The interaction between interpersonal trust and management control in manager-employee relationships; a contingency perspective.

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The interaction between interpersonal trust and management control

in manager-employee relationships; a contingency perspective.

University of Groningen

Faculty of Economics and Business

Master of Science in Business Administration

Specialization: Organizational and Management control

Name:

Arno Glashouwer

Studentnumber:

S1654799

Email:

A.Glashouwer@student.rug.nl

Phone:

06-48 52 89 54

Supervisor:

Dr. P.E. Kamminga

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PREFACE

This master thesis is the result of a research on the relationship between management control and interpersonal trust. In the exploratory stage of this research, management control and interpersonal trust seems to interact as a balance to me. Soon I discovered that the relationship between those variables was far more complex. After a literature research, in my opinion the contingency theory could provide a solution to this complex theory.

With this research, I complete the Master of Science in Business Administration (Msc BA), specialization Organizational and Management Control (O&MC), at the University of Groningen. By finishing this research, I also finish my college days. The experiences and knowledge of my study will be very helpful in my future career.

I would like to thank several people for their support in the process of writing this master thesis. First of all, I would like to thank my supervisor dr. P.E. Kamminga. His feedback, creative ideas, know-how, and patience were of great help in writing this thesis. I would also like to thank prof. dr. J. van der Meer-Kooistra for her contribution as co-supervisor.

Furthermore, I would like to thank the interviewees for their input on the empirical part of this research. In addition, I thank the organizations in which I could conduct the interviews.

Finally, I would like to thank my family, friends and co-students for their support and inspiration during my study period at the University of Groningen. Thanks to them, I have had a great time in Groningen.

I hope you enjoy reading this master thesis!

Groningen, July 2010

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EXECUTIVE SUMMARY

The research question of this paper is formulated as following: What is the influence of uncertainty, strategy and the length of a relationship on the interaction between interpersonal trust and management control in manager-employee relationships? By answering this question, it is intended to contribute some insights of in the contradictory and inconsistent literature about the relationship of management control and interpersonal trust. After a literature review, five propositions are developed to find an answer to the research question. These propositions are tested in an empirical study, which consist of 5 cases. By cases, the relationship of 5 managers with their employees is meant. The cases are studied by conducting interviews with 5 managers, who work in 5 different organizations. Proposition 1 state that in particular formal controls will lead to a higher level of interpersonal trust in case of low uncertainty. This proposition is supported by the cases, but in 2 cases size and structure of the organization overruled uncertainty in this relationship. In small organizations, in particular social controls are used, even in case of low uncertainty. Propositions 2 state that in particular social controls will lead to a higher level of interpersonal trust in case of high uncertainty. This proposition was supported in both relevant cases. Proposition 3 claims that in particular the use of formal controls will lead to a higher level of interpersonal trust in case of a cost leadership strategy. This proposition did also find support by the cases. Although, size and structure of the organizations is even more important than organizational strategy in this relationship. In a small organization with a cost leadership strategy, social controls are more often used then in bigger organizations with the same strategy. Proposition 4 claims that in particular the use of social controls will lead to a higher level of interpersonal trust in case of a differentiation strategy. This proposition is supported in all of the three relevant cases. According to proposition 5, in the mature stage of a relationship, a high level of interpersonal trust leads to a looser level of management control. This proposition is partly supported by the cases. It seems likely that the proposition is supported under the condition of positive experiences with those employees. Furthermore, it is required that a manager should have the autonomy to make adjustments to formal control systems.

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1. INTRODUCTION

In order to be sure that managers and employees act in the firm’s best interest, organizations make use of management control systems. Management control systems provide information to managers, that is intended to be useful for performing their tasks and to develop patterns of behavior that are seen as the best way (Otley, 1999). Management control systems are the instruments of managers to perform management control. In this paper, we focus on the manager-employee relationship. In that respect, management control is defined by Flamholtz, Das and Tsui (1985) as a formal mechanism that managers use to direct employees towards the accomplishment of organizational goals.There are different types of management control systems. Merchant and Van der Stede (2007) distinguish four types of management control systems; results-, action-, personnel- and cultural control systems.

Besides management control systems, interpersonal trust is a common issue in management control within organizations. Interpersonal trust has no single definition. It is frequently referred as “the extent to which a person is confident in, and willing to act on the basis of, the words, actions, and decisions of another” (McAllister, 1995, p.25).

There is a fundamental disagreement in the literature on the relationship between trust and management control. Previous studies have failed to answer if trust and control are substitute or complement each other (Woolthuis, Hillebrand, Nooteboom, 2005). Management control and interpersonal trust interacting as substitutes means that a low level of trust allows for a high level of formal controls and a high level of trust allows for limited formal control. Management control and interpersonal trust interacting as complements means that formal controls enhance the level of interpersonal trust and vice versa (Costa and Bijlsma-Frankema, 2007). For example, Tosi et al. (2003) describe management control and trust as substitutes in their paper about the agency and stewardship theory. On the other hand, Tomkins (2001) has found that management control and trust complement each other, because information derived from control systems can be shared to generate trust.

