordination mecha-
nisms to leverage the potential of their dispersed operations in environments of shared decision-
making. It follows that the relationships between headquarters and subsidiaries are shaped by
high levels of organisational interdependence, local autonomy and pro-activeness.1
According to many authors, traditional hierarchical control mechanisms are not appropriate to
govern interdependent relationships between headquarters and subsidiaries within modern interna-
tional organisations. In particular, performance measurement systems (PMSs) are expected to
broaden their scope so as to improve strategy implementation and to be used interactively for
enhancing global knowledge-sharing and learning. However, there is a notable lack of recent em-
pirical research on PMSs in international organisations. The lack of literature is remarkable given
the significant evolution of international management, which has substantially redefined the rela-
tionships between headquarters and subsidiaries.2
In this paper, we document the widespread inclusion of non-financial indicators in PMSs used
within international organisations. This is consistent not only with prior empirical research, but
also with the strategy-based approach to PMSs. Strategic PMSs are considered as strategy imple-
mentation tools, capable of coordinating dispersed actions and creating goal congruence through
the communication, analysis and evaluation of a diverse set of key performance indicators. In
this paper, we explore the association between the inclusion of non-financial indicators in PMSs
and the interactions between headquarters and subsidiaries. In particular, we investigate how
non-financial indicators favour dialogue and learning within international organisations. Our em-
pirical study attempts to provide a comprehensive description of the PMSs employed in relation-
ships between headquarters and subsidiaries, considering both structural (i.e., design-related) and
procedural (i.e., use-related) elements of PMSs. We present descriptive statistics of the comprehen-
siveness of PMSs, the level of subsidiary participation in the design of PMSs, the reliance on relative
performance evaluation, and the interactive use of PMSs.3 The focus of our attention is on non-
financial indicators and the factors associated with their inclusion in PMSs employed in relation-
ships between headquarters and subsidiaries.
Strategic PMSs are considered as strategy implementation tools,

capable of coordinating dispersed actions and creating goal
congruence
In our research, we used a multi-method approach based on a large-scale questionnaire-based

survey and both structured and semi-structured interviews. The survey involved the 300 largest
non-financial subsidiaries of foreign companies operating in Italy (with a response rate of 48 per
cent). Our final sample contained subsidiaries operating in 15 different industries, employing on
average about 600 employees, and with headquarters of 17 different nationalities. We integrated
the survey data with qualitative information gathered through interviews with 13 respondents.
Eight interviews were structured and five were semi-structured. The interviews helped us to assess
the validity of our survey instruments, to interpret the survey data, and to enrich our conclusions
with anecdotal evidence.
Long Range Planning, vol 43 2010 499

The results reveal that, on average, about 47 per cent of the total number of indicators contained
in PMSs employed in relationships between headquarters and subsidiaries are non-financial, and
that a large number of subsidiaries report performance indicators referring to each of the four per-
spectives proposed by the Balanced Scorecard framework.4 The data analyses show that relative per-
formance evaluation, subsidiary participation in the design of PMSs and interactive use of PMSs are
strongly associated with the inclusion of non-financial indicators, after controlling for other factors
affecting the properties of performance indicators and the characteristics of relationships between
headquarters and subsidiaries. The interviews confirm these results and explain that non-financial
indicators are likely to be used for identifying best practices within cooperative relationships.
Non-financial indicators are likely to be used for identifying best

practices within cooperative relationships
Based on these empirical findings, we conclude that PMSs can facilitate strategic alignment
within international organisations through the dialogue between headquarters and subsidiaries sup-
ported by non-financial performance indicators. By combining insights from the international
management literature and results from prior PMS-related empirical research, this paper discusses
a relatively unexplored issue: the use of non-financial indicators within relationships between head-
quarters and subsidiaries. Our study of the design and use of PMSs contributes to an understanding
of the benefits of the inclusion of non-financial indicators, especially for strategic alignment within
relationships between headquarters and subsidiaries. Therefore, the empirical evidence presented in
this paper contributes to the ongoing debate about the relevance of planning and control systems
within complex organisations with evolving strategies.5
We organise the paper as follows. In the next section, we present our research question generated
from a review of the evolution of the issue in international management literature and PMS-related
research. Next, we describe our research methodology. In the subsequent section, we present and
discuss our survey and interview results. In the final part of the paper, we draw conclusions and
suggest implications for managers and future research.
Theoretical background and research question

Relationships between headquarters and subsidiaries represent a typical research subject in interna-
tional management literature. Studies on these relationships may deal with (i) describing the role of
a local subsidiary, (ii) analysing management systems implemented by headquarters to control
subsidiaries, or (iii) determining drivers of subsidiary performance.6
The evolution of structure and strategy in modern international organisations challenges each of
these three typical subjects. Recent international management literature conceives international
organisations as differentiated networks, rather than as one of the classical broad structural arche-
types such as an area, a product or a matrix structure. Within international networks, subsidiaries
are not merely intermediaries between headquarters and local markets. Different subsidiaries have
different roles, which do not merely depend on headquarters’ mandates. Subsidiaries can exploit
their local advantages and undertake initiatives to gain attention from headquarters and play
unique roles to achieve international strategic objectives. They are sources of distinctive capabilities,
which are autonomously developed at the local level and then transferred throughout the compa-
ny’s multinational networks. In such international organisations, the alignment of strategic objec-
tives between headquarters and subsidiaries is crucial in the achievement of the organisation’s
overall success. It follows that headquarters’ control cannot simply rely on narrow hierarchical sys-
tems that are imposed on subsidiaries and focus on financial dimensions. Headquarters need to em-
ploy management control systems that take into consideration the variegated mix of dependence,
independence and interdependence characterising modern relationships between headquarters and
subsidiaries. The variety of subsidiaries’ roles and of the control systems employed to manage
500 Financial and Non-financial Performance Measures in Multinational Companies

relationships suggests that subsidiary performance is the result of complex combinations of several
elements related to international strategies, environmental embeddedness and local entrepreneur-
ship. Therefore, headquarters face significant challenges in measuring the performance of subsidiar-
ies, which are semi-autonomous entities, capable of making their own decisions but constrained in
their actions by the demands of corporate offices and by the opportunities of local environments.7
Recent international management literature conceives international

organisations as differentiated networks, rather than as one of the
classical broad structural archetypes
Recent studies on PMSs in international organisations underline how developments in interna-
tional management open up new problems for PMSs. In particular, O’Donnell shows that the
traditional way to frame relationships between headquarters and subsidiaries, based on the Agency
Theory, fails to explain crucial elements of strategic PMSs. According to the Agency Theory, head-
quarters control foreign subsidiaries mainly through monitoring and incentives. In contrast, the
author finds that headquarters achieve control of foreign subsidiaries by managing organisational
relationships, and that the characteristics of these relationships predominantly influence the design
of the PMSs. Additionally, Muralidharan and Hamilton point out that the emphasis on a subsidi-
ary’s role in the achievement of global strategic objectives implies differentiated approaches to the
design of PMSs. Therefore, they suggest, the set of performance indicators reported to the head-
quarters should be tailored to the specific contribution made by the subsidiary to the implementa-
tion of the company’s strategy. Finally, according to Dent, the evolution of international strategies
requires headquarters to legitimise and balance multiple measurement perspectives, coordinate
organisational complexity, develop more sophisticated competitor analyses, improve resource
allocation, and overcome centrifugal tendencies in their relationships with subsidiaries. Specifically,
he contends that the balance of multiple measurement perspectives should lead to a comprehensive
and non-diagnostic use of PMSs.8
Subsidiary performance is the result of complex combinations of

several elements related to international strategies, environmental
embeddedness and local entrepreneurship
The suggestions offered by recent studies in the international management literature seem to be
consistent with the evolution of PMSs.9 Indeed, contemporary approaches to PMSs advocate the
use of non-financial indicators in addition to the traditional financial metrics based on the account-
ing perspective. Two main reasons support these contemporary approaches to PMSs.
First, the rationale behind the inclusion of non-financial indicators in PMSs has often been re-
lated to the limitations of financial metrics. Non-financial indicators are considered to be more for-
ward-looking, better able to predict future performance, more adequate to measure intangible
assets and less subject to manipulation than financial metrics. The proliferation of non-financial
indicators documented in managerial literature supports the academic research view regarding
the limitations of financial performance indicators.10
Second, the inclusion of non-financial indicators in PMSs should not merely represent a more
sophisticated version of the monitoring mechanism. This means that their role should not be

