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5.1. SUMMARY, CONCLUSIONS AND DISCUSSION 123 the manager cannot easily influence his own performance target, but, as Gibbons & Murphy (1990) argue colluding with other managers within the organization to opportunistically lower the performance target may not be difficult 2 . Based on the overall findings of chapters 2 & 4, I conclude that RPE, as it is implemented in practice, is not an effective means to reduce room for opportunistic behaviour amongst business unit managers. However, the fact that RPE is not often used to mitigate opportunism by comparing managerial performance to that of external peers exclusively, does not falsify Murphy’s claim that RPE can reduce opportunism. The use of internal peers is not a prerequisite for RPE. Rather, RPE as described in the executive compensation literature, most likely is based on performance information of external peers. After all, top managers do not have internal peers, whereas business unit managers do. <strong>Business</strong> unit managers may be comparable to other business unit managers within the organization. Notwithstanding my findings, RPE may still be an effective means of mitigating the room for opportunism amongst business unit managers if the peer comparison is based on an external reference group. Unfortunately, my data do not allow empirical analyses of this idea 3 , as will be discussed in the limitations section at the end of this chapter. 4. RPE use for both purposes simultaneously In the previous paragraph, we saw that, although many organizations use RPE, it is, on average, not used to mitigate opportunistic behaviour amongst business unit managers. Organizations may not use RPE for this purpose because in most cases, RPE adopters rely on reference groups containing internal peers. As argued previously, internal and mixed peer groups may not facilitate opportunism mitigation, at least not as well as external peer groups. This observation raises the question of why organizations, after investing in RPE as a control instrument, do not simply use external instead of internal peer groups and use RPE also to mitigate opportunism. Here, I present two post-hoc explanations for this phenomenon. These explanations refer to cost-benefit trade-offs and to control instrument design considerations, respectively. First, the respondents report low room for managerial opportunism regardless of whether they use RPE. This finding, which was discussed in chapter 4, suggests that, on average, the respondents do not need (additional) control instruments to reduce opportunistic behaviour. Thus, the benefits of using RPE to reduce 2 The risk of collusion is documented in the analytical agency literature (see: Holmstrom 1982) and in experimental studies (see: Towry (2003) and Zhang (2008). 3 An independent sample T-test shows no significant difference in the mean levels of the room for managerial opportunism between the RPE users who rely exclusively on external peers and the RPE adopters who use mixed or purely internal peers. However, this null result can easily be driven by the limited subsample size of the ’external peers only’ group (N=21).
124 CHAPTER 5. CONCLUSION opportunism may be limited. Additionally, using external instead of internal peers may incur significant costs. Making a comparison to a reference group requires performance data about peers. Internally, these data may be freely available or available at relatively low costs. However, externally, one needs to acquire data on a specific peer group. General performance information about competitors or the industry as a whole may be available for free. However, if a comparison to more specific measures at the business unit level or lower levels is preferred, these data become increasingly costly to obtain. My data show that easily available company data only accounts for 16% of the information used in performance evaluations. In contrast, 61% of the information used in the performance evaluation of business unit managers consists of disaggregated or non-financial performance metrics at or below the business unit level. If these metrics are to be compared with those of external peers, significant costs would be involved to obtain this specific information. Overall, trading off the costs and benefits may result in not using RPE for opportunism-mitigation purposes. However, it is entirely possible that if RPE is already used for the purpose of noise reduction, the additional use of RPE for opportunism-reduction purposes is not a matter of cost-efficiency. Instead, simultaneously using RPE for both purposes may be highly undesirable because the two purposes may have contradictory design requirements. This contradiction may be due to the nature of the preferred peer group composition. Whereas the use of RPE for opportunism-mitigation purposes may benefit mostly from an external peer group, the opposite may be true for noise-reduction purposes. To reduce noise, using an internal peer group would be most effective because of the relevance of the peer group’s performance. The business unit may simply have more in common with its internal peers than with its competitors (e.g., in terms of the back office, the costs of distribution or other organization-wide similarities), than with external peers who may organize their business differently. This consideration suggests that an organization has to choose whether it wants to incorporate peer information into the performance evaluation of its managers for noise- or for opportunism-reduction purposes but not for both. 5.2 Implications for Practice A well-designed Management Control System is important for organizations because it helps to realize organizational goals. Literature claims that effective control system design consists of multiple dimensions. These dimensions include: 1) the choice of relevant performance metrics; 2) the strength of the relation between performing well on these metrics
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Relative Performance Evaluation in
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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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2.1. INTRODUCTION 15 is not a promi
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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 29 can
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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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3.3. SAMPLE AND MEASUREMENT 71 Tabl
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Page 160 and 161: Biography Hilco van Elten (1979) ho
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