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2.2. THEORETICAL BACKGROUND 19 Since RPE has been described in the literature (e.g., Holmstrom 1982), the applicability of RPE has been associated with uncertainty. More specifically, this argument applies to uncertainty shared amongst peers because peer performance is only informative to the extent that the uncertainties are common in nature (Holmstrom 1982, Frederickson 1992, Matsumura & Shin 2006). Only common events influence both the agent’s performance and peer performance. On the other hand, individual (or idiosyncratic) uncertainty only affects the agent’s performance, leaving peer performance unaffected. This reasoning follows Gibbons & Murphy (1990) and Kren (2002), who explain RPE use with its potential benefit of specifically filtering out common (as opposed to idiosyncratic) uncertainty 3 . I hypothesize specifically that RPE can provide insulation for the noise-increasing effects of common uncertainty. I expect more RPE use under higher levels of common uncertainty. This expectation results in the following hypothesis: H1: Common uncertainty has a positive effect on the use of RPE. 2.2.2 RPE and Opportunism-Mitigation; the Use of Internally vs. Externally Determined Standards As argued in the introduction of this chapter, it is not only external events that can cause target-setting problems. Problems that originate from within the business unit can also cause problems by affecting the difficulty of the performance target. Specifically, this argument relates to managerial opportunism and the room that managers have to opportunistically affect (i.e., lower) their performance target level. Murphy’s (2001) findings imply that managers lower their performance targets if the possibility to do so, presents itself to them. This reduces the motivational properties of the target, which may lead to suboptimalization of managerial efforts. Murphy (2001) shows, both theoretically and empirically that RPE can reduce the room that managers have to behave opportunistically. This second perspective on RPE relates to the way in which performance standards are determined. Murphy distinguishes between two main ways in which standards can be set: 1) they can be determined in some internal, administrative process; or 2) they can be externally determined. The difference between these alternatives lies in the extent to which agents can influence the level (or: difficulty) of the performance standard. Internally determined standards include standards based on prior-year performance and standards derived from plans or budgets. Such standards are 3 Both Gibbons & Murphy (1990) and Kren (2002) find partial support for this proposition.
20 CHAPTER 2. RPE AT THE BUSINESS UNIT MANAGER LEVEL affected by managerial actions, and can have dysfunctional effects. For example, when standards are based on prior-year performance, managers have an incentive to avoid unusually positive outcomes, because good performance in the current period is penalized through an increased standard in the next period (Murphy 2001). In a similar vein, budget-based standards provide incentives to negotiate easy standards (Fisher, Frederickson & Peffer 2002) and disincentives to beat the budget, especially in a regime of incremental budgeting (Bouwens & Kroos 2011, Murphy 2001). In contrast, externally determined standards are less affected by managerial actions because the difficulty of the standard is based on something outside the sphere of influence of the manager (e.g. it is based on market conditions or peer performance). Examples of externally determined standards include timeless performance standards (plans measuring performance relative to a fixed standard such as a pre-specified return on assets (Murphy 2001:252)), company-wide cost of capital, and the use of peer groups (Murphy 2001). RPE is an example of such an externally determined performance standard because it incorporates information about the performance of an external reference group of agents 4 . The performance of an industry peer group lies well outside the sphere of influence of the manager, yet it does constitute his performance target. Such an RPE-based performance target is not subject to the business unit’s prior-year performance, to negotiations between the business unit manager and the top management of the firm, or to anything else that the business unit manager can manipulate. These considerations suggest that the room for managerial opportunistic behaviour can be delimited by incorporating the performance of a reference group of agents into the performance evaluation and that RPE can aid the standard-setting process. 2.2.2.1 Information Asymmetry The opportunism-mitigation perspective informs my model with the effect of information asymmetry on the use of RPE. Information asymmetry relates to the information gap between principal and agent, for example, concerning the knowledge about the quality of the business unit performance, the (internal and external) factors that influence the performance, the technical processes and the transformation processes of the unit. Information asymmetry is often argued to be the core of agency problems. It is the combination of information asymmetry and the agent’s aversion both to work and risk that steers him away from cooperative behaviour and results in managerial opportunism (Holmstrom 1982, Kunz & Pfaff 2002). Information asymmetry leads to managerial opportunism if the agent, 4 ‘External’ means that the reference group is external to the business unit. However, it is not necessarily external to the firm. A reference group might consist of other business units inside the firm that face (some of) the same external conditions (e.g., they operate on the same market).
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Page 50 and 51: 2.4. ANALYSES 41 2.4.2 Correlations
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3.3. SAMPLE AND MEASUREMENT 69 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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3.4. ANALYSES 75 3.4 Analyses This
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3.4. ANALYSES 77 Table 3.9: Pearson
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3.4. ANALYSES 79 Table 3.10: Result
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3.4. ANALYSES 81 Table 3.11: Result
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3.4. ANALYSES 83 Larcker & Rusticus
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3.5. CONCLUSIONS AND DISCUSSION 85
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Chapter 4 Does Relative Performance
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4.1. INTRODUCTION 89 Moreover, chap
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4.2. DEVELOPMENT OF THE MODEL 91 is
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4.2. DEVELOPMENT OF THE MODEL 93 Sp
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4.3. SAMPLE AND MEASUREMENT 95 4.3
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4.3. SAMPLE AND MEASUREMENT 97 To i
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4.3. SAMPLE AND MEASUREMENT 99 of R
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4.3. SAMPLE AND MEASUREMENT 101 Tab
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4.4. ANALYSES 103 Table 4.8: Items
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4.4. ANALYSES 105 RPE use ✻ Posit
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4.4. ANALYSES 107 The model does sh
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4.4. ANALYSES 109 RPE and RFMO. Mor
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4.4. ANALYSES 111 room for manageri
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Chapter 5 Conclusion 5.1 Summary, C
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5.1. SUMMARY, CONCLUSIONS AND DISCU
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5.2. IMPLICATIONS FOR PRACTICE 125
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5.3. LIMITATIONS AND SUGGESTIONS FO
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Appendix Overview of Questionnaire
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Q5 How often do the following thing
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Q14 When serving your clients, how
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Q23 Please indicate whether you agr
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Noise Q34 NOISE (primary measure) P
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References 1. Abernethy, M.A., Bouw
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26. Diamantopoulos, A. & Siguaw, J.
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52. Himmelberg, C.P. & Hubbard R.G.
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83. Towry, K. 2003. ‘Control in a
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148 beïnvloeden, veroorzaken ruis
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Biography Hilco van Elten (1979) ho
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