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to even more different settings. Many researchers have tried to find building blocks to develop a management control system with the use of contingency theory. Fisher (1998) stated that a better fit between control systems and contingency variables lead to better organizational performance, which makes this problem an important issue in management control. Studies about contingency theory have provided insights on the emergence of management control systems, but they have not resulted in a widely accepted theory on management control (Dent, 1990). A reason for that is that the contingency models focusing on parts of the management control systems (Speklé, 2001). For example, Bruns and Waterhouse (1975) focus primarily on budgeting systems. This paper, however, focuses on multiple contingency factors and threats multiple management control system mechanisms to determine the relationship between management control and interpersonal trust.

In this paper we would like to argue that the relationship between management control and interpersonal trust is contingent upon the setting in which it operates. So, different organizational conditions can lead to different outcomes in the relationship between management control and trust. In current literature about management control and trust, little attention has been paid to the context in which this relationship arises (Bijlsma-Frankema, Costa, 2005). On the basis of strategy, uncertainty and the length of relationship, the relationship between management control and interpersonal trust is explored. Thereby, we provide some interviews with managers to examine these outcomes in practice. By doing so, it is intended to contribute some insights in the contradictory and inconsistent theory about the relationship between trust and management control.

1.1 Research questions

To achieve the objectives of this research, some research questions are generated. The main question of this research will be:

What is the influence of uncertainty, strategy and the length of a relationship on the interaction between interpersonal trust and management control

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Interpersonal Trust Management control Contingency factors: - uncertainty - organizational strategy - length of relationship

Figure 1: Conceptual model

The following theoretical sub-questions will be answered to answer the key question: - What is management control and what is interpersonal trust?

- What is the relationship between interpersonal trust and management control in manager-employee relationships?

- Which contingency factors are seen as determinant in the literature about the relationship between management control and interpersonal trust?

- How do these determinant contingency factors influence the relationship between interpersonal trust and management control?

To examine whether we see these outcomes in practice, the following sub-questions should be answered:

- To what extent are the theoretical expectations supported by the empirical findings?

- How can differences between literature and practice be explained?

- To what extent do the empirical findings lead to an adoption of the theoretical expectations?

1.2 Outline of paper

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2. THEORETICAL FRAMEWORK

In this chapter, the theoretical framework of this research is developed. It should answer the question what the influence of uncertainty, strategy and the length of relationships is to the interaction between management control and interpersonal trust in manager-employee relationships. The structure of this paper is as following. We start with an explanation of management control and interpersonal trust. After that, we continue with the interaction between these two variables. The main question in this paragraph is whether management control and interpersonal trust interact as substitutes or as complements. Thereafter, the contingency theory is introduced and finally the influence of three contingency factors on the interaction between management control and interpersonal trust are explored.

2.1 Management control

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good job. They distinguish four types of control to avoid these problems; results control, action control, personnel control, and cultural control.

2.1.1 Types of control

Merchant and Van der Stede (2007) describe four types of control; results control, action control, personnel control, and cultural control. Results controls reward people for generating good results. This pay for performance system encourages and empowers managers and employees, and influence actions because of the consequences they have. Action controls are the most direct form of management control, because they make it impossible for employees to take actions that should not be done. Examples of action controls are limited access to areas or enter passwords on computers. It also involves preaction reviews, like planning and budgeting, to give direction to the actions of employees. A third part of action control is the description of actions that are acceptable and unacceptable by using checklists for example. A fourth form of action control is to assign more employees or machines to a task than necessary to ensure the continuation of tasks in case of setbacks.

Personnel controls are used to ensure that the employees are able to do a good job, are capable to do a good job, and that they are motivated to do a good job. Three commonly used methods to realize these goals of personnel controls are selection and placement of employees, providing training and education, and job design. Personnel controls rely on self-monitoring abilities and the drive for personal development of employees.

Cultural controls are a powerful form of group pressure on individuals to meet goals and objectives. It relies on group norms and values. Codes of conduct and group rewards are the most important methods of shaping culture within a firm, which is relatively fixed over time.

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2.1.2 Tightness of control systems

Control system tightness is difficult to measure. It is subjective to determine the intensity of management control, which should be called tight or loose. It depends largely on the different types of controls. Results control and action controls are commonly seen as tight controls, whereas cultural and personnel control are in most cases looser forms of controls. (Merchant, Van der Stede, 2007). The degree of tightness of results control depend on the presence of precise, objective, time based, and understandable performance measurements. Besides that, the degree in which desired results are defined and the involvement of incentives determine the tightness of results control. Action control is considered to be tight if it is highly likely that employees act in the organization’s best interest and not engage in harmful actions. According to Fisher (1998), a tight control system usually has challenging budget targets, does not allow adjustments to these targets, and allows little targets slack. So in a tight control system, motivational problems, lack of direction, and personal limitations are closely monitored. Bijlsma-Frankema and Costa (2005) give three conditions to implement formal or tight controls. First of all, to implement formal control the tasks and behaviors need to be programmable and the outcomes have to be measurable. Second, formal control requires the possibility of monitoring, evaluation and feedback to supervise if employees act according to the rules and procedures. Third, a suitable juridical structure is needed to give sanctions to deviant behavior.

