pdf - Nyenrode Business Universiteit

5.2. IMPLICATIONS FOR PRACTICE 125
and the compensation; and 3) the determination of the relevant difficulty of the performance
target (i.e., what performance level qualifies as ‘good’ performance?). RPE helps
to determine the difficulty of the performance targets and/or budgets to which managers
are held accountable. By providing organizations with a means to set the performance
standards, RPE plays an important role in the design of the Management Control System.
This study shows that RPE is an effective and widely used praxis for evaluating business
unit managers. RPE improves the quality of the performance evaluation if common external
events affect the manager’s measured performance. Reducing noise improves the
contractual efficiency between the business unit manager and his superior. This improvement
has important consequences for the motivation of the business unit manager. In turn,
increased motivation can help the organization realize its goals.
If organizations wish to use relative performance targets, it is important to consider the
composition of the peer group. Most organizations in my sample compare the performance
of the evaluated manager to a group of internal peers. This has several benefits. Firstly,
detailed performance data on internal peers is mostly available at low costs. Secondly,
internal peers face, in general, highly similar external events. In this sense, the comparison
to internal peers is highly efficient to reduce noise. However, using internal peers is
probably not an effective option for another application of RPE use, namely the reduction
of managerial opportunism.
Organizations may wish to use RPE to mitigate managerial opportunism. However, as
it is currently implemented throughout my sample, RPE does not seem to be a suitable
means of reducing the room that business unit managers have to engage in opportunistic
behaviour. This is probably because of the fact that organizations primarily rely on internal
peer groups. If organizations aim to use RPE for opportunism-reduction, the use
of internal peers does not seem to be an effective design choice. This finding does not
mean that the RPE cannot help organizations reduce the opportunism of their employees.
In fact, RPE may still be effective in opportunism-mitigation if designed differently. My
suggestion is that organizations use a benchmark peer group that cannot be easily influenced
by the evaluated manager, by, for example, comparing the manager’s performance
to the performance of a group of competitors outside the organization. This use of RPE is
similar to the application of RPE amongst top executives, where the effectiveness of RPE’s
opportunism-reduction properties is supported by empirical literature.
These considerations suggest that, when implementing RPE use in the Management Control
System, organizations are well advised to make an a priori decision on wether they
want to use RPE for the reduction of noise, or the mitigation of managerial opportunistic
behaviour.