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2.2. THEORETICAL BACKGROUND 21 who has superior insights about the mechanisms that drive performance, resorts to misrepresentation of the performance potential towards the principal or building budgetary slack (Fisher, Maines, Peffer & Sprinkle 2002, Dunk 1993, Chow et al. 1988). Information asymmetry makes target setting difficult. Setting performance target difficulty at a relevant level can be problematic when a subordinate has better information than a superior about factors that influence performance, especially when the agent’s pay depends on his performance vis-à-vis the target (conform: Chow et al. 1988). When information asymmetries concerning an activity exist, the organization can choose to solve them by investing in knowledge about the activity 5 . Organizations can also choose not to solve the information asymmetry, for example, because of the costs involved. The latter strategy might be fully acceptable if the top management is still able to make meaningful claims about the quality of the business unit performance, which is possible via RPE. Through RPE, the principal can let the peer group ‘decide’ the difficulty of the performance standard, without the need to understand the specific workings of the business unit and the factors that drive its performance. This does not reduce the amount of information asymmetry itself; the principal remains unaware of the specific factors that determine the business unit’s performance potential. Instead, the principal retrieves the information that she requires from the market. This way, the principal works around the business unit to assess its manager’s effort, instead of obtaining the information required to evaluate the performance of the business unit, which is often costly to obtain or simply unavailable. This study argues that RPE can mitigate the managerial opportunism that results from information asymmetries, by determining the performance target outside of the sphere of influence of the agent. RPE can reduce the target-setting consequences of the information asymmetries. Even if the principal has limited knowledge of the factors that influence performance, she can observe the effects of these factors through changes in peer performance. Ergo, I expect information asymmetry to increase the use of RPE. However, I only expect this relation under the condition of comparability to a relevant peer group. For RPE to reduce the effects of information asymmetry, the transformation process of the business unit and the factors that influence the performance potential, must be comparable to, for example, other business units. If a business unit produces highly specific products or services or relies heavily on specific processes, its performance cannot be assessed by the performance of its peers. 5 For example, top management could hire an expert who supervises the activity, or invest in specific knowledge about the activity for members of the top management team. Alternatively, the company could outsource or sell the activity (or in this case: the business unit) to a party who can control it more effectively.
22 CHAPTER 2. RPE AT THE BUSINESS UNIT MANAGER LEVEL In conclusion, this study predicts a positive effect of information asymmetry on RPE use, but only if the business unit’s activities and processes are comparable to peers. I expect a positive effect of comparability on the relation between information asymmetry and RPE use. This expectation is modelled as a moderating effect of comparability of the business unit on the relation between information asymmetry and RPE use. This relation is explicated in hypothesis H2. H2: Comparability of the business unit has a positive effect on the association between information asymmetry and the use of RPE. 2.2.3 Interaction Effect Between Common Uncertainty and Information Asymmetry Finally, I hypothesize an interaction effect 6 between common uncertainty and information asymmetry that increases the benefits of RPE. Together, the two variables can rule out potential control alternatives for RPE and thereby increase RPE use. This hypothesis is not built on either one of the perspectives on RPE in particular, but combines the antecedents (uncertainty and information asymmetry) that follow from both perspectives. To reduce noise and/or opportunism, organizations have a number of target-setting instruments at their disposal, one of which is RPE. Examples of these instruments include: participative budgeting, the use of a timeless performance target (such as a long-term ROI), and RPE. The usefulness of these target-setting instruments depends on the circumstances. This section describes how these target-setting instruments apply to various combinations of uncertainty and information asymmetry. For example, some target-setting instruments may be very useful in situations of high uncertainty and low information asymmetry or vice versa. Furthermore, these instruments may lose their applicability in a situation of combined high uncertainty and high information asymmetry. However, I argue that, in situations of combined high uncertainty and high information asymmetry, RPE remains a viable target setting method. Earlier in this chapter I argued that, in a situation of high uncertainty, forecasting would be difficult due to unforeseen events. RPE can help to reduce noise in the performance evaluation by filtering out the performance effects of uncertainty - to the extent that the uncertainty is common to the peer group. However, if information asymmetry levels are 6 This interaction effect is modelled as an ‘independent-variable interaction’, where both independent variables have an amplifying effect on their relation with the dependent variable (Luft & Shields 2003, Gerdin & Greve 2004).
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Page 50 and 51: 2.4. ANALYSES 41 2.4.2 Correlations
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Page 56 and 57: 2.4. ANALYSES 47 Table 2.15: Summar
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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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