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5.1. SUMMARY, CONCLUSIONS AND DISCUSSION 121 In chapter 3, I further analyse the noise-reduction effect of RPE by examining the consequences of using RPE. Whereas chapter 2 explains RPE use with assumed noise-reducing effects of RPE, chapter 3 analyzes this explanation in a more direct manner. Chapter 3 studies whether organizations that use RPE experience reduced levels of noise in the performance evaluation. This question is important because the results from chapter 2 may be driven by alternative explanations. The literature provides various rival explanations for the association between uncertainty and RPE use. These alternative explanations include the increased need for internal competition (i.e., by pitting employees against each other through evaluating their performance relative to each other) and the desire to stimulate organizational learning via the benchmarking of performance. The results of chapter 3 reaffirm the findings of chapter 2 concerning noise reduction. The analyses show that RPE use yields reduced levels of noise in the performance evaluation. This finding strengthens the conclusion that RPE effectively reduces noise in the performance evaluation of business unit managers. 3. RPE use and the reduction of room for managerial opportunism The third research topic concerns the opportunism-mitigation perspective on RPE, which is based on Murphy (2001). According to this perspective, RPE can reduce the room that managers have to opportunistically influence their performance target difficulty, by placing the target determination process outside their sphere of influence (see: Murphy 2001). This perspective is addressed in chapters 2 and 4. As discussed in the previous section, chapter 2 explains RPE use with factors that antecede RPE use. In addition to the measure of common uncertainty that drives noise, chapter 2 includes an antecedent that is based on the opportunism-mitigation perspective. This antecedent is information asymmetry, which is combined with business unit comparability. Information asymmetry increases the room for the manager to behave opportunistically. I argue that the opportunism-increasing effect of information asymmetry can only be solved by RPE if the business unit is sufficiently comparable to a peer group 1 . However, the analyses do not show robust support for the opportunism-mitigating effect of RPE. Only one of two models supports the joint effects of information asymmetry and business unit comparability. However, this support is only marginally significant. The opportunism-mitigation explanation receives additional empirical attention in chapter 4. Similar to the approach of chapter 3, the fourth chapter of my thesis 1 If a business unit is not comparable to a relevant peer group because the unit produces highly specific products or services or relies heavily on specific processes, the unit’s performance cannot be assessed by the performance of its peers. In this case, peer comparison is not informative about the performance target.
122 CHAPTER 5. CONCLUSION addresses the RPE claim in a more direct manner than chapter 2. The models in chapters 3 and 4 focus on testing a single explanation instead of including both perspectives simultaneously. The benefit of the analyses in chapters 3 and 4 lies in their statistical power. The analyses are statistically more powerful because they do not include or require statistically demanding interaction effects. Increasing statistical power is especially important for the opportunism perspective because limited statistical power could have driven the marginal findings in chapter 2. However, chapter 4 confirms the conclusions of chapter 2 with regard to the opportunism-mitigating properties of RPE. Similar to chapter 2, the analyses in chapter 4 show that RPE has no opportunism-mitigating effect for business unit managers. Instead, the analyses of chapter 4 indicate that using RPE increases (instead of decreases) the room that managers have to behave opportunistically. A partial, post-hoc explanation for why RPE does not reduce the room for managerial opportunism is found in the work of Davila & Penalva (2006) and Ittner et al. (1997). According to Davila & Penalva, managers can influence the composition and weighting of their own performance measurement system. Managers self-select a set of performance targets that is highly controllable. Ittner et al. argue that managers may influence the composition of their PMS to obtain more manipulable performance measures. If managers can influence their performance measurement system, they can also influence their performance standard. Thus, managers can choose those measures on which they compare favourably with their peers. By self-selecting the performance metrics (or the weight placed on the individual metrics in the performance measurement system), the manager bypasses the opportunism-mitigating properties of RPE. My data support this observation by Ittner et al. (1997). In response to a question not used earlier in this study, my respondents claim that they can negotiate or otherwise influence their performance criteria to, on average, some extent. Moreover, this influence increases with increasing use of RPE for explicit target setting purposes. My data show no association between less specific applications of RPE and the possibility to influence the set of performance criteria. Although this explanation reasons why RPE may not be an efficient control instrument for opportunism reduction, it only partially explains the positive effect of RPE on the room for managerial opportunism. From the analyses in chapter 2, we learn that organizations implement RPE into the performance evaluation praxis of business unit managers mainly by relying on internal and mixed peer groups. Within my sample, only 8% of the RPE users rely exclusively on external peers, whereas the remaining 92% use internal peers at least to some extent to determine the performance targets. However, using internal peers may violate Murphy’s (2001) ‘influenceability’ presumption. The reason why RPE may reduce opportunism because
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Relative Performance Evaluation in
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NYENRODE BUSINESS UNIVERSITEIT Rela
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Table of Contents Preface 1 General
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Preface Why do people make things h
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2.2. THEORETICAL BACKGROUND 23 suff
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2.3. SAMPLE AND MEASUREMENT 25 2.2.
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2.3. SAMPLE AND MEASUREMENT 33 this
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2.3. SAMPLE AND MEASUREMENT 35 Emph
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2.4. ANALYSES 37 2.4 Analyses This
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2.4. ANALYSES 39 Table 2.8: RPE use
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2.4. ANALYSES 41 2.4.2 Correlations
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2.4. ANALYSES 43 Concerning the con
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2.4. ANALYSES 45 Table 2.13: Result
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2.4. ANALYSES 47 Table 2.15: Summar
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2.5. CONCLUSIONS AND DISCUSSION 49
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2.5. CONCLUSIONS AND DISCUSSION 51
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2.6. CONTRACTIBILITY MIMIC MODEL (A
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2.7. ANALYSES FOR FOR-PROFIT BUS (A
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Chapter 3 Does Relative Performance
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3.1. INTRODUCTION 61 Holmstrom’s
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3.2. DEVELOPMENT OF THE MODEL 63 3.
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3.2. DEVELOPMENT OF THE MODEL 65 RP
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3.3. SAMPLE AND MEASUREMENT 67 3.3
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Page 138 and 139: Appendix Overview of Questionnaire
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