limited to improving supervision and diagnostic control. Rather, the employment of PMSs with
non-financial indicators is recommended by the contemporary approaches in order to enhance
strategy implementation. PMSs therefore become strategy tools, because they contribute towards
strategic objectives through three mechanisms: (i) a better understanding of the linkages between
various strategic priorities; (ii) more effective communication of the association between objectives
and actions; and (iii) more efficient allocation of resources and tasks. As argued in the international
management literature, the three mechanisms are crucial within relationships between headquarters
and subsidiaries. Thus, it is important to understand how non-financial indicators can be impor-
tant elements in the creation of strategic alignment within international organisations. Empirical
research on non-financial performance indicators is very broad and examines several issues. How-
ever, no prior study addresses the issue of the adoption of non-financial indicators within relation-
ships between headquarters and subsidiaries. This omission not only limits our knowledge about
international organisations, but also circumscribes our understanding of the properties of non-
financial indicators.11
In international organisations, the understanding of the strategic linkages connecting various
objectives is difficult and complex because of the variegated structure shaping the creation of
global value, and the mix of organisational interdependence and local embeddedness characteris-
ing subsidiaries’ operations. PMSs including non-financial indicators offer a more comprehensive
picture of the performance drivers because they measure performance areas beyond the financial
results. Moreover, by adopting different measurement perspectives, they tend to balance compet-
ing strategic priorities. Communication of the links between objectives and actions is significantly
hindered by the geographical, cultural and business distance between headquarters and subsidiar-
ies. Non-financial indicators translate strategy into operational terms, improving the comprehen-
sion of objectives and desired actions. Moreover, by focusing the attention on leading
performance drivers, they avoid strategy perception gaps and strengthen the cohesion of strategic
actions. Finally, resource allocation throughout network-based international organisations cannot
follow traditional hierarchical approaches. PMSs including non-financial indicators help to exam-
ine performance results by measuring key technical elements which highlight differences in busi-
ness operations and practices. Moreover, by supplementing financial metrics with technical
indicators, they provide additional information for international capital budgeting and strategic
planning.
PMSs including non-financial indicators offer a more comprehensive

picture of performance drivers, because they measure performance
areas beyond the financial results
In order to empirically test some of the above arguments supporting the employment of strategic
PMSs that include both financial metrics and non-financial indicators, and to better understand the
role of non-financial indicators in the PMSs between headquarters and subsidiaries, our research is
driven by the following fundamental question:
Can the inclusion of non-financial indicators in PMSs improve dialogue between headquarters and
subsidiaries?
To answer the question, we first investigate which measurement perspectives, measurement ob-
jects and financial and non-financial indicators are contained in PMSs used in relationships be-
tween headquarters and subsidiaries. As discussed above, contemporary approaches contend that
PMSs support the implementation of strategy by measuring performance according to multiple
perspectives. In addition, a more comprehensive performance measurement implies multiple mea-
surement objects captured by a balanced mix of financial metrics and non-financial indicators.
Thus, we empirically analyse (i) which measurement perspectives (financial, customer, internal

process and/or people) are adopted by PMSs, (ii) whether performance indicators are measured by
product, market, customer, distribution channel and/or geographic area, and (iii) the relative
weight of non-financial indicators over the total number of indicators included in PMSs. Based
on the attention given to non-financial indicators by both the academic and managerial literature,
we might expect to find the frequent inclusion of non-financial indicators in the PMSs employed by
headquarters in their relationships with subsidiaries. On the other hand, the interdependence be-
tween headquarters and subsidiaries, the local autonomy driving subsidiaries’ development and
the variety of environmental factors affecting subsidiaries’ performance might be relevant obstacles
to the inclusion of non-financial indicators in PMSs.
Further, we focus our attention on the factors associated with the inclusion of non-financial
indicators in order to examine their contribution to the dialogue between headquarters and
subsidiaries. Prior PMS-related research shows that the selection of performance indicators to be
included in PMSs depends on three main factors: the purpose of performance measurement, the
information content (called informativeness) of performance indicators used, and the organisa-
tional setting. For each of the three factors, we investigate various aspects.12
We focus on the factors associated with the inclusion of non-financial

indicators in order to examine their contribution to the dialogue
between headquarters and subsidiaries
First, our investigation of the purpose of PMSs allows us to analyse the role of non-financial in-
dicators in the relationships between headquarters and subsidiaries. The international management
literature argues that one of the most relevant purposes assigned by headquarters to PMSs
employed within their relationships with subsidiaries refers to relative performance evaluation.
Through relative performance evaluation, headquarters compare subsidiaries’ results and acknowl-
edge best performances. By comparing and analysing different local results, headquarters facilitate
the identification of best practices and subsidiaries can benchmark their operations in an environ-
ment of constructive competition. We examine the association between non-financial indicators
and relative performance evaluation. On the one hand, the difficulty of standardising non-financial
indicators may discourage headquarters from using them for relative performance evaluation. On
the other hand, headquarters could adopt non-financial indicators for relative performance evalu-
ation in order to emphasise the relevance of non-financial perspectives for the creation and assess-
ment of global success. As well as assessing organisations’ reliance on relative performance
evaluation, we examine whether the interactive use of PMSs is associated with the inclusion of
non-financial indicators. The interactive use of PMSs means that performance indicators are
frequently analysed to generate learning about actions leading to performance. PMSs used interac-
tively can promote dialogue and knowledge-sharing throughout the organisation. They facilitate
both strategy implementation and formation. Non-financial indicators are supposed to be partic-
ularly appropriate for the interactive use of PMSs, because they offer a more comprehensive
representation of performance results and avoid myopic and diagnostic approaches to performance
measurement.13
PMSs used interactively can promote dialogue and knowledge-sharing

throughout the organisation

Second, analysis of the elements influencing the informativeness of performance measures helps
our understanding of the relationship between financial metrics and non-financial indicators of
performance. The informativeness of a performance indicator is its capacity to provide marginal
information about performance. Informativeness depends on contextual elements. Autonomous
subsidiaries are proactively involved in many activities and, therefore, financial metrics are likely
to have poor informativeness about their performance. Seemingly, high organisational interdepen-
dence indicates that subsidiary performance depends on interactions among several units and,
therefore, the informativeness of traditional financial metrics is low. We examine how informative-
ness affects the inclusion of non-financial indicators in PMSs, by considering subsidiary autonomy
and organisational interdependence. As shown by previous empirical results, we expect that the in-
clusion of non-financial indicators will be associated with elements (i.e., subsidiary autonomy and
organisational interdependence) that tend to reduce the informativeness of financial metrics.14
Third, our investigation of the organisational setting in which PMSs are employed controls for
the key characteristics shaping the relationship between headquarters and subsidiaries. Prior studies
provide a variety of variables capturing different elements that characterise relationships between
headquarters and subsidiaries. Subsidiary size is normally used as a proxy of the level of resources
available at the subsidiary level and it has been shown that PMSs of large firms are likely to contain
non-financial indicators. Profitability has been found to be associated with the design of PMSs. In
particular, the PMSs of loss-making firms are likely to emphasise financial metrics because of the
pressure to report good financial performance results. Both the international management literature
and PMS-related research show that national cultural attributes based on Hofstede’s taxonomy (i.e.,
individualism, power distance, masculinity and uncertainty avoidance) also contribute to an expla-
nation of the design of PMSs employed within international organisations. Finally, in a prior survey
on PMSs in international organisations, we found that subsidiary participation in the design of
PMSs is positively associated with the inclusion of non-financial indicators. If the headquarters
share the design of PMSs with the subsidiaries, the inclusion of non-financial indicators measuring
key technical performance drivers is more likely. By considering subsidiary size, subsidiary profit-
ability, headquarters nationality and subsidiary participation in the design of PMSs, we examine
a wide variety of elements shaping relationships between headquarters and subsidiaries.15
If the headquarters share the design of PMSs with the subsidiaries, the
inclusion of non-financial indicators measuring key technical
performance drivers is more likely
Research methodology
Our research is based on a multi-method empirical approach. Reviews of empirical research show
that questionnaires are commonly used to gather data about PMSs but are rarely combined with
complementary research methods, and this is seen as a limitation of prior research. Specifically,
the combination of quantitative and qualitative information gathered through different empirical
methods helped us to enhance the assessment of our empirical measurements, validated our inter-
pretation of empirical evidence and strengthened the basis for our conclusions.16
Our survey study involved 300 Italian subsidiaries of foreign international companies. Subsidiar-
ies of foreign companies represent approximately one-third of the largest Italian companies.17 We
extracted non-financial subsidiaries with the highest annual revenues from the AIDA database. We
contacted every subsidiary to obtain the email address of its Chief Financial Officer (CFO) or com-
parable position. CFOs were selected as the most appropriate category of respondents for our re-
search objectives, because they are in charge of performance measurement and discuss the reported
performance indicators with top management.18