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2.2 Trust

Trust is a popular issue in management accounting research. There is no clear definition for trust. Most authors seem to agree that critical elements to define trust are positive expectations and the willingness to become vulnerable (Bijlsma-Frankema, Costa, 2005). The focus in this research is on manager-employee relationships and as mentioned in the introduction, we focus on interpersonal trust, which is defined as “the extent to which a person is confident in, and willing to act on the basis of, the words, actions, and decisions of another” (McAllister, 1995, p.25). More specific, in this paper interpersonal trust can be seen as the confidence a manager has the intentions of its employees to act in the firm’s best interest. Spreitzer and Mishra (1999) distinguish four dimensions of interpersonal trust; competence, openness, reliability and concern. Competence assures management that employees have the skills and abilities to fulfill their tasks. Openness assures managers that employees use their skills and abilities to fulfill their tasks. Trust in openness is about the trust a manager has in the intentions and honesty of employees to act in the firm’s best way. Reliability is the level in which managers believe that employees will do what they say they are doing. Finally, the concern dimension of trust is the level in which managers have confidence in employees that they are concerned with the interests of the organization. Slack and Lewis (2002) define interpersonal trust as the willingness of one party to relate with another in the belief that the other’s actions will be beneficial rather than detrimental to the first party, even though this cannot be guaranteed. They distinguish three degrees of trust; calculative, cognitive, and bonding trust. These degrees are in chronological order from a weak to a closer form of trust. Calculative trust is based on knowledge. As it comes to calculative trust, trust leads to more benefits than not trusting the partner. Cognitive trust is based on the knowledge about how the partner reacts in certain circumstances. The behavior of the partner can be anticipated. Bonding trust is based on feelings. In this case, partners identify with each other. They share values, moral codes and a sense of what obligations are due to each other.

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meaning that a manager act the same kind of behavior over time. Second is behavioral integrity, which includes telling the truth and keeping promises. Thirdly, sharing and delegation of control is positive in the trustworthiness of managers. Participation in decision-making is most important in this category. Communication is the fourth category of trustworthy behavior. The emphasis in communication is on sharing and exchanging ideas, which is divided into accurate information, explanations for decisions, and openness. Last category is demonstration of concern. This means that managers show interest in the needs of employees, protect the interest of employees, and protect employees from other who wants to take advantage from them for their own interest. Employees’ trust in managers is build by this behavior. On the other hand, a manager, which shares and delegates control and communicates a lot with his employees, shows to have trust in its employees.

Das and Teng (2001) state that social controls lead to a higher level of trust. They create mutual understandings about goals and norms and values, which is likely to increase trust. Besides that, if the extent in which organizations reserve time and money to recruit and educate employees is high, it is likely that these employees do a good job for that company. So, besides trustworthy behavior, the presence of social controls leads to a higher level of interpersonal trust.

2.3 Trust and control; substitutes or complements?

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This research focuses on the management-employee relationship within an organization. In the literature different relationships between management control and interpersonal trust are concluded. Tosi et al. (2003) compare the agency theory with the stewardship theory, which both have emerged ‘to ensure that managers act in the firm’s best interest’. The agency theory stresses controlling decision-makers through monitoring and incentives alignment. Stewardship theory stresses that decision-makers act in the organizations best way even in the absence of controls. The first is more related to management control, whereas the second theory is closely linked with trust. Results of their study have shown that under agency control conditions, decision-makers were more likely to act in the firm’s best way than under stewardship conditions. It is likely that this theory is also accountable for manager-employee relationships (Tosi, Brownlee, Silva, Katz, 2003). Das and Teng (2001) state that management control keeps the level of trust down, because strict rules and objectives means that employees do not have the autonomy to decide what works best. Also Ouchi (1979) describes management control and trust as substitutes. He mentioned in his article about organizational control mechanisms; “People must either be able to trust each other or to closely monitor each other if they are to engage in cooperative enterprises”. If managers believe that employees do not act in the firm’s best interest, more management control is needed.

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and feedback that leads to a higher level of cooperation, which is positive to the level of interpersonal trust. Their conclusion implicates that organizations will choose a tighter level of management control, because risk reduces due to a higher level of interpersonal trust.

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2.4 Contingency theory

To find solutions to the management control structure variety problem, researchers frequently refer to the contingency theory. “The contingency theory argues that the design and use of control systems is contingent upon the context of the organizational setting in which these controls operate” (Fisher, 1998, p.48). Rather than seeking for the single best management control system, it is necessary to identify important contingency factors and their effects to management control systems (Evans, Lewis, Patton, 1986). So, to make decisions about the implementation of management control systems it is necessary to create knowledge about the effects of a certain level of a contingency factor to that management control system. For example, what is the effect of environmental uncertainty to pay-for-performance rewarding systems? This knowledge is useful to make decisions whether an organization should implement such a rewarding system or not.

