Surrogation is a psychological phenomenon in which the measure(s) of a construct of interest evolve to replace the construct itself. Research on performance measurement in management accounting has identified surrogation as "the tendency for managers to lose sight of the strategic construct(s) the [performance] measures are intended to represent, and subsequently act as though the measures are the constructs of interest" (emphasis in original). An everyday example of surrogation is a manager tasked with increasing customer satisfaction who begins to believe that the customer satisfaction survey score actually is customer satisfaction.
Inspired by work by Yuji Ijiri, the term surrogation was coined by Willie Choi, Gary Hecht, and William Tayler in their paper, "Lost in Translation: The Effects of Incentive Compensation on Strategy Surrogation". They show managers tend to use measures as surrogates for strategy, acting as if measures were in fact the strategy when making optimization decisions. This appears to occur even if a measure-maximizing choice ultimately works against the strategy.
They also show surrogation is exacerbated by incentive compensation. But, the phenomenon is distinct from wealth-maximizing behavior, since it persists both when incentives are removed and when they are changed to create an opportunity cost for maximizing the surrogate. The additional tendency to surrogate in the presence of incentives is reduced when managers are compensated based on multiple measures of a strategy rather than on a single measure.
Choi et al. proposed attribute substitution as a mechanism for surrogation. Attribute substitution in decision-making involves a complex target attribute being replaced by a more easily-accessible heuristic attribute. For this to occur, the target attribute must be relatively inaccessible, the heuristic attribute must be readily accessible, and the mental substitution must not be consciously rejected by the person. In the case of surrogation, the two attributes are related in that some party intends the heuristic attribute to serve as proxy for the target attribute.
In a follow-up study, Choi, Hecht, and Tayler demonstrate involving managers in the selection of a strategy reduces their tendency to surrogate. Merely involving managers in the strategy deliberation process does not appear to have the same surrogation-reducing effect as involving them in the actual selection of the strategy.
Jeremiah Bentley shows the effects of incentive compensation on surrogation are partially explained by a mechanism in which measure-based incentive compensation (in this case using a single measure) and wealth-maximizing behavior lead agents to distort their operational decisions (see Campbell's law). That operational distortion, in turn, leads them to change their beliefs about the compensated measure's causal relationship with the outcome--in other words, to surrogate--possibly as a means of reducing cognitive dissonance arising from inconsistency between beliefs and actions. He demonstrates that allowing people to provide narrative explanations for their decisions reduces the amount of operational distortion observed under an incentive compensation scheme, and also reduces surrogation. He also finds that the effect is larger for people who have a high preference for consistency, which supports the argument that surrogation is due to an attempt to reduce cognitive dissonance. Robert Bloomfield had proposed a link between cognitive dissonance and surrogation in an earlier paper.
In a subsequent study, Paul Black, Tom Meservy, William Tayler, and Jeff Williams show that surrogation can occur simply when a measure is provided to managers, even if they do not receive incentive compensation based on the measure. That is, if managers know that something is being measured, they will begin to surrogate on that measure, even if they are told that the measure is no more nor less important that other measures when determining their compensation. This implies that firms must be careful in determining what measures are communicated to managers, as managers may surrogate on a measure just because they hear that it is being measured.
William Tayler discusses everyday examples of surrogation and incentive compensation on BYU News Radio.