pdf - Nyenrode Business Universiteit
pdf - Nyenrode Business Universiteit pdf - Nyenrode Business Universiteit
2.2. THEORETICAL BACKGROUND 23 sufficiently low, alternatives exist. The principal could cancel out the performance effects of external events on the standards by ex-post determining the appropriate target level together with the business unit manager (i.e., participative budgeting), without ‘consulting the market’ via RPE. In the situation of low uncertainty and high information asymmetry, RPE can reduce the risk of managerial opportunism. But if uncertainty is low, the principal also has other target-setting means at her disposal besides RPE that also mitigate opportunism. Murphy (2001) argues that other externally determined standards 7 -such as the use of timeless performance standards or firm-level cost of capital target- can reduce the risk of managerial opportunism. However, in a situation of combined presence of high 8 uncertainty and high information asymmetry, the presented alternatives (i.e., participative budgeting, timeless performance standards, and firm cost of capital) will not be viable methods for determining the performance target. Given the presence of high information asymmetry, participative budgeting suffers from the risk of managerial opportunism; the business unit manager can exploit his information advantage to negotiate easy targets. Furthermore, the presence of uncertainty introduces noise into the performance evaluation, which reduces the applicability of fixed, yet externally determined performance standards such as timeless performance standards and firm cost of capital. RPE, however, does not lose its applicability under the condition of combined high common uncertainty and high information asymmetry. In conclusion, although RPE is a viable method for target setting, situations exist where alternative target-setting instruments are available. The question of whether these alternatives are equally efficient as RPE in these situations lies well beyond the scope of this research. However, in a combined setting of high common uncertainty and high information asymmetry, I expect the presented alternatives to lose their applicability, whilst RPE keeps its usefulness. This leads to more use of RPE. I formulate this synergetic effect of the presented antecedents to RPE use in the following hypothesis: H3: Common uncertainty and information asymmetry have a combined positive effect on the use of RPE. 7 Murphy (2001) labels timeless performance standards and company cost of capital as externally determined because these targets cannot be influenced by the business unit manager. 8 The question of how high ‘high’ is exceeds the level of theoretical articulation of this argument. The hypothesis and analyses assume a linear relation without a predefined threshold for uncertainty and/or information asymmetry.
24 CHAPTER 2. RPE AT THE BUSINESS UNIT MANAGER LEVEL 2.2.4 Control Variables This subsection introduces the control variables, including: contractibility, emphasis on firm-level measures, and size and sector controls. The first control variable refers to the contractibility of performance (abbreviated: contractibility). Contractibility is a prerequisite for any output-oriented control structure (Speklé 2001). As generally accepted in the literature, contractibility entails that: 1) goals can be specified unambiguously; 2) the organization is able to measure outputs in a reasonably undistorted manner (that is, the output metrics correspond rather well with the actual goals that the unit needs to accomplish); and 3) the responsible individuals (in this case, business unit managers) understand the process of transforming efforts into results (following: Speklé & Verbeeten 2008 9 ). To make a meaningful comparison of the output of an agent to a performance standard, the performance needs to be contractible. Because RPE is based on the comparison of outputs (instead of inputs, processes or efforts), contractibility is a necessary condition for RPE use. Second, the analyses control for the emphasis on firm-level measures. Performance information can be obtained with measures at various organizational levels. If performance metrics at the firm-level are used, the amount of noise in the performance evaluation of the business unit manager increases because the manager being evaluated cannot control other parts of the organization affecting this performance measure. Thus, the use of firmlevel measures in the performance evaluation makes the manager responsible for additional uncontrollable events. I expect the choice to rely on RPE (for example for noise-reduction purposes) to be influenced by the inclusion of noisy performance measures, such as firmlevel measures. Finally, the analyses control for size and sector effects. Size is often regarded as a potentially important determinant of performance measurement practice. For example, small organizations might provide a more fertile ground for result-based performance measurement systems (Dewatripont et al. 1999). However, larger organizations might be more effective in the use and implementation of such systems (Rogers 1995, De Lancer Julnes & Holzer 2001). The sector control variables distinguish between production, financial services, service organizations, and not-for-profit business units. 9 Speklé & Verbeeten (2008) derive the list of conditions for contractibility from several seminal papers that apply the conditions (amongst others) in contract oriented control structures, e.g. Otley & Berry (1980), Hofstede (1981), and Gibbons (1998).
- Page 2 and 3: Relative Performance Evaluation in
- Page 4 and 5: NYENRODE BUSINESS UNIVERSITEIT Rela
- Page 6 and 7: Table of Contents Preface 1 General
- Page 8: Preface Why do people make things h
- Page 11 and 12: 2 CHAPTER 1. GENERAL INTRODUCTION I
- Page 13 and 14: 4 CHAPTER 1. GENERAL INTRODUCTION o
- Page 15 and 16: 6 CHAPTER 1. GENERAL INTRODUCTION T
- Page 17 and 18: 8 CHAPTER 1. GENERAL INTRODUCTION F
- Page 19 and 20: 10 CHAPTER 1. GENERAL INTRODUCTION
- Page 22 and 23: Chapter 2 The Use of Relative Perfo
- Page 24 and 25: 2.1. INTRODUCTION 15 is not a promi
- Page 26 and 27: 2.2. THEORETICAL BACKGROUND 17 The
- Page 28 and 29: 2.2. THEORETICAL BACKGROUND 19 Sinc
- Page 30 and 31: 2.2. THEORETICAL BACKGROUND 21 who
- Page 34 and 35: 2.3. SAMPLE AND MEASUREMENT 25 2.2.
