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Chapter 4 Does Relative Performance Evaluation Mitigate Room for Managerial Opportunism? Preamble to Chapter 4 The current chapter addresses the claim that RPE reduces the room that managers have to behave opportunistically. By doing so, this study answers the second part of research question 3: is RPE effective at reducing noise and opportunism? The opportunism-mitigation claim is also assessed in chapter 2, together with the noisereduction claim. Chapter 2 refers to the opportunism-mitigation perspective to motivate the effect of opportunism drivers on RPE, and finds mixed support for this relation. The current chapter analyses the opportunism-mitigation claim in a more direct manner. Instead of analysing whether RPE use is increased by factors that facilitate managerial opportunism, the current chapter studies whether RPE effectively reduces the room for managerial opportunism. Further studying the opportunism-mitigation perspective is important for our understanding of the consequences of RPE use for Management Control. The analyses shed light on whether the inconclusive results in chapter 2 are due to RPE’s limited added value to reduce opportunism, or whether the results are, for example, driven by the statistical properties of the analyses in chapter 2. Together with the assessment of the opportunismmitigating properties of RPE, the current chapter adds to our understanding of whether RPE use can be explained by an organizational wish to restrain managers from engaging in behaviour that is not congruent with the organization’s objectives. 87
88 CHAPTER 4. OPPORTUNISM MITIGATION EFFECTIVENESS 4.1 Introduction The current chapter empirically assesses whether Relative Performance Evaluation reduces managers’ room for opportunistic behaviour, as argued by Murphy (2001). Murphy claims that RPE reduces opportunism because RPE makes it more difficult for members of the organization to opportunistically influence their own performance targets. The tendency to behave opportunistically is a central tenet in economics-based theorizing about Management Control. Economic theories provide us with a model of man, who shows self-interest seeking behaviour with guile (Williamson 1975:255). Opportunistic behaviour is not simply a theoretical matter but is highly recognizable in actual behaviour. Prior research indicated that opportunistic behaviour is a realistic human trait. For example, an experimental study by Maas & Van Rinsum (2011) shows that more than half of the study’s participants act opportunistically if possible by overstating their performance to maximize their individual pay-offs. An earlier study by Hannan et al. (2006) provides a similar picture of participants of an experiment opportunistically misrepresenting their own performances. The consequences of opportunistic behaviour within organizations can be significant. If the members of the organization seek their own self-interest and act against organizational goals (e.g., by shirking or committing fraud), their behaviour reduces organizational gains. Another manifestation of opportunistic behaviour relates to the determination of performance targets. Murphy (2001) argues that organizational members often can opportunistically influence their own target difficulty. For example, if performance standards are based on prior-year performance, managers can affect their target-levels by avoiding unusually positive outcomes. However, according to Murphy’s reasoning, organizations can use RPE to reduce the room for managerial opportunism. RPE places the determination of the performance target outside the employee’s sphere of influence, where it is more difficult for the employee to lower his target difficulty. Under RPE, the performance of the evaluated agent is compared with the performance of an external reference group of agents. This peer comparison determines a performance standard to which the agent’s performance is benchmarked. The ‘external determination’ of the performance target renders it less vulnerable to managerial opportunism, than performance targets that are determined within the employee’s ‘reach’. Murphy’s opportunism perspective provides a compelling theoretical explanation for RPE use. However, the empirical support for this explanation of RPE is limited. Murphy finds empirical support for his reasoning in a study that does not explicitly focus on RPE, but on externally determined targets in general. Murphy shows that companies using budget-based and other internally determined performance standards have less variance in the bonus payouts and are more likely to smooth their earnings than companies using externally determined standards (Murphy 2001:245).
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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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4 CHAPTER 1. GENERAL INTRODUCTION o
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6 CHAPTER 1. GENERAL INTRODUCTION T
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8 CHAPTER 1. GENERAL INTRODUCTION F
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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 27 2.3.
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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
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 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
Page 82 and 83: 3.3. SAMPLE AND MEASUREMENT 73 Tabl
Page 84 and 85: 3.4. ANALYSES 75 3.4 Analyses This
Page 86 and 87: 3.4. ANALYSES 77 Table 3.9: Pearson
Page 92 and 93: 3.4. ANALYSES 83 Larcker & Rusticus
Page 98 and 99: 4.1. INTRODUCTION 89 Moreover, chap
Page 100 and 101: 4.2. DEVELOPMENT OF THE MODEL 91 is
Page 102 and 103: 4.2. DEVELOPMENT OF THE MODEL 93 Sp
Page 104 and 105: 4.3. SAMPLE AND MEASUREMENT 95 4.3
Page 106 and 107: 4.3. SAMPLE AND MEASUREMENT 97 To i
Page 108 and 109: 4.3. SAMPLE AND MEASUREMENT 99 of R
Page 110 and 111: 4.3. SAMPLE AND MEASUREMENT 101 Tab
Page 112 and 113: 4.4. ANALYSES 103 Table 4.8: Items
Page 114 and 115: 4.4. ANALYSES 105 RPE use ✻ Posit
Page 116 and 117: 4.4. ANALYSES 107 The model does sh
Page 118 and 119: 4.4. ANALYSES 109 RPE and RFMO. Mor
Page 120 and 121: 4.4. ANALYSES 111 room for manageri
Page 126 and 127: Chapter 5 Conclusion 5.1 Summary, C
Page 128 and 129: 5.1. SUMMARY, CONCLUSIONS AND DISCU
Page 134 and 135: 5.2. IMPLICATIONS FOR PRACTICE 125
Page 136 and 137: 5.3. LIMITATIONS AND SUGGESTIONS FO
Page 138 and 139: Appendix Overview of Questionnaire
Page 140 and 141: Q5 How often do the following thing
Page 142 and 143: Q14 When serving your clients, how
Page 144 and 145: 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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