pdf - Nyenrode Business Universiteit
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120 CHAPTER 5. CONCLUSION<br />
Additionally, the type of data that my study uses may also have influenced the<br />
findings concerning RPE’s prevalence. Most empirical studies that are currently<br />
available in the literature rely on archival data from before 2006, when the SEC<br />
did not yet require firms to disclose detailed information about their compensation<br />
plans. These data have the drawback of requiring indirect instead of direct analyses.<br />
Indirect analyses study RPE as if a manager’s performance is evaluated relative to<br />
his competitors’ performance instead of explicitly studying whether the performance<br />
evaluation system incorporates peer performance information. In contrast to most<br />
prior studies, this thesis uses detailed survey data on the performance evaluation<br />
praxis of 325 business unit managers. This survey instrument was specifically designed<br />
for the current study. This instrument provided the analyses with more detail<br />
and richness such that the study produced a more accurate description of RPE in<br />
practice.<br />
Studying RPE at a lower organizational level by using detailed survey data may generate<br />
much more evidence on RPE use than prior studies. Therefore, I conclude that<br />
my findings concerning RPE adoption do not contradict the existing knowledge base<br />
on RPE but rather extend it to a different organizational level. This finding furthers<br />
our knowledge about the empirical validity of RPE.<br />
2. RPE use and the reduction of noise<br />
After the exploration of the prevalence of RPE at the level of business unit managers,<br />
the next goal of my research is to explain the use of RPE. This study adopts two<br />
explanations for RPE use. As presented earlier in this chapter, the first explanation<br />
is based on the notion that RPE use reduces noise by partially insulating the performance<br />
evaluation from the effects of external circumstances. This perspective on<br />
RPE is the primary explanation for RPE use found in the literature.<br />
Chapter 2 of this thesis explains RPE use by studying factors that antecede RPE<br />
use. The first antecedent described in chapter 2 is common uncertainty, which follows<br />
from the noise-reduction perspective. Common uncertainty refers to uncertainties in<br />
the agent’s external environment and his business unit that are common amongst his<br />
reference group. Uncertain events induce noise in the performance evaluation. RPE<br />
can reduce the effect of external uncertain events for as far as these events are common<br />
amongst the reference group (see, for example, Holmstrom 1982). The analyses<br />
conducted in chapter 2 robustly support the effect of this RPE driver by showing<br />
that common uncertainty positively influences the use of RPE. This finding suggests<br />
that RPE use can be explained from a noise-reduction perspective.