- Page 36 and 37: 2.3. SAMPLE AND MEASUREMENT 27 2.3.
- Page 38 and 39: 2.3. SAMPLE AND MEASUREMENT 29 can
- Page 40 and 41: 2.3. SAMPLE AND MEASUREMENT 31 Comp
- Page 42 and 43: 2.3. SAMPLE AND MEASUREMENT 33 this
- Page 44 and 45: 2.3. SAMPLE AND MEASUREMENT 35 Emph
- Page 46 and 47: 2.4. ANALYSES 37 2.4 Analyses This
- Page 48 and 49: 2.4. ANALYSES 39 Table 2.8: RPE use
- Page 50 and 51: 2.4. ANALYSES 41 2.4.2 Correlations
- Page 52 and 53: 2.4. ANALYSES 43 Concerning the con
- Page 54 and 55: 2.4. ANALYSES 45 Table 2.13: Result
- Page 56 and 57: 2.4. ANALYSES 47 Table 2.15: Summar
- Page 58 and 59: 2.5. CONCLUSIONS AND DISCUSSION 49
- Page 60 and 61: 2.5. CONCLUSIONS AND DISCUSSION 51
- Page 62 and 63: 2.6. CONTRACTIBILITY MIMIC MODEL (A
- Page 64 and 65: 2.6. CONTRACTIBILITY MIMIC MODEL (A
- Page 66 and 67: 2.7. ANALYSES FOR FOR-PROFIT BUS (A
- Page 68 and 69: Chapter 3 Does Relative Performance
- Page 70 and 71: 3.1. INTRODUCTION 61 Holmstrom’s
- Page 72 and 73: 3.2. DEVELOPMENT OF THE MODEL 63 3.
- Page 74 and 75: 3.2. DEVELOPMENT OF THE MODEL 65 RP
- Page 76 and 77: 3.3. SAMPLE AND MEASUREMENT 67 3.3
- Page 78 and 79: 3.3. SAMPLE AND MEASUREMENT 69 3.3.
- Page 80 and 81: 3.3. SAMPLE AND MEASUREMENT 71 Tabl
24 CHAPTER 2. RPE AT THE BUSINESS UNIT MANAGER LEVEL<br />
2.2.4 Control Variables<br />
This subsection introduces the control variables, including: contractibility, emphasis on<br />
firm-level measures, and size and sector controls.<br />
The first control variable refers to the contractibility of performance (abbreviated: contractibility).<br />
Contractibility is a prerequisite for any output-oriented control structure<br />
(Speklé 2001). As generally accepted in the literature, contractibility entails that: 1) goals<br />
can be specified unambiguously; 2) the organization is able to measure outputs in a reasonably<br />
undistorted manner (that is, the output metrics correspond rather well with the<br />
actual goals that the unit needs to accomplish); and 3) the responsible individuals (in this<br />
case, business unit managers) understand the process of transforming efforts into results<br />
(following: Speklé & Verbeeten 2008 9 ). To make a meaningful comparison of the output<br />
of an agent to a performance standard, the performance needs to be contractible. Because<br />
RPE is based on the comparison of outputs (instead of inputs, processes or efforts), contractibility<br />
is a necessary condition for RPE use.<br />
Second, the analyses control for the emphasis on firm-level measures. Performance information<br />
can be obtained with measures at various organizational levels. If performance<br />
metrics at the firm-level are used, the amount of noise in the performance evaluation of<br />
the business unit manager increases because the manager being evaluated cannot control<br />
other parts of the organization affecting this performance measure. Thus, the use of firmlevel<br />
measures in the performance evaluation makes the manager responsible for additional<br />
uncontrollable events. I expect the choice to rely on RPE (for example for noise-reduction<br />
purposes) to be influenced by the inclusion of noisy performance measures, such as firmlevel<br />
measures.<br />
Finally, the analyses control for size and sector effects. Size is often regarded as a potentially<br />
important determinant of performance measurement practice. For example, small<br />
organizations might provide a more fertile ground for result-based performance measurement<br />
systems (Dewatripont et al. 1999). However, larger organizations might be more<br />
effective in the use and implementation of such systems (Rogers 1995, De Lancer Julnes<br />
& Holzer 2001). The sector control variables distinguish between production, financial<br />
services, service organizations, and not-for-profit business units.<br />
9 Speklé & Verbeeten (2008) derive the list of conditions for contractibility from several seminal papers<br />
that apply the conditions (amongst others) in contract oriented control structures, e.g. Otley & Berry<br />
(1980), Hofstede (1981), and Gibbons (1998).
Change language