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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).