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of uncertainty is low, the role of trust is minimal. Different strategies have different characteristics, so it is likely that under different strategies, different levels of interpersonal trust occur.

Another important variable for the interaction between management control and interpersonal trust is the length of the relationship in a manager-employee relationship. Is there a difference in management control between new employees or experienced employees? Do managers have more trust in experienced employees than they have in new employees? In the literature of management control and trust this topic is hardly discussed. Therefore, in this research the length of the relationship is treated as a variable for determining the interaction between management control and interpersonal trust (Tomkins, 2001). In the remainder of this chapter, because of their importance in the management control structure variety problem, the effects of (task and environmental) uncertainty, organizational strategy, and the length of relationship to the relationship between management control and interpersonal trust are explored.

2.4.1 Uncertainty

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Sullivan (1993). Four questions are developed to determine the intensity of environmental uncertainty, which results in five turbulence levels. These levels or in order from no change till discontinuous unpredictable change; repetitive, expanding, changing, discontinuous and supriseful. Govindarajan (1984) linked environmental uncertainty to performance evaluation styles. He concluded that in a situation with a high environmental uncertainty managers rely on subjective judgments on performance, whereas in a situation with a low environmental uncertainty managers rely on results controls to evaluate performance. From the above literature, we can conclude that in cases of high uncertainty the appropriate level of management control is loose and that managers use social controls. In cases of low uncertainty, the appropriate level of management control is tight and managers use formal controls.

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managers can even better interpret behavior because the likely actions are clear. So, under low uncertainty, an increase of formal controls leads to an increase of interpersonal trust.

In cases of low uncertainty, formal controls lead to a high level of interpersonal trust. Although interpersonal trust plays a weaker role in cases of low uncertainty, the level of available information, cooperation and constructive feedback leads to a higher level of trust. In cases of high uncertainty, social controls lead to a high level of interpersonal, because there is no other information to guide behavior. The lack of information is due to difficulties to implement formal controls under high uncertainty. By the recruitment of highly skilled employees, training and education, and a strong organizational culture, managers try to ensure that employees act in the firms’ best interest. Therefore, social controls substitute for formal controls in case of high uncertainty.

This results in the following propositions:

Proposition 1:

If uncertainty is low, in particular the use of formal controls will lead to a higher level of interpersonal trust.

Proposition 2:

If uncertainty is high, in particular the use of social controls will lead to a higher level of interpersonal trust.

2.4.2 Organizational strategy

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products and markets are not limited to their technological capabilities. Innovation is the major tool to take advantage over competitors. An analyzer is a hybrid combination of a defender and a prospector. It tries to combine the strengths of both strategies to minimize risk while maximizing the opportunity for profit. A successful analyzer must be able to respond in time to actions of prospectors while in the same time their operations in the stable markets remain efficiently. Reactors are seen as a failure of implementing one of the other three strategies. This occurs if the technology, structure and processes do not match the strategy, or if the strategy does not fit into the environment of the organization.

Porter (1980) distinguishes three strategies; cost leadership, differentiation, and focus. With a cost leadership strategy it is intended to establish a strong market position through care about costs by standardizing products and produce in the most effective way. With a differentiation strategy an organization is intended to produce a product or service that is seen as unique within the business. An organization with a focus strategy distinguishes itself to focus on a certain group of buyers, a certain segment of the product, or a certain geographical market. A focus strategy can contain characteristics of both a cost leadership strategy as a differentiation strategy. Dependable on these characteristics, a focus strategy is linked to a cost leadership or a differentiation strategy in the remainder of this paper. The main difference between the strategies of Porter and Miles and Snow is that Porter focuses more on product groups, while Miles and Snow’s strategies are applicable to the whole organization. Although there are clear differences between those strategies, there are also similarities. Mainly the defender and cost leadership strategies and the prospector and differentiation strategies correspond to each other.

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strategy. The strategies of Miles and Snow are called ‘strategic pattern’, and can both lead to a differentiation and a cost leadership strategy, because different business units need different control systems. In their framework they state that a cost leadership strategy is linked with a tight management control system, while a differentiation strategy is linked to loose management control. Also Bruggeman and Van der Stede (1993) have found that tight control is most appropriate in cost leadership strategies. They also have found that loose control is the best option in differentiation strategies when extreme flexibility is required. Govindarajan (1988) supports the conclusion that different business units can have different strategic positions, which needs different management control systems. He states that in case of a cost leadership strategy, a tight management control plays an important role. A differentiation strategy needs a more flexible management control system. Govindarajan and Fisher (1990) conclude that formal controls have a positive effect on a SBU with a cost leadership strategy. On the other hand, social controls have a positive effect on a SBU with a differentiation strategy. From the above we can conclude that the strategic position has effect on the design of the management control system. A cost leadership strategy should lead to a tight and formal management control system, while a differentiation strategy should lead to a looser management control system based on social controls.