Table 1. Final sample: industry composition
Industry No. obs. % Average no. of employees
Apparel 6 4.3 80
Automotive 10 7.1 624
Business services 6 4.3 332
Chemicals 13 9.2 355
Consumer goods 5 3.5 1.406
Electronics 17 12.1 292
Energy 4 2.8 444
Food and beverages 13 9.2 622
Industrial equipment 20 14.2 257
Information technology 8 5.7 1.654
Medical products and equipment 8 5.7 220
Miscellaneous 14 9.9 440
Pharmaceuticals 7 5.0 814
Telecommunications 3 2.1 4.000
Transportation and logistics 7 5.0 357
Total 141 100.0 -
Table 1 and Table 2 report the sample composition by industry and by headquarters nationality,
respectively. A total of 144 questionnaires were returned (the response rate was 48 per cent). Three
questionnaires were substantially incomplete and we excluded them from the final sample. We did
not find any significant differences in late and early responses; this indicates a low probability of
non-response bias. Our final sample contained 141 subsidiaries operating in 15 different industries
across manufacturing, service and merchandising sectors. There was no significant concentration of
Table 2. Final sample: headquarters nationality
Headquarters country No. obs. % PDI IDV MAS UAI
Austria 3 2.3 11 55 79 70
Belgium 3 2.3 65 75 54 94
Denmark 3 2.3 18 74 16 23
Finland 3 2.3 33 63 26 59
France 13 9.2 68 71 43 86
Germany 19 13.7 35 67 66 65
Hong Kong 1 0.8 68 25 57 29
Japan 6 4.6 54 46 95 92
The Netherlands 6 4.6 38 80 14 53
Norway 1 0.8 31 69 8 50
South Africa 1 0.8 49 65 63 49
Spain 2 1.5 57 51 42 86
Sweden 4 3.1 31 71 5 29
Switzerland 13 9.2 34 68 70 58
Taiwan 1 0.8 58 17 45 69
UK 10 6.9 35 89 66 35
USA 50 35.1 40 91 62 46
PDI: Power distance index; IDV: Individualism; MAS: Masculinity; UAI: Uncertainty avoidance index.
(Source: www.geert-hofstede.com).

observations; this indicates a good level of representation for our final sample. On average,
subsidiaries in the final sample reported total assets of V180 million, net income of V4.5million
and 600 employees.19
We integrated survey data with qualitative information derived from interviews undertaken with
a subset of the questionnaire respondents. Structured interviews were held with eight respondents.
We chose to contact a diverse set of subsidiaries in order to examine a variety of situations. Spe-
cifically, we selected subsidiaries with different combinations of organisational interdependence
and local autonomy. We also conducted semi-structured interviews with five other respondents.
The purpose of the semi-structured interviews was to encourage discussion about broader aspects
of PMSs and the characteristics of relationships between the headquarters and the subsidiary.20
For interview, we selected subsidiaries with different combinations of

organisational interdependence and local autonomy
Table 3 contains background information about the subsidiaries involved in interviews. In
particular, for each subsidiary, the table reports the industry in which the subsidiary operates,
the proportion of non-financial indicators included in the PMS, an indication of the level of
subsidiary autonomy and organisational interdependence with respect to the average sample level
(i.e., high if above average; low, otherwise), the number of the subsidiary’s employees, whether the
subsidiary reported an economic loss in the last period, and the nationality of the headquarters.
The appendix provides more details about our empirical research methodology.
Variables
We designed our questionnaire based on a review of prior empirical work in both the international
management literature and PMS-related research, plus the cooperation of two subsidiary controllers.
Table 3. Background information about subsidiaries involved in the structured interviews
Subsidiary (industry) Proportion of Subsidiary Organisational Employees Loss- Headquarters

non-financial autonomy interdependence making country
indicators %
Structured interviews
A (Transportation and 40 Low Low 560 Yes Germany
logistics)
B (Chemicals) 30 Low Low 650 No USA
C (Industrial equipment) 0 High High 20 No Germany
D (Pharmaceuticals) 64 High High 3,000 No France
E (Information technology) 67 High Low 450 No Germany
F (Information technology) 50 High Low 250 No Austria
G (Electronics) 33 Low High 100 No Germany
H (Information technology) 65 Low High 7,600 Yes USA
Semi-structured interviews
I (Medical products and 42 High High 400 No Germany
equipment)
J (Food and beverages) 70 Low High 700 No France
K (Industrial equipment) 42 Low High 500 Yes Germany
L (Industrial equipment) 62 High High 1,100 No USA
M (Chemicals) 42 Low High 700 Yes Switzerland

From a list of 35 performance indicators grouped into four measurement perspectives, respon-
dents were asked to mark which indicators are included in the PMSs regularly used by subsidiaries
to report performance results to headquarters. We formed the list of indicators by examining prior
empirical research on PMSs and suggestions received during the pilot testing of our questionnaire.
Indicators were grouped into four categories borrowed from the Balanced Scorecard framework.
We calculated the proportion of customer, internal processes and people performance indicators,
over the total number of indicators marked by each respondent, as variables for the presence of
non-financial indicators in that organisation’s PMS. In addition, our tables report results for
the overall proportion of non-financial indicators (i.e., the sum of the proportions of the three
non-financial perspectives).21
To investigate the factors associated with the inclusion of non-financial indicators, we
constructed variables for relative performance evaluation, interactive use of PMSs, subsidiary
autonomy, organisational interdependence, subsidiary size, subsidiary profitability, headquarters
nationality and subsidiary participation in the design of PMSs. We measured on a 5-point Likert
scale to what extent performance indicators contained in PMSs are used for relative performance
evaluation. We measured the interactive use of PMSs based on the two instruments used by Aber-
nethy and Brownell. One instrument has four items measuring on a 5-point Likert scale the extent
to which PMSs are used as interactive tools in relationships between headquarters and subsidiaries.
The other instrument proposes two descriptions of PMSs and asks respondents to choose the clos-
est to their PMS. This second instrument is intended to check for the reliability of the multi-item
instrument. We found high correlation between the variables constructed using the two alternative
methods. This implies good reliability of the multi-item method and we used it for the construction
of the variable for the interactive use of PMSs. On a 5-point Likert scale, we measured the extent to
which the subsidiary had autonomously undertaken eight entrepreneurial actions in the last three
years. We formed the list of possible initiatives by examining prior empirical research on subsidiary
entrepreneurship. Based on the instrument used by O’Donnell, we measured to the extent to which
a subsidiary’s activity is affected by organisational interdependence. Our variable captures both ver-
tical interdependence (i.e., between headquarters and subsidiary) and horizontal (i.e., between
subsidiaries). To measure subsidiary size we used the natural logarithm of the total number of
the subsidiary’s employees. To take into account subsidiary profitability, we constructed a dummy
variable, which is equal to 1 if the last reported income of the subsidiary is positive and 0 otherwise.
In line with a large number of empirical studies, we measured cultural attributes based on
Hofstede’s indices. For each headquarters’ nationality, we used the power distance, masculinity,
individualism and uncertainty avoidance indices. Through a principal components analysis, we
constructed one variable factoring in the four indices. Finally, for subsidiary participation in the
design of PMSs, we measured on a 5-point Likert scale the extent to which the design of PMSs
was imposed by headquarters.22
Findings
Descriptive statistics
Table 4 reports the items composing the empirical variables, descriptive statistics and reliability sta-
tistics. Cronbach’s Alphas are calculated as reliability statistics for the survey instruments; all of
them are higher than 65 per cent. The reliability statistic for the four Hofstede’s indices is the total
variance explained by the principal component, which is almost 50 per cent. These indices indicate
that our variables have good content validity.
The number of performance indicators contained in PMSs ranges from two to 34, with an average of
16. In contrast to rules of thumb that discourage the inclusion of more than ten different indicators in
PMSs, our survey data shows that most companies (77 subsidiaries; 55 per cent of the final sample)
include more than ten but less than 20 indicators. In 46 cases (33 per cent of the final sample),
more than half of the indicators included in PMSs are non-financial. However, there is only one
case (0.7 per cent of the final sample) of PMSs containing non-financial indicators alone, whereas there

Table 4. Descriptive statistics
Variable No. Factor Reliability Mean Median St.dev. Min Max

obs. loading statistics
Total number of performance indicators 141 - - 16 16 7 2 34

