Residual Income in Four Dimensions: Goal-Congruity, Controllability, Understandability and Practicability

Andrzej Cwynar
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Andrzej Cwynar: University of Information Technology and Management in Rzeszów, Poland

Timisoara Journal of Economics, 2009, vol. 2, issue 2(6), 63-76

Abstract: The article discusses ten versions of residual income known in the literature from the point of view of four criteria that are of special importance if the measure is to be the basis of managerial bonuses: goal-congruity, controllability, understandability and practicability. There is – on average – a considerable trade-off between goal-congruity and the three remaining criteria. However, there are residual income versions – like net economic income (NEI) and the variant of residual income that is based exclusively on unadjusted book values (RIBV) – which demonstrate outstandingly favorable levels of goal-congruity, controllability, understandability and practicability. Although NEI exhibits the highest level of goal-congruity among the ten versions of residual income studied in the article and acceptable levels of three remaining features, it is deficient of intensive scientific examination which is necessary to make such a new tool the subject of justified recommendation. On the other hand, RIBV is the most controllable and seems to be the most understandable and the most practicable among the ten versions analyzed in the paper. However, its goal-congruity is relatively low. Yet, it can be improved without making the computational formula more complex simply by including some mechanisms making managers less myopic in bonus plan architecture.

Keywords: residual income (RI); net economic income (NEI); residual income that is based exclusively on unadjusted book values (RIBV); goal-congruity (search for similar items in EconPapers)
JEL-codes: G30 L25 M10 (search for similar items in EconPapers)
Date: 2009
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