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the outcomes are unknown and the creativity of employees leads to quality instead of routine tasks. Interpersonal trust is important in innovative circumstances. Massey and Kyriazis (2007) have found that interpersonal trust between R&D and marketing positively influences the effectiveness of new product development projects. Because the creativity of employees is very important, managers will ensure that employees are highly skilled and motivated trough time and money spend on recruitment of employees and education. So, social controls lead to a higher level of interpersonal trust under differentiation strategies.

We can conclude that in case of a cost leadership strategy, an increase of formal controls lead to a higher level of interpersonal trust. This strategy leads to low uncertainty, little variation in the product range and simple and efficient processes. If formal controls are used, much information about performance is available. Managers can act on this information, which leads to a higher level of interpersonal trust of managers to employees. In case of a differentiation strategy, the use of social controls will lead to a higher level of interpersonal trust. Because tight formal controls are difficult to implement, managers ensure trust trough recruitment of highly skilled employees and education of employees. So, social controls substitute for formal controls in case of a differentiation strategy. These conclusions are consistent with the propositions about uncertainty in the previous paragraph.

According to Govindarajan (1988), the choice of a strategy largely influences the level of uncertainty within an organization. Uncertainty and organizational strategy seems to be positively related.

This leads to the following propositions:

Proposition 3:

In case of a cost leadership strategy, in particular the use of formal controls will lead to a higher level of interpersonal trust.

Proposition 4:

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2.4.3 Length of relationship

Length of the relationship is an interesting contingency factor for the decision-making concerning management control systems in manager-employee relationships. Despite the environment and tasks for team members are the same, managers can use different management control mechanisms across employees, due to experiences a manager has with that employee. The length of the relationship is in this paper measured as the time an employee is employed in an organization.

Tomkins (2001) has found that trust and management control can be characterized by an inverted U-shaped curve, with trust increasing over time. In the early stage of a relationship the level of interpersonal trust and management control is low due to the lower level of commitment and the risks that the relationship would collapse. As the relationship matures from the initial stage, trust and management control can be seen as complements. This is because trust cannot be build without further information and experiences. In the mature stage of a relationship, in case of positive experiences, the level of trust is at a high level. It is likely that less information is needed to sustain such a relationship, which leads to trust and management control as substitutes (Tomkins, 2001). Fryxell et al. (2002) have

found the same conclusions within joint ventures. They state that formal controls are positive for performance in young joint ventures and negative for the performance in older joint ventures. Figure 1 illustrates the development of management control and trust over time.

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From the above figure, we can conclude that propositions one until four are particularly applicable to the initial stage of a relationship. Interpersonal trust is build by formal controls in cases of low uncertainty and a cost leadership strategy, while social controls build interpersonal trust in case of high uncertainty and a differentiation strategy. However, once trust is at a high level, the level of formal control becomes looser, because less information is needed to sustain the relationship. This effect is the greatest in case of propositions one and three, because in particular formal controls become looser or are abandoned when relationships become longer. The above conclusions lead to the following proposition:

Proposition 5:

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3. EMPIRICAL RESEARCH

In the previous chapter, some propositions are developed as a result of a literature study. In this chapter, we show the results of several interviews with managers. The goal of these interviews is to determine to what extent there exists support for the propositions of the theoretical framework in practice. First of all, we describe the methodology of the empirical research. Then, we declare the development of the interview. After that, we give an overview of the most important characteristics of the results of the interviews.

3.1 Research methodology

This study can be indicated as an explanatory study. An explanatory case study is relevant where the research wants to explain a phenomenon between variables (Yin, 1981). In this empirical research, we take the propositions from the theoretical framework as a starting point. We would like to investigate if the propositions are supported by cases in practice. After that, we determine if the propositions from the theoretical framework must be adapted. We continue in the next paragraph with an explanation of the cases that are chosen and the procedure of this empirical research.

3.2 Sample and procedures

In this empirical part of the research, 5 cases are analyzed with the aim to test the theoretical framework. By cases, the relationship of 5 managers with their employees is meant. Therefore, the theoretical concepts are operationalized by interview questions, which are explained in the next paragraph. The cases are studied by conducting interviews with 5 managers, who work in 5 different organizations.

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organizational strategies, we can determine how management control and interpersonal trust interact under different conditions.

The interviews are semi-structured and include questions about the background of the manager and the concepts of the conceptual model, which are uncertainty, strategy, and length of the relationship, use of management control systems and the level of interpersonal trust. An outline of the interview can be found in appendix 1. The interviews are conducted at the organization. The time per interview ranged from 90 until 120 minutes. A week before the interview was conducted, the outline of the interview was provided to the manager. During the interview, notes were made about the answers of the manager. After the interview, these notes are converted into interview reports. The managers have checked the content of the interview results afterwards. Reports of the interviews are held by the author and are available for inspection.