Proportion of non-financial performance 141 - - 0.43 0.44 0.17 0.00 1.00
indicators
Proportion of customer performance 141 - - 0.15 0.14 0.12 0.00 1.00
indicators
Proportion of internal processes 141 - - 0.14 0.13 0.11 0.00 0.54
performance indicators
Proportion of people performance 141 - - 0.15 0.15 0.09 0.00 0.35
indicators
Relative performance evaluation 141 3.48 4.00 1.18 1.00 5.00
Interactive use of PMS (4-item score) 141 0.82 3.71 3.79 0.87 1.26 5.00
Performance indicators are used as 141 0.845 3.89 4.00 0.94 1.00 5.00
a means of debating the ongoing
decisions and actions of managers
Performance measurement is a continuous 141 0.850 4.08 4.00 1.00 1.00 5.00
process. It demands regular and frequent
attention from managers
There is a lot of interaction between the 141 0.735 3.51 4.00 1.21 1.00 5.00
headquarters and the subsidiary for PMS
PMS is used to discuss with peers and 141 0.810 3.33 4.00 1.19 1.00 5.00
subordinates changes occurring in the firm
Subsidiary autonomy (8-item score) 141 0.84 3.37 3.37 1.00 1.18 5.37
Re-pricing of the products at local level 138 0.665 3.61 4.00 1.42 1.00 5.00
Product adaptations to local needs 141 0.750 3.42 3.00 1.26 1.00 5.00
Development of the market offer 139 0.767 2.86 3.00 1.34 1.00 5.00
through local services
Design of commercial practices at 138 0.806 3.22 3.00 1.30 1.00 5.00
local level
Outsourcing of logistics and customer care 138 0.461 2.64 3.00 1.38 1.00 5.00
Development of new customer segments 138 0.665 3.20 3.00 1.33 1.00 5.00
Creation of distribution and post-sales 137 0.674 2.84 3.00 1.44 1.00 5.00
channels
Design of advertising practices at 139 0.790 2.91 3.00 1.34 1.00 5.00
local level
Organizational interdependence 141 0.67 2.49 2.37 0.94 1.00 5.00
(3-item score)
Subsidiary depends on the effective 141 0.562 3.26 3.00 1.33 1.00 5.00
functioning of headquarters to keep
performing its own tasks effectively
Subsidiary depends on the effective 140 0.906 2.21 2.00 1.12 1.00 5.00
functioning of other subsidiaries to
perform its own tasks effectively
Activities of other foreign 139 0.868 2.26 2.00 1.11 1.00 5.00
subsidiaries influence the outcomes
of this subsidiary
Number of employees 141 573 175 1.197 10 8.809
Subsidiary profitability (dummy variable) 141 0.72 1.00 0.45 0.00 1.00

Table 4 (continued )
No. Factor Reliability
Variable obs. loading statistics Mean Median St.dev. Min Max
Headquarters national culture 141 0.49 0.00 e0.28 1.00 e1.47 2.30
(4-item score)
Power Distance Index 141 0.785
Individualism 141 e0.695
Masculinity 141 0.059
Uncertainty Avoidance Index 141 0.920
Subsidiary participation 141 1.77 1.00 1.06 1.00 5.00
are six cases (4 per cent of the final sample) of PMSs containing financial metrics alone. These results
document that PMSs primarily include indicators of the traditional financial measurement perspec-
tive, but in most cases, they supplement financial metrics with a remarkable number of non-financial
indicators. On average, the proportion of non-financial indicators is 43 per cent. Specifically, the pro-
portions of customer, internal processes and people indicators are 15, 14 and 15 per cent, respectively.
It is therefore equally probable that non-financial indicators are related to the customer, internal
processes or people measurement perspective.
In most cases, PMSs supplement financial metrics with a remarkable

number of non-financial indicators
Table 5 reports the Pearson correlation coefficients, which show high significant correlations be-
tween the financial indicators and the three non-financial perspectives. High correlations indicate
frequent combinations of financial metrics and non-financial indicators in PMSs. However, because
the correlation coefficients across non-financial indicators are not statistically significant, there is no
clear evidence of a recurrent combination of performance indicators. Overall, descriptive statistics
and correlation analysis indicate a dispersion of the selected indicators over a wide array of non-
financial indicators.
In order to further investigate the performance dimensions of PMSs in relationships between
headquarters and subsidiaries, we provide additional descriptive statistics for the specific perfor-
mance indicators marked by respondents in Table 6. The seven indicators most frequently reported
from subsidiaries to headquarters are traditional financial metrics. However, it can be noticed that
the distribution across respondents is very heterogeneous. Indeed, there are only ten indicators with
a frequency lower than 35 per cent, meaning that they are rarely contained in PMSs. The three non-
financial measurement perspectives (i.e., customer, internal processes and people) appear to be
equally represented in PMSs. The high frequencies of sales volume trend (80 per cent of cases)
and market share (50 per cent of cases) highlight the high emphasis of PMSs on customer indica-
tors. Interestingly, particular non-financial indicators (e.g., Organisational Climate Indicators; 26.4
per cent of cases) are more frequently used than advanced financial metrics (e.g., Economic-value
Added; 24.3 per cent of cases).
Table 7 reports the descriptive statistics of the measurement objects related to performance in-
dicators. Respondents marked whether performance indicators are measured by total subsidiary,
product, market, customer, distribution channel or geographical area. The two most frequent mea-
surement objects are subsidiary (87.5 per cent of cases) and product (32.8 per cent of cases). Only
about 9 per cent of indicators are reported by geographical area in PMSs used in relationships be-
tween headquarters and subsidiaries. Presumably, the concentration of PMSs on subsidiary-level

510
Table 5. Correlation analysis
2 3 4 5 6 7 8 9 10 11 12
Financial and Non-financial Performance Measures in Multinational Companies
1. Proportion of non-financial indicators 0.569*** 0.544*** 0.532*** 0.068 0.109 0.303*** 0.216*** 0.096 e0.205** e0.199** 0.190**
2. Proportion of customer indicators e0.164** e0.063 0.111 0.044 0.032 0.000 0.012 e0.151* e0.254*** e0.022
3. Proportion of internal processes indicators 0.109 e0.078 0.120 0.257*** 0.309*** 0.001 e0.181** e0.035 0.150*
4. Proportion of people indicators 0.068 0.009 0.256*** 0.067 0.156* 0.021 e0.062 0.232***
5. Subsidiary autonomy 0.020 0.008 e0.035 0.086 0.013 e0.024 0.166**
6. Organisational interdependence 0.049 0.167** e0.160** 0.056 e0.106 0.307**
7. Relative performance evaluation 0.185*** e0.013 e0.013 0.017 0.191**
8. Subsidiary size e0.269*** 0.037 e0.030 0.289***
9. Subsidiary profitability e0.070 0.085 e0.044
10. Subsidiary participation e0.103 e0.172**
11. Headquarters national culture 0.015
12. Interactive use of PMS 1.000
***Correlation is significant at the 0.01 level. **Correlation is significant at the 0.05 level. *Correlation is significant at the 0.10 level (2-tailed).
Table 6. Frequency of performance indicators
Performance indicators Measurement perspectives Frequency %
Sales Revenues Financial 139 99.3

Operating Income Financial 134 95.7
Contribution Margin Financial 128 91.4
Gross Margin Financial 127 90.7
Net Income Financial 124 88.6
Cash Flow Financial 115 82.1
Net Working Capital Financial 112 80.0
Sales Volume Trend Customer 112 80.0
Days Sales Outstanding Financial 110 78.6
Employee Turnover People 94 67.1
Process Productivity Rate Internal processes 71 50.7
Market Share Customer 70 50.0
Return on Investment Financial 67 47.9
Return on Equity Financial 64 45.7
People Training Expenses People 63 45.0
Residual Income Financial 61 43.6
Product/Services Quality Internal processes 60 42.9
Internal Processes Total Costs Internal processes 59 42.1
Service Indicators Internal processes 58 41.4
Customer Satisfaction Customer 53 37.9
People Productivity Rate People 53 37.9
% Research&Development Expenses/Revenues People 49 35.0
Market Coverage Indicators Customer 45 32.1
Process Quality Internal processes 44 31.4
% Sales from New Products, Patents and Licenses People 42 30.0
Organizational Climate Indicators People 37 26.4
New Customer Rate Customer 35 25.0
Product Cycle Time Internal processes 35 25.0
Economic-value added Financial 34 24.3
Customer Loyalty Rate Customer 27 19.3
Internal Customer Satisfaction Ratings Internal processes 21 15.0
Time to Market People 19 13.6
Flexibility Rate Internal processes 18 12.9
Trade Partner Satisfaction Customer 15 10.7
Innovation Rate on the Development Projects People 14 10.0
results can be explained by the relatively narrow scope of subsidiaries’ activities in our sample,
which are probably regional units rather than global players. Given the limited variation, we did
not include a variable for measurement object in our empirical analyses but concentrated our
attention on the proportion of non-financial indicators contained in PMSs.
Survey and interviews results

Table 8 reports results of four regression models where relative performance evaluation, interactive
use of PMSs, subsidiary autonomy, organisational interdependence, subsidiary size, subsidiary prof-
itability, headquarters nationality and subsidiary participation are predictors of the overall propor-
tion of non-financial indicators and the proportion of customer, internal processes and people
indicators contained in PMSs. Each model is statistically significant at the 5 per cent level or lower.
Model 1 is the general model, since it uses the overall proportion of non-financial indicators as

