pdf - Nyenrode Business Universiteit

2 CHAPTER 1. GENERAL INTRODUCTION
If any organization wants to successfully pursue its goals, the goals of the owner and the
individual members of the organization need to be aligned. If goals are aligned, the members
of the organization have the same interests as the owner. This is a necessary condition
for successfully pursuing the achievement of organizational goals.
The academic field of Management Control addresses this problem of goal alignment. In
general, Management Control studies how to motivate the members of the organization to
act congruently with organizational goals. Management Control often relies on economicsbased
theorizing to address goal congruency issues. Economic reasoning argues that it is
possible to rely on the provision of incentives to align the goals of the organization and its
individual members. Such an incentive would be to reward individuals for goal-congruent
behaviour. A typical reward would be a bonus for good performance. However, it is also
possible that the reward is non-financial in nature. Examples of non-financial rewards
include increased career prospects, or an acknowledgement from higher management, for
example, as ‘teacher of the year’ or ‘salesman of the month’. Both financial and nonfinancial
rewards can be considered as a form of pay for performance.
The general idea is that pay for performance aligns the goals of individual employees with
the owner’s goals. After all, providing effort congruent with organizational goals is now in
the employee’s self-interest. The employee receives a reward when he performs well or, in
other words, when he attains his performance target.
Aligning the goals of the organization with those of its individual members by providing
incentives is a delicate task that requires careful consideration of all of the elements of
such an ‘incentive system’. Several design aspects must be determined before an incentive
system can function properly, including: 1) the choice of the performance metrics, 2) the
strength of the pay-performance relationship, and 3) the determination of the performance
target level. This dissertation addresses this last aspect of incentive structure design, as
will be explained in more detail in the remainder of this chapter. First, the three design
aspects are discussed briefly.
The first design aspect concerns the choice of performance metrics. Performance measurement
is an essential part of the design of any incentive system (Baker 2002). The basic
question is how to measure performance in a reasonably undistorted manner. A performance
measure is congruent or undistorted to the extent that it is systematically aligned
with the organization’s true objective (Bouwens & Speklé 2007). A wide variety of financial
and non-financial performance measures exists. Examples include: profits, revenues,
market share and customer satisfaction. However, it is also possible to select measures
at the personal level, such as the development of professional skills and participation in
permanent education programmes. To create a congruent performance measurement system,
one must select those metrics that accurately measure what the owner desires of the