3.3 Measurements

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controls are direct forms of management control, which are also known as formal controls. Personnel controls and cultural controls determine the level of social control. Manager’s trust in employees is measured by four dimensions of interpersonal trust by Spreitzer and Mishra (1999). Concern, competence, reliability and openness are distinguished to measure interpersonal trust. Besides that, interpersonal trust is measured by the ‘sharing and delegation of control’ and ‘communication’ dimensions of the five categories of trustworthy behavior of Whitener (1998). The interaction between management control and interpersonal trust is measured on the basis of the three causes of management control problems, which are lack of direction, motivational problems and personal limitations. Managers are asked to decide which management control mechanisms (formal or social) are used to overcome these problems. After that, managers are asked what the effect on interpersonal trust is when those management control mechanisms are used. Finally, on the basis of the three management control problems, managers are asked if they use other MCS in case of new employees compared with experienced employees. Also, differences in the level of interpersonal trust are determined for new employees and experienced employees. The outline of the interview can be found in appendix 1.

3.4 Results

In this paragraph, the results of the interviews are discussed. Per case, we describe the general characteristics of the manager and the organization, we discuss the level of uncertainty and the organizational strategy, and we discuss the use of management control mechanisms. Thereafter, we explain to what extent the relevant propositions are supported by the cases. If a proposition is relevant depends on the level of uncertainty and to the organizational strategy. Proposition 5 about the length of the relationship is applicable to all cases. At the end of this paragraph, an overview of the interview results is given.

3.4.1 Manager A

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turnover of the company was € 20 million and the profit was € 2 million. Manager A is a member of the management team and is responsible for finance and facility services. He leads a team of 6 employees. Manager A has 30 years experiences in finance and is now 10 years employed in this company.

The main characteristics of a cost leadership strategy are low uncertainty, little variation in the product range, and simple and efficient processes. In case of organization A, there is not much innovation in their branch, and costs are the order-winning factor. Processes are highly standardized and there is a limited range of products. Therefore, we can conclude that the strategy of organization A can be described as a cost leadership strategy.

Task uncertainty is measured by the ability to measure output and the knowledge of the transformation process. In organization A, task uncertainty is low, because of standard processes and products. Products only differ in length, thickness and height. The output is easily measurable. Environmental uncertainty is low as well. There are little shifts within the positions of competitors, little product innovation, and they can timely respond to changes concerning laws and regulations.

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to make sure that highly qualified and motivated employees are attracted to the company. Social control among employees is seen as very important within this organization. Employees can receive a group reward based on the organizations profit.

The level of interpersonal trust between manager A and its employees is high. Employees know what to do and have enough competence to fulfill their tasks and responsibilities. Concerned trust is high because of the openness towards the manager and the high level of motivation to act in the firm’s best interest. Manager A indicates the employees as reliable.

Due to a low uncertainty and a cost leadership strategy, propositions 1, 3 and 5 are the relevant propositions in this case. According to Manager A, interpersonal trust arises by a low task uncertainty, a flat organizational structure and adequate guidance to perform tasks. Manager A does not use tight formal controls to increase the level of interpersonal trust, so proposition 1 and 3 are not supported in this case. Manager A has also mentioned that formal controls are not used because tasks are simple. Employees know what to do and the risk of faults is small. Besides that, the organizational structure is flat and the size of the organization is limited. Thereby, it is quite simple to overview the activities within the company and to intervene if necessary. Manager A does not distinguishes management control on the basis of the experience an employee has. All employees are treated equally. Management control is loose in the initial stage of the relationship and this remains equal as the relationship matures. Thus, proposition 5 is not supported either.

3.4.2 Manager B

Manager B is senior banker. He leads a regional office where five employees are employed. In total about 1000 people are working at this bank. In 2008, the turnover of the bank was € 462 million and their activities resulted in a loss of € 66 million. Manager B is employed for 14 years at this bank.

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In organization B, task uncertainty is low. Products and services are standardized. Also processes are standardized as far as possible. Output can be measured easily. The environment of banking is dynamic. By the economic recession the laws and regulations are tightened up, the bonus culture is abolished and other banks have folded. Organization B is an unlisted bank and has had no governmental support through its strong market position. Solvency and liquidity are strong. Due to the stability, the level of trust of customers in the organization is high and as a result much credit money has flowed into the bank. On the other hand, reorganization was necessary whereby 250 employees were forced to leave the organization. However, no employees of this regional office had to leave the organization. In conclusion, although the environment of banking is dynamic, the environmental uncertainty for the team of manager B is low to medium, because the effects of the environment have little impact on the activities at the regional office.

Manager B exercises management control on the basis of formal controls. Specific goals are imposed by the top management on the office, which are divided by the manager across the employees in that office. A yearly assessment on the basis of these goals is linked to the rewards of employees. These goals are also used to plan the activities within the team. Products, like personal credits, are standard and available at any time, so the employees only need to fulfill commercial activities to sell their products and services. Processes are described in process schemes. Besides that, checklists and system checks have to avoid errors in processes. Reports are frequently used to inform employees about goal progressions and to redirect activities. Social controls are used to a lesser extent. Education takes place internally and is mainly aimed to update the knowledge about laws and regulations. The HRM department on the head office is busy with the recruitment of new employees. As the senior banker of the regional office, manager A can have influence on the choice of a new employee. There is a sober culture within the bank. No codes of conduct and group rewards are provided.