Table 7. Descriptive statistics of the measurement objects
Measurement object Frequency Mean Median St.dev. Min Max
Subsidiary 87.5 14.3 14.0 6.8 0.0 34.0

Product 32.8 5.4 5.0 4.4 0.0 23.0
Market segment 18.0 3.0 1.0 4.2 0.0 19.0
Customer 14.7 2.4 1.0 3.7 0.0 23.0
Distribution channel 12.6 2.1 0.0 3.9 0.0 20.0
Geographic area 8.9 1.5 0.0 2.9 0.0 19.0
a dependent variable and provides results to answer our research question. The model is statistically
significant and has an Adjusted-R2 of 29.1 per cent. The results of Model 1 show that the inclusion
of non-financial indicators in PMSs is significantly associated with relative performance evaluation,
interactive use of PMSs, subsidiary size, headquarters nationality and subsidiary participation.
These results indicate that PMSs containing a high proportion of non-financial indicators support
relative performance evaluation, and are used interactively in relationships between headquarters
located in countries with low power-distance, masculinity, uncertainty avoidance indices and
a high individualism index, and large subsidiaries that participated in the design of the PMSs.
The remaining models provide the statistical significance of predictors of the proportion of the
three types of non-financial indicators, namely customer, internal processes and people indicators.
The results of Model 2 show that the proportion of customer indicators is associated with relative
performance evaluation and headquarters nationality, while controlling for the other factors. In
particular, PMSs with a high proportion of customer indicators are likely to be employed in rela-
tionships between subsidiaries and headquarters of countries with low power-distance, masculinity
and uncertainty avoidance indices and a high individualism index. The results of Model 3 show that
the proportion of internal processes indicators is associated with relative performance evaluation,
Table 8. Regression analyses of the factors associated with the inclusion of non-financial indicators in PMSs
Variable Model 1 Model 2 Model 3 Model 4
Proportion of Proportion Proportion of Proportion

non-financial of customer internal processes of people
indicators indicators indicators indicators
Relative performance evaluation 0.338** 0.241** 0.182* 0.175*

Interactive use of PMS 0.186* 0.102 0.066 0.168
Subsidiary autonomy 0.030 0.068 e0.073 0.069
Organisational interdependence 0.020 e0.009 0.083 e0.051
Subsidiary size 0.177* e0.011 0.305** .0000
Subsidiary profitability 0.145 e0.036 0.104 0.187*
Headquarters nationality e0.191* e0.242** e0.012 e0.086
Subsidiary participation 0.208** 0.131 0.205* 0.009
Adjusted R2 0.29** 0.11** 0.17** 0.06*
**Correlation is significant at the 0.01 level. *Correlation is significant at the 0.05 level. (2-tailed). The number are
standardised coefficients for independent variables included in the regressions models. We tested the existence of
multicollinearity among the independent variables using the variance inflation factor (VIF). VIFs of all the variables
were below 2, so that all of them were included in the final model. Normality test was performed with the following
techniques: Shapiro-Wilk KolmogoroveSmirnov. Cramerevon Mises and AndersoneDarling.

subsidiary size and subsidiary participation. PMSs with a high proportion of internal processes in-
dicators are likely to be employed in relationships between headquarters and large subsidiaries that
participated in the design of the PMSs. The results of Model 4 show that the proportion of people
indicators is associated with relative performance evaluation and subsidiary profitability. PMSs with
a high proportion of people indicators are likely to be employed within relationships between head-
quarters and profitable subsidiaries. Coefficients for subsidiary autonomy and organisational inter-
dependence are not statistically significant in any of the four regression models. This lack of
significance does not exclude the possibility that they influence the design of PMSs, but it does
indicate that their influence is not marginally significant when controlling for the other influential
factors included in our models.
The proportion of customer indicators is associated with relative

performance evaluation and headquarters nationality
The qualitative information gathered through structured and semi-structured interviews sup-
ports a strong association between the inclusion of non-financial indicators in PMSs and relative
performance evaluation, interactive use of PMSs and headquarters culture. In the remaining part
of this section, we report quotes from the interviews to offer qualitative evidence of the role of
non-financial indicators in dialogue between headquarters and subsidiaries. We offer a more critical
discussion and integration of the results obtained through the survey and the interviews in the
following section.
For Subsidiary I, the inclusion of non-financial indicators allows knowledge-sharing and sup-
ports the formal mechanisms of relative performance evaluation aimed at producing organisational
learning. The CFO of Subsidiary I stated ‘The quarterly subsidiary ranking that we receive from our
headquarters creates a fruitful competition, because we see the results achieved by other subsidiaries
and we examine what we can do to improve our rank.’
For Subsidiary I, the inclusion of non-financial indicators allows

knowledge-sharing and supports the formal mechanisms of relative
performance evaluation
Moreover, interviewees explained that non-financial indicators are appropriate measures for
relative performance evaluation because they provide information about the leading performance
drivers (e.g., productivity, customer retention, employee satisfaction) and are not affected by the
international heterogeneity of costing methods and, more generally, accounting rules. The CFO
of Subsidiary I remarked ‘It is hard to make those comparisons looking at financial metrics, because
subsidiaries use different accounting information systems and financial data are hardly
comparable.’
Like that of Subsidiary I, the PMS of Subsidiary L is used for relative performance evaluation,
which is a mechanism employed to identify best practices. The CFO of Subsidiary L commented
‘Within our company, sharing information about performance measures helps us to identify best
practices. We spend more time looking into non-financial performance measures because they
highlight abnormal operating results. Given the autonomy that we have in financial accounting
and reporting, a comparison based on financial indicators would not make any sense and would
probably be misleading.’

‘Given our autonomy in financial accounting and reporting, a
comparison based on financial indicators would not make any sense’
The association between non-financial indicators and relative performance evaluation is
confirmed by the information gathered through the structured interviews. The Business Controller
of Subsidiary D emphasised the link between non-financial indicators and learning, as follows: ‘We
have a continuous benchmarking process that heavily relies on non-financial performance
indicators to transfer know-how throughout the organisation.’
The following comments were made by respondents of two subsidiaries whose PMSs include
a low proportion of non-financial indicators: ‘We report financial numbers and few technical
indicators because our PMS is used just for consolidation purposes. There is no form of relative
performance evaluation and corporate objectives drive our local commercial activities.’ (Subsidiary
B) ‘Since we are a start-up, any type of comparison between subsidiaries’ results would be pointless
and our PMS contains financial metrics alone.’ (Subsidiary C)
The association between non-financial indicators and interactive use of PMSs emerges from
many comments gathered through the interviews. Specifically, we observed that PMSs include
a high proportion of non-financial indicators in cases where the PMSs are important mechanisms
frequently used by the highest level of management and performance information is regularly in-
terpreted and discussed in meetings between headquarters and subsidiary managers. The Country
Controller of Subsidiary J explained ‘Every month general managers, product managers and finan-
cial managers from every country meet at the corporate office to discuss performance results. It is
not a simple presentation about what went well and what went badly. It is an occasion to share
concerns, to develop ideas, and to explain local distinctive conditions. Our PMS is the starting
point of the discussion.’
Furthermore, interviewees connected the relevance of non-financial indicators to the cultural at-
tributes of headquarters. The CFO of Subsidiary K stated: ‘I would define the headquarters’ style as
command and control. The pressure coming from the headquarters office is very high and perfor-
mance measurement is very detailed. Given our corporate administrative and bureaucratic culture,
it is taken for granted that we report the desired financial results, but if the corporate office wants to
know more about what is going on, then they start examining non-financial indicators more
carefully.’
Cultural attributes of the headquarters significantly shape relationships with the subsidiaries, and
consequently the role assigned to the PMSs. The Country Controller of Subsidiary J noted ‘Our
group is very fragmented and our parent company believes that coordination is key. Thus, we re-
ceive a very clear mandate and requests and we need to follow formalised and standard procedures.
Non-financial indicators help coordination because they allow a good understanding of the differ-
ent areas of performance, giving a wide picture of the business operations.’
Cultural attributes of the headquarters significantly shape relationships

with the subsidiaries, and consequently the role assigned to the PMSs
The interviews provided anecdotal evidence to support the significance of another factor that is
significant in our statistical analysis of survey data, namely subsidiary participation in the design of
PMSs. Interviewees of subsidiaries using PMSs with a high proportion of non-financial indicators
described how the subsidiary participated in the design of the PMS employed in relationships with
their headquarters. The CFO of Subsidiary L reported: ‘Our subsidiary was allowed to indepen-
dently prepare its own accounting manual to meet local accounting and fiscal standards.

