On The Use Of Nonfinancial Performance Measures In The Innovation Incentive Of Enterprises

With the fierce development of knowledge economy, technology revolution and globalization from the end of 20th century on, technology innovation is and will continue to be the key factor for enterprises' winning competition. But apart of ownership and operating, the characteristics of technology including nonexclusive, uncertainty and costing sometime between imputing and outputting, which result in under-investment in technology innovation. So it is necessary to design an innovation incentive mechanic.In this article, we summarized the theories and applications of performance measurement both here and abroad, found two obvious trends: one is that financial measurements are becoming combined with nonfinancial measurements. Meanwhile, we have not found enough theoretical analysis, especially dynamic analysis. So we present a two-period Holmstrom-Milgrom model, discussing how performance measurement influences the manager's behaviors on three conditions: optimal long-term contact, contact can be renegotiated and nonfinancial measurement is used. We argue that the manager will under-invest in the innovation if performance measurement is based on profit only, and they will spend less effort on innovation when the contact can be renegotiated. This problem can be resolved by using nonfinancial measures, especially in the high technology lines. To exam these solutions, we use some data to do demonstration, finding the consistency between solutions and demonstrations. At last, technology innovation is divided into three periods, including trying period, middle period and mass-producing period. Then we present a performance measurement system, which is innovation oriented.