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goals. The level of concern is high but among employees, the level of motivation was somewhat decreased by the loss in 2008, high goals and the reorganization in 2009. Manager B has tried to motivate employees by being enthusiastic about opportunities to realize goals, but was not able to adjust the goals, because top management does not allow adjustments of goals.

In this case, propositions 1, 3 and 5 are relevant because of a cost leadership strategy and a low level of uncertainty. Manager B has confirmed that through standard procedures and the amount of reports, the level of interpersonal trust in its employees is increased. Due to these standard procedures and the reports, much information about employees’ performances is available and thereby manager B is capable to judge behavior and to make redirections if necessary. For example, if the manager ascertains that the realization of the goal of the number of sold insurances is behind schedule, he can make up a marketing plan in order to still reach the goal. The cost leadership strategy has contributed to a reduction of the number of products, which is a positive effect for the usage of standard procedures. Due to standard procedures, the risk of defaults is limited, which leads to a higher level of interpersonal trust between the manager and its employees. From the above, it can be concluded that propositions 1 and 3 are supported by this case. Thus, in particular the use of formal controls lead to a higher level of interpersonal trust under the conditions of low uncertainty and a cost leadership strategy. When an employee is newly employed in this organization, management control is loose because employees get much space to get accustomed to the tasks. In this stage, goals are low and the consequences are looser than in case of experienced employees. Experienced employees have strict goals. Salary and bonuses depend on the realization of these goals. As the relationship matures, these formal controls do not become looser. So, proposition 5 is not supported by manager B. Although manager B would like to give more responsibilities to experienced employees, higher management does not provide that opportunity by imposing high goals for the regional office.

3.4.3 Manager C

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responsible for 40 employees, who work in teams for a client portfolio of 60-70 customers in the North of the Netherlands. In total, 125 employees work in that region, which have resulted in a turnover of € 18 million and a profit of about € 2 million in 2009.

Quality and involvement are the order-winning factors of their services. On the basis of price, the organization cannot compete with competitors. The organization is a leader in their branch when it comes to changes concerning laws and regulations. The organization is closely involved to the branch organization, which is responsible for laws and regulations within accountancy. Therefore, organization C can offer their customers a better quality of accountancy services. This strategy can be indicated as a differentiation strategy.

Checking and formatting annual reports is a standard procedure. However, the reports are custom made on the basis of standard processes. Also, changes in laws and regulations make it more difficult to perform tasks. Therefore, the task uncertainty can be seen as medium. The environmental uncertainty is created by the requirements of customers. Time pressure is the most important external factor. This pressure can be handled well through flexibility in the planning of personnel. Besides time pressure, laws and regulations are tightened up in the past years. The organization may well respond to these changes, because organization C is involved in the development of these laws and regulations. We might say that the environmental uncertainty is low till medium.

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planning. There is significant use of checklists. This is because of the requirements of laws and regulations.

The level of interpersonal trust is high. The manager indicates that he has a high trust in the capability and trustworthiness of his employees. In general, employees are seen as honest, reliable and concerned.

In this case, the relevant propositions are 4 and 5 due to the differentiation strategy. Manager C indicates that the right education and coaching make employees capable to perform their jobs well. A personal development plan, in which quality and education are most important, makes that employees know what the expectations of the organization are. If an employee has difficulties with some tasks, more coaching or education is offered. The manager tries to motivate employees by frequently giving compliments. If employee’s motivation decreases, a conversation must lead to an We can hardly draw conclusions about the propositions of uncertainty, because both task uncertainty and environmental uncertainty are at a medium level. We can conclude that proposition 4 does get support in this case. So, in particular social controls lead to a higher level of interpersonal trust. Manager C mentions that, instead of routine tasks, the creativity of employees lead to a high quality. Quality is the most important factor of their strategy. Therefore the development of the management control systems is aimed to realize a high level of quality. Respond to changes in laws and regulations are the most important factor to remain a high level of quality. Also education is seen as important to generate function growth among employees. By paying much attention to the personal development of employees, manager C’s interpersonal trust in its employees increases.

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ambitions of each individual employee instead of the length of the relationship. So, proposition 5 is not supported by manager C.

3.4.4 Manager D

Manager D is the owner of a small service company. They provide services in process management, which lead to directly usable applications to improve processes. With a team of 10 employees they generate a turnover of 1 million euro’s yearly. Manager D is educated in economy, has 15 years of experience as controller and is now for one and a half year the owner of this organization.