Headquarters was very supportive. The design of the PMS was up for discussion and I judged the
approach of headquarters as very collaborative. As a result, our PMS contains a diverse set of sum-
mary indicators.’
Lastly, semi-structured interviews were occasions to discuss the results of our regression analyses
based on survey data with some respondents, and to rely on their practitioners’ viewpoints in order
to interpret results more consistently. In particular, since we have already reported comments on
the effects of other factors, we provide a couple of examples of interviewees’ comments on the as-
sociation between non-financial indicators and subsidiary size and profitability.
‘Large subsidiaries have more influence on decision-making in international companies. The
effect of their performances on the overall global performance is substantial and, therefore, the
PMSs cannot be limited to traditional financial measures.Non-financial indicators broaden the
spectrum of control and avoid short-sighted measurements.’ (Subsidiary I) ‘My previous experi-
ences showed me that in loss-making companies, managers run the risk of paralysis-by-analysis
and cannot overcome the limitations of a narrow financial measurement.’ (Subsidiary J)
‘Non-financial indicators broaden the spectrum of control and avoid

short-sighted measurements’
The two comments above suggest that both subsidiary size and subsidiary profitability are associ-
ated with the inclusion of non-financial indicators in PMSs. Subsidiary size is seen as a proxy of the
relative strategic importance of the subsidiary within the international organisation. In order to mea-
sure the performance of strategic subsidiaries, PMSs are expected to adopt a multi-dimensional mea-
surement approach. Subsidiary profitability is seen as a proxy for the success of the subsidiary. Some
interviewees warned that headquarters might develop a negative tendency to concentrate on financial
recovery and fail to investigate causes of financial troubles faced by loss-making subsidiaries.
Summary and discussion of empirical findings

The survey results reveal the dominance of financial metrics in PMSs, suggesting that the financial
perspective is the most widely adopted measurement perspective in relationships between head-
quarters and subsidiaries. The six most frequently reported indicators are related to the financial
measurement perspective and capture two critical dimensions of subsidiaries’ contributions to
global performance, namely financial profitability (the first five indicators in the list: Sales Reve-
nues, Operating Income, Contribution Margin, Gross Margin, Net Income) and capital efficiency
(the next two indicators: Cash Flow and Net Working Capital). Consistent with these statistics, the
information gathered through interviews rejects the notion of the diminishing importance of finan-
cial (typically, accounting) metrics proposed by some early studies on strategic performance
measurement.23
The information gathered through interviews rejects the notion of the

diminishing importance of financial metrics proposed by some early
studies
Our empirical evidence shows a widespread combination of non-financial indicators related to
different measurement perspectives and traditional financial metrics. In particular, our research
provides empirical evidence about the inclusion of multiple indicators in the PMSs employed in
relationships between headquarters and subsidiaries. Our findings are consistent with

contemporary PMS-related research, which reports that companies find non-financial indicators to
have incremental but not superior information content, meaning that non-financial indicators are
complementary and not substitute measures of performance. In particular, comments from the in-
terviews indicate that headquarters adopt multiple perspectives in order to more comprehensively
assess and evaluate financial performance, which remains the primary focus of PMSs. More specif-
ically, our findings show that PMSs in relationships between headquarters and subsidiaries contain
a remarkable variety of indicators, but there is a significant prevalence of traditional financial met-
rics measuring performance at the subsidiary and product levels. In our sample, we did not observe
a dominant non-financial measurement perspective, suggesting that customer, internal processes
and people indicators all have the same likelihood of being included in the PMSs used in relation-
ships between headquarters and subsidiaries.
Additionally, our analyses show the significance of the association between five factors and the
inclusion of non-financial indicators. Relative performance evaluation, interactive use of PMSs,
subsidiary size, headquarters nationality and subsidiary participation in the design of the PMSs
are associated with the proportion of non-financial indicators included in PMSs, independent of
factors affecting the informativeness of the performance indicators. In particular, relative perfor-
mance evaluation and headquarters nationality are significant factors associated with the inclusion
of customer indicators; relative performance evaluation, subsidiary size and subsidiary participation
are significant factors associated with the inclusion of internal processes indicators; relative perfor-
mance evaluation and subsidiary profitability are significant factors associated with the inclusion of
people indicators.
Our structured and semi-structured interviews provided supporting evidence to explain the
associations tested by our regression analyses. The interviews strongly support the arguments of
contemporary approaches to PMSs that consider non-financial indicators to be more suitable
than traditional financial metrics for capturing and reporting important dimensions of perfor-
mance results. Moreover, they contribute to the international management literature contending
that learning and interaction between headquarters and subsidiaries are strategic imperatives within
international organisations. From our interviews, it emerges that learning can be fostered through
the use of comprehensive PMSs. Interviewees reported that PMSs adopting multiple measurement
perspectives are used for relative performance evaluation, which is a mechanism for the identifica-
tion, communication and diffusion of best practices within the international organisation. A few
examples follow:
‘In our company, we pay much attention to information-sharing, and relative performance eval-
uation is one way to learn from each other and make sure objectives and actions are aligned
throughout the organisation.’ (Subsidiary E) ‘The comparative analysis of non-financial indicators
improves the information-sharing and learning that our headquarters promotes to align subsidiar-
ies’ actions.’ (Subsidiary F)
‘In our company, we pay much attention to information-sharing, and

relative performance evaluation is one way to learn from each other’
Notwithstanding the traditional financial and administrative standardisation governing many re-
lationships between headquarters and subsidiaries, the use of financial metrics remains limited by
controllability issues, local environmental uncertainties and heterogeneity of accounting standards.
Thus, headquarters employing forms of relative performance evaluation tend to prefer non-finan-
cial indicators over traditional financial metrics. In line with contemporary approaches to PMSs,
this suggests that only PMSs that balance different perspectives with the inclusion of multiple in-
dicators avoid distorted evaluations and suboptimal decisions driven by uncontrollable and volatile
factors. In addition, our findings suggest that non-financial indicators allow relative performance

evaluation, which is used to foster learning within the relationship between headquarters and
subsidiaries through the sharing of performance information.
The role of PMSs in the dialogue between headquarters and subsidiaries is indicated also by the
association between non-financial indicators and the interactive use of PMSs. Our results show that
the PMSs that contain a significant number of non-financial indicators in addition to financial
metrics are used interactively. One out of three subsidiaries in our sample reported having
a PMS employed in relationships with their headquarters with more non-financial indicators
than financial metrics. PMSs with a prevalence of non-financial indicators are associated with
higher levels of interactive use of the PMS. Interview information supported these results and
explained that non-financial indicators are commonly used as the basis for discussing and evaluat-
ing performance results and strategic actions between headquarters and subsidiaries. The CFO of
Subsidiary L described the interactive use of PMSs as follows: ‘After the third day of every month,
our headquarters schedules a conference-call meeting, which normally goes on for four or five
hours.The objective of the meeting is not only to share the analysis of performance numbers,
but also to plan corrective actions to cope with emerging issues. High emphasis is placed on knowl-
edge-sharing and involvement in order to deeply understand our performance results.’
The information collected through our interviews indicates three main reasons why non-finan-
cial indicators support dialogue and interactive relationships. First, since they refer to operating
aspects (e.g., customer service, inventory management, human resource training), they provide dif-
ferential and more in-depth information compared to that of traditional financial metrics. Second,
since they measure results from different perspectives, they are more forward-looking and capture
key drivers of performance (e.g., customer satisfaction, quality, employee motivation). Third, since
they are regularly used within the business functions even for purposes beyond performance mea-
surement (e.g., market analyses, production planning, career management), they attract the atten-
tion of a wide set of managers who can engage in fruitful discussions to analyse the organisational
performance.
Further, the interviews confirm that large subsidiaries make a crucial contribution to the achieve-
ment of global strategic objectives because of the large quantities of resources they have available.
Thus, PMSs in large subsidiaries tend to include non-financial indicators in order to capture
multiple aspects of performance. The Country Controller of Subsidiary J noted: ‘Subsidiary size
indicates organisational complexity: more products, more segments, more customers, etc. The
complexity leads to supplementing financial metrics with non-financial indicators to capture differ-
ent drivers of performance.’
PMSs in large subsidiaries tend to include non-financial indicators in

order to capture multiple aspects of performance
In particular, our regression analyses used the total number of people employed by a subsidiary
as a proxy for subsidiary size and we found a positive association between the inclusion of internal
processes indicators and subsidiary size. Presumably, subsidiaries with many employees perform
several processes or they perform complex processes, and this explains why their PMSs are likely
to include a high proportion of internal processes indicators.
Both survey data and interview information highlighted the effect of headquarters’ culture on the
inclusion of non-financial indicators in the PMSs used between headquarters and subsidiaries.
These findings confirm the results of prior research. However, in our analyses of survey data we
used a variable reflecting national culture: whereas interview information pointed out it is primarily
the organisational culture that plays a pivotal role in the design of PMSs. The CFO of Subsidiary M
explained: ‘In our company, we think globally. We all know what the goals are and we all work
towards them. This is our cultural approach and I see that our PMS is consistent with the idea
of one global company. Our shareholders look at financials primarily. Thus, we give considerable

