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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.
126 CHAPTER 5. CONCLUSION 5.3 Limitations and Suggestions for Further Research As any study, the research presented in this thesis is subject to a number of limitations. In this subsection, I discuss the limitations that I consider to be the most important for my study. These limitations include the drawback of studying control instruments in isolation, the potential issues caused by using survey data in terms of causality, and the quality of the measurement. These limitations and their consequences are discussed in the remainder of this chapter. 5.3.1 Studying Control Instruments in Isolation Although RPE is part of a Management Control System that consists of many control instruments, this research project studies RPE as an isolated control instrument. I do so because of the design of the study in general and of the questionnaire in particular. Because I focus on a single control instrument, I do not have data (or theory) on other potential control instruments that are used, for example, to reduce noise in the performance evaluation or mitigate the room for managerial opportunism. This lack of data may affect the results of this study. According to Chenhall (2003), one drawback of studying the specific elements of a control system in isolation from the other organizational controls potentially leads to model underspecification. Although I acknowledge Chenhall’s warning, I deem it necessary to study this specific instrument in isolation first before taking on a more holistic approach. My study is one of the first to investigate RPE at the lower echelons. Before this study, we had little empirical understanding of how RPE works in the evaluation and compensation praxis of business unit managers. A focused study that analyses a single control instrument can invest the ample space and time that is required to approach the instrument with multiple measures and perspectives. Doing so is necessary to obtain a deeper understanding of the subject matter, which will, for example, allow one to establish measures that can be incorporated into other studies with broader scopes. Nonetheless, studying the interaction of RPE with other control instruments within the control system is an important next step to understanding RPE. This analysis may shed more light on the theories adopted throughout this thesis. This thesis leaves the holistic study of the role of RPE in the control system to future research.
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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 CHAPTER 1. GENERAL INTRODUCTION I
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10 CHAPTER 1. GENERAL INTRODUCTION
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Chapter 2 The Use of Relative Perfo
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2.1. INTRODUCTION 15 is not a promi
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2.2. THEORETICAL BACKGROUND 17 The
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2.2. THEORETICAL BACKGROUND 19 Sinc
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2.2. THEORETICAL BACKGROUND 21 who
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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 31 Comp
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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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2.6. 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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3.3. SAMPLE AND MEASUREMENT 73 Tabl
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