importance to them. How? We believe that we need to look at our international operations accord-
ing to a value-chain perspective. Thus, we integrate financial metrics with process indicators. This
integration was a big change in our PMS and was driven by a new view of our global strategy.’
The management literature does not provide a solid framework for the explanation of interrela-
tionships connecting national cultural attributes and organisational cultures, and the interpretation
of our results remains problematic.24 We discuss avenues for future research in the next section.
Finally, our results regarding subsidiary participation are in line with prior PMS-related research in
international organisations, since they show that subsidiaries rarely participate in the design of PMSs,
but that their participation produces a higher number of non-financial indicators included in the
PMSs. Our interviews provide anecdotal evidence of subsidiary participation and explain that the sub-
sidiary’s involvement in the design of the PMS leads to broader performance measurement, which is
the result of a deeper understanding of the performance drivers made possible by the contribution of
the subsidiary. The Country Finance Manager of Subsidiary H explained ‘Top-talent managers were
selected to participate in a worldwide project to redesign the PMS between headquarters and
subsidiaries. A taskforce was formed and included three managers from our subsidiary.’
Results regarding subsidiary participation in the design of PMSs indicate that cooperative rela-
tionships between headquarters and subsidiaries facilitate the adoption of multiple measurement
perspectives, as emphasised by recent studies in international management.
Cooperative relationships between headquarters and subsidiaries

facilitate the adoption of multiple measurement perspectives
Although our analysis of survey results does not provide strong support, many interviewees ar-
gued in favour of an association between subsidiary profitability and the inclusion of non-financial
indicators in PMSs between headquarters and subsidiaries. Comments from our interviews pointed
out that headquarters emphasise control of financial results in subsidiaries with poor financial per-
formance, to push subsidiary managers to turn around the financial situation quickly. The CFO of
Subsidiary I stated: ‘I believe that the focus on financial metrics is fine for companies in an early
stage of their lives when it is common to have poor financial performance. As soon as the company
turns profitable, the PMS gets more sophisticated because business operations change and develop.’
Our analysis of the survey data shows that subsidiary profitability is significantly associated with
people indicators, which include performance indicators of innovation and knowledge develop-
ment. This result contributes to the stream of research within the international management liter-
ature that deals with subsidiary performance. Specifically, our findings offer empirical evidence for
the existence of a link between a subsidiary’s economic success and emphasis by its PMS on per-
formance indicators related to innovation and human capital investments. Consistent with prior
studies, these findings suggest that organisational learning and human capital can make the differ-
ence in periods of macro- or micro-economic crises.25
In our empirical research, we did not find significant relationships linking the inclusion of non-
financial indicators in PMSs to subsidiary autonomy, organisational interdependence or subsidiary
profitability. The international management literature emphasises the fact that subsidiary auton-
omy and organisational interdependence are key elements describing the role of subsidiaries within
international organisations, and PMS-related research points out that they affect the informative-
ness of performance indicators. In our regression models, the levels of subsidiary autonomy and
organisational interdependence did not significantly help to explain the variation in the proportion
of non-financial indicators in PMSs. In our discussion of results with interviewees, the lack of a sig-
nificant association between the two factors and the inclusion of non-financial indicators was
mainly explained by the scant attention paid by headquarters to distinctive subsidiary roles. Indeed,
interview information documented that headquarters tend to apply uniform approaches to their

local subsidiaries because of the need for a worldwide administrative language, and have difficulties
in differentiating control systems based on the specificity of local environments. Moreover, auton-
omous subsidiaries tend to perceive their distinctive competences in terms of rivalry with those of
the headquarters, and they find it difficult to engage in cooperative relationships with headquarters.
These tensions between headquarters and subsidiaries hinder the design of PMSs that take into pri-
mary consideration particular aspects of a subsidiary’s role. As a consequence, in relationships be-
tween headquarters and subsidiaries our findings suggest that the key elements affecting the
informativeness of performance indicators are not strongly linked to the design of PMSs.
Autonomous subsidiaries tend to perceive their distinctive competences

in terms of rivalry with those of the headquarters
Conclusions and implications
Our study examines PMSs in modern international organisations. Based on questionnaires col-
lected through a survey involving 300 foreign-owned subsidiaries and interviews with 13 respon-
dents to our questionnaire, we discuss the significance of eight factors associated with the
inclusion of non-financial indicators in PMSs used in relationships between headquarters and
subsidiaries. In particular, we explore the contribution of non-financial indicators to the dialogue
between headquarters and subsidiaries, which is expected to have significant impact on the inter-
national organisation’s performance according to the international management literature. Consis-
tent with our theoretical analysis of contemporary approaches in international management
literature and PMS-related research, our empirical evidence suggests that the inclusion of perfor-
mance indicators in PMSs is explained by the purpose of the PMSs (captured by the reliance on
relative performance evaluation and the interactive use of PMSs) and the characteristics shaping
the relationships between headquarters and subsidiaries (captured by subsidiary size, headquarters
nationality and subsidiary participation), while controlling for the informativeness of the perfor-
mance indicators (captured by subsidiary autonomy and organisational interdependence).
From the findings of our study, we can draw conclusions that have implications for both inter-
national management and PMS-related research and practice.
The associations between non-financial indicators and relative performance evaluation and inter-
active use of PMSs underline the fact that the inclusion of non-financial indicators is strictly con-
nected to their use within the relationships between headquarters and subsidiaries. In particular, the
associations indicate that non-financial indicators help foster dialogue between headquarters and
subsidiaries. The dialogue starts from a shared analysis of a diverse set of performance indicators
and is aimed at generating learning within the international organisation through performance
information-sharing. As we reported in this paper, the evolution of international management
emphasises that the dialogue between headquarters and subsidiaries is necessary to deal with the
complex web of organisational relationships and to achieve strategic alignment throughout the in-
ternational organisation. Therefore, in order to support the achievement of this goal of strategic
alignment, PMSs should not be conceived simply as measurement diagnostic tools or problem
detectors. Instead, they should be used to foster dialogue between peripheral units and corporate
offices and to initiate collaborative discussions about strategic performance results. We provide
evidence that non-financial indicators support this dialogue because they capture key performance
drivers and complement the information content of traditional financial metrics.
PMSs should be used to foster dialogue between peripheral units and

corporate offices, and to initiate collaborative discussions

Further, we found a positive correlation between subsidiary participation and interactive use of PMSs,
suggesting that subsidiary autonomy is not inherently in conflict with a cooperative attitude in relation-
ships between headquarters and subsidiaries. Prior international management literature emphasises that
autonomous subsidiaries tend to engage in hostile behaviours towards their headquarters to avoid the
threat of expropriation of resources or distinctive mandates. Our research offers some evidence that sub-
sidiary autonomy may be associated with interactive use of PMSs to gain attention from headquarters,
with positive effects on economic performance as shown in prior studies. Creating more organisational
involvement through the reduction of the gap between decision-makers and implementers can increase
the effectiveness of strategy implementation.26 Moreover, our results on the positive association between
subsidiary participation and non-financial indicators challenge PMS-related research, which tends to
conceive of PMSs as hierarchical systems implemented by a top-down approach.27 Our survey data re-
veal that this is definitely true in most cases. However, the participation of the subsidiary in the design of
the PMS is positively associated with the proportion of non-financial indicators in the PMS, and qual-
itative information gathered through our interviews confirms that subsidiary participation facilitates the
inclusion of non-financial indicators in PMSs used between headquarters and subsidiaries. These find-
ings imply that the process followed by international organisations to design PMSs has significant con-
sequences on the selection of performance indicators.
Finally, our results regarding the association between the inclusion of non-financial indicators and
relative performance evaluation offers further support to the conclusion about the positive effect of
non-financial indicators on the dialogue between headquarters and subsidiaries. Interviews in particular
helped us to understand that the purpose of relative performance evaluation is to generate learning about
business practices within the international organisation. In addition to the common limitations attrib-
uted to financial metrics, our findings highlight the fact that the noise and volatility of traditional finan-
cial metrics are serious issues that prevent their use for relative performance evaluation in relationships
between headquarters and subsidiaries. These limitations seem to be more severe than the difficulties of
measuring non-financial indicators uniformly across local subsidiaries. Therefore, by supporting relative
performance evaluation, non-financial indicators have a positive effect on organisational dialogue and
learning. The novel empirical evidence provided in this paper confirms prior studies arguing that
balanced structures, such as separated organisational units, balanced performance measurement and
parallel operations, are designed to generate organisational learning.28
The noise and volatility of traditional financial metrics are serious issues
that prevent their use for relative performance evaluation
Future research could extend and improve our empirical study with respect to various aspects. Based on
our survey data, we cannot directly test the strategic linkage of non-financial indicators. However, we did
observe a lack of clear patterns connecting non-financial indicators, suggesting that it is likely that the de-
sign of PMSs is not necessarily linked to strategy. PMSs may simply include diverse indicators in order to
supplement traditional financial metrics. Prior studies have already shown how in many cases non-finan-
cial indicators are not linked to strategy, and that their inclusion in PMSs is motivated merely by dissatis-
faction with traditional financial metrics. The lack of a strategic linkage diminishes the benefits of including
non-financial indicators and may cause problems related to information overload, managerial confusion
and evaluation ambiguity. Therefore, it is critical that headquarters design diverse PMSs as part of a strategy
implementation process.29 Future research could further investigate the strategic linkage of non-financial
indicators by examining the process followed by international organisations to design PMSs that include
customer, internal processes and people indicators. Further, future research could investigate relationships
between the design and use of PMSs by examining additional aspects. It could extend our study and in-
crease the sophistication of the variable of relative performance evaluation with analyses of the additional
purposes of PMSs, such as rewarding or capital budgeting. By collecting data in different settings, it could

test the effects of additional variables related to PMSs (e.g., organisational culture and strategic linkage of
performance indicators), and to overcome the limitations of our linear regression models it could examine
empirical models that capture moderating and mediating effects. For example, future studies could focus
on small subsidiaries and examine the intervening effect of organisational complexity, which we can only
partially describe given the composition of our sample.
Future studies could focus on small subsidiaries and examine the

intervening effect of organisational complexity
Acknowledgements
We thank the participants at the 2008 PMA Symposium, in Lausanne. We are grateful for the
helpful comments from the Editors and three anonymous reviewers.
Appendix
Methodological remarks
In our empirical design, we defined a subsidiary as an independent legal entity owned by a foreign
company. The target population includes subsidiaries operating in manufacturing service and mer-
chandising sectors. Pilot testing with practitioners and academic colleagues was conducted in order
to ensure that the variables of interest were relevant and to remove any ambiguity in the wording of
the questions. Specifically, the pilot testing led us to reduce the number of questions and avoid
redundant items.
The structured interviews contained the following questions:
1. What actions did the subsidiary autonomously undertake in the last three years?
2. How do the subsidiary management and operations depend on the other units of the interna-
tional group?
3. Why does the PMS used to report to headquarters contain certain indicators? How are these
indicators used for relative performance evaluation?
4. Did the subsidiary participate in the design of the PMS?
Examples of the questions included in the semi-structured interview are:
1. What does the subsidiary do?

2. What is the relative importance of the subsidiary within the international group?
3. Which are the performance indicators contained in the formal PMS regularly reported to the
headquarters?
4. Does the headquarters use forms of relative performance evaluation? Please describe these forms.
5. How does the headquarters exercise management control over the subsidiary? Examples?
Table A1 summarises information about the five subsidiaries involved in the semi-structured
interviews.
Information gathered through interviews suggested some robustness checks. Specifically, we ran re-
gressions controlling for industry effect, and our results were confirmed. In addition, we also included
in our regression models a variable for the level of business diversification (measured as the number of
businesses in which the subsidiary operates). The variable turned out to be not statistically significant
and original results were confirmed. We did not report results of robustness checks for reason of brev-
ity and because they showed less explanatory power than the regression models presented in the paper.

522
Table A1. Background information on subsidiaries involved in the semi-structured interviews
Subsidiary Non-financial Headquarters culture Relative performance Interactive use

indicators and control evaluation of PMS
I Market Share Loose administrative control Quarterly ranking by a large set Few and informal meetings to
Customer Satisfaction General subsidiary managers of non-financial indicators related discuss performance results but
Trade Partner Satisfaction come from headquarters to supply-chain intense informal communication
Financial and Non-financial Performance Measures in Multinational Companies
Service Quality High level of subsidiary Ad-hoc benchmarking studies on customer- and internal
Service Indicators autonomy because of the process-related indicators
Planning Accuracy strategic importance of the
local market
J Product Quality Tight budgetary control Monthly standard report containing Monthly meeting at the headquar-
Service Quality High standardisation financial and non-financial indicators ters
Process Quality of procedures and for every plant sent from headquarters office to discuss performance
Service Indicators management systems to country general managers results with all product line man-
Product Cycle Time agers
Process Productivity Rate from different subsidiaries
Flexibility Rate
People Productivity Rate
K New Customer Rate Centralised decision-making Benchmarking tool (called ‘Knowledge Informal and infrequent
Product Quality Command and control style Repository’, not formally connected communication about
Product Cycle Time of management with performance evaluation) available performance indicators
Service Quality on intranet, including non-financial
People Training Expenses performance indicators
Long Range Planning, vol 43
L Product Quality Delegation coupled with Reliance on relative performance Long monthly meetings to
Product Cycle Time pervasive financial control evaluation for target setting and analyse and discuss performance
Service Quality Corporate pragmatism and knowledge management indicators at different management
Service Indicators informal communication High transparency over levels (normally conference calls)
Process Quality performance indicators according to a management-
Process Productivity Rate across subsidiaries by-exceptions control
New Patents Sales Volume
M Product Quality Internal network approach Rare benchmarking studies Intense exchange of performance
Service Indicators with high emphasis on and informal comparisons information (especially financial)
2010
Process Productivity Rate product lines of performance indicators but no meeting to discuss it
New Customer Sales Volume International management
523
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Biographies
Andrea Dossi is Associate Professor of Management Accounting at Bocconi University and Director of Accounting,
Control, Corporate and Real Estate Finance at SDA Bocconi School of Management. His research interests are
performance measurement systems and roles of chief financial officers in organisations.
Lorenzo Patelli is Assistant Professor of Accounting at Benedictine College and Adjunct Assistant Professor of
Management Accounting at SDA Bocconi School of Management. His research interests include management
control systems in multinational companies, executive compensation and performance measurement systems.

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Long Range Planning 43 (2010) 498e526 http://www.elsevier.

You Learn From What You

According to recent studies in international management, relationships between head-

Strategic PMSs are considered as strategy implementation tools,

In our research, we used a multi-method approach based on a large-scale questionnaire-based

Long Range Planning, vol 43 2010 499

Non-financial indicators are likely to be used for identifying best

Theoretical background and research question

500 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

Recent international management literature conceives international

Subsidiary performance is the result of complex combinations of

Long Range Planning, vol 43 2010 501

PMSs including non-financial indicators offer a more comprehensive

502 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

We focus on the factors associated with the inclusion of non-financial

PMSs used interactively can promote dialogue and knowledge-sharing

Long Range Planning, vol 43 2010 503

504 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

Industry No. obs. % Average no. of employees

Total 141 100.0 -

Table 2. Final sample: headquarters nationality

Headquarters country No. obs. % PDI IDV MAS UAI

Long Range Planning, vol 43 2010 505

For interview, we selected subsidiaries with different combinations of

Table 3. Background information about subsidiaries involved in the structured interviews

Subsidiary (industry) Proportion of Subsidiary Organisational Employees Loss- Headquarters

506 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

Long Range Planning, vol 43 2010 507

Variable No. Factor Reliability Mean Median St.dev. Min Max

Total number of performance indicators 141 - - 16 16 7 2 34

508 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

In most cases, PMSs supplement financial metrics with a remarkable

Long Range Planning, vol 43 2010 509

Table 5. Correlation analysis

Performance indicators Measurement perspectives Frequency %

Sales Revenues Financial 139 99.3

Survey and interviews results

Long Range Planning, vol 43 2010 511

Measurement object Frequency Mean Median St.dev. Min Max

Subsidiary 87.5 14.3 14.0 6.8 0.0 34.0

Variable Model 1 Model 2 Model 3 Model 4

Proportion of Proportion Proportion of Proportion

Relative performance evaluation 0.338** 0.241** 0.182* 0.175*

512 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

The proportion of customer indicators is associated with relative

For Subsidiary I, the inclusion of non-financial indicators allows

Long Range Planning, vol 43 2010 513

Cultural attributes of the headquarters significantly shape relationships

514 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

‘Non-financial indicators broaden the spectrum of control and avoid

Summary and discussion of empirical findings

The information gathered through interviews rejects the notion of the

Long Range Planning, vol 43 2010 515

‘In our company, we pay much attention to information-sharing, and

516 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

PMSs in large subsidiaries tend to include non-financial indicators in

Long Range Planning, vol 43 2010 517

Cooperative relationships between headquarters and subsidiaries

518 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

Autonomous subsidiaries tend to perceive their distinctive competences

PMSs should be used to foster dialogue between peripheral units and

Long Range Planning, vol 43 2010 519

520 Financial and Non-ﬁnancial Performance Measures in Multinational Companies

Relative performance evaluation 0.338 0.241 0.182* 0.175*