Manager D describes their strategy as a focus strategy. They are specialists in process management in the financial branch. The main characteristics of a differentiation strategy are innovation, highly-skilled employees, non-routine processes and a wide range of products. In this case, innovation is also present, because organization D focuses on a unique product in a certain market. For the realization of their products and services, they use non-routine processes and work with highly-skilled employees. So, the focus strategy of organization D is closely linked to a differentiation strategy and is therefore applicable to proposition 4.

The level of task uncertainty is high. There is very little standardization in the tasks and the output cannot easily be measured. According to manager D, the level of environmental uncertainty is also high. The financial sector is very dynamic and unpredictable. Manager D mentions that the high level of uncertainty brings opportunities, but it is important to monitor risks, which takes a lot of time.

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The level of interpersonal trust is high. Manager D has much trust that employees are capable to perform tasks and to realize goals. Besides that, in general employees are honest and open to the manager and they are seen as reliable and concerned with the success of the organization. This high level of interpersonal trust results in a high level of freedom employees have to organize own work and the influence they have on decisions. The direction is very open about decisions and meetings are frequently organized to discuss with employees about the success of the company.

In this case, we can draw conclusions on propositions 2, 4 and 5, because of the high level of uncertainty and a differentiation strategy. Manager D’s interpersonal trust in its employees increases because personnel are highly skilled and much time is spent on coaching. Individual conversations with employees must decide whether more coaching or education is necessary. In these conversations employees are informed of tasks and goals. In principle, employees are highly motivated because of the interesting projects and because of a financial incentive. If employees are not motivated, manager D will enter into a conversation to find the cause of the demotivation and to come up with a personal solution. In particular good education and intensive coaching lead to a higher level of interpersonal trust according to manager D. Due to non-routine tasks less information is available and outcomes are unknown, which make it difficult to generate interpersonal trust from formal controls. We can conclude that interpersonal trust is in particular increased by social controls. This means that manager D supports proposition 2 and 4. So, in particular social controls lead to a higher level of interpersonal trust under the conditions of high uncertainty and a differentiation strategy.

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3.4.5 Manager E

Manager E is the manager of the research and development department of a company that produces flue gas systems. This organization has multiple locations throughout Europe with a total of 600 employees. On the location of manager E, there are 140 people employed. The team of manager E includes 5 employees, which are responsible for innovations within the company.

Organization E is the market leader within this industry and they want to remain this market leadership trough continuous improvement on their products and by developing new products. This corresponds to the characteristics of a differentiation strategy, namely innovation, highly-skilled employees, non-routine processes and a wide range of products. So, the strategy of this company can be described as a differentiation strategy.

Tasks are directed by projects in which two main goals are set. First of all, the organization wants to meet customer requirements. When a product is not developed yet, the research and development department must take care of the development of that product. Secondly, the requirements of laws and regulations must be met. For example, there are requirements for the recirculation of flue gasses that is spread by boilers. In a test center, standard processes are used to perform measurement. Outcomes of the processes are unknown and are not programmable due to complex tasks and a wide product range. Therefore, we can conclude that task uncertainty is medium till high. The environmental uncertainty is also rather high. There are few competitors, but they have to respond regularly to changes in laws and regulations. Besides that, customer demand changes. Due to the organizational strategy, the organization wants to meet the requirements by the customer. This makes innovations necessary. There are little changes within the branch. There was a shift from metal to plastic as it comes to the use of materials, but this trend happened by slow stages.

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project. These budgets are not strict and can be changed if necessary. Goals are not set on the basis of profit or turnover, but quality of projects and work attitude determine if a bonus is received. Manager E measures these factors subjectively. Reports are made of completed tasks and costs of labor and materials are recorded. We can conclude that some forms of formal controls are used, but in a loose way. Social controls are also used. Employees of the research and development department are highly skilled. Besides that, internships on other departments are organized for these employees and, if necessary or when employees ask for it, courses can be offered. Besides that, the job design is important within this department. Employees do not have to deal with complex tasks. Also all resources that are needed to fulfill tasks are available for employees. General rules of decencies are valid for all employees. No group rewards are provided.

The level of interpersonal trust of manager E in its employees is high. For all of the four dimensions of interpersonal trust, which are competence, openness, reliability and concern trust, the manager responds positive to the behavior of employees. Especially, the influence of the research and development department to the success of the organization leads to a high level of motivation among employees. This high level of interpersonal trust is reflected in the high level of freedom that is given to the employees. Besides that, a lot of communication takes place with employees.

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manager E supports proposition 4. In case of a differentiation strategy, in particular social controls lead to a higher level of interpersonal trust. The organizational strategy requires a high level of innovation. There is little information available about the products and processes and outcomes are unknown. The creativity and experience of employees should lead to the realization of innovations. By recruiting highly skilled and experienced employees, the managers interpersonal trust in its employee’s increases. Also, the job design contributes to the manager’s interpersonal trust in employees.

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Table 1: Overview interviews

Organization MAN A MAN B MAN C MAN D MAN E

Function interviewee

Manager finance and organization

Senior Banker Senior manager accountancy Director/ Owner consultancy office Manager R&D Duration of employment

10 years 14 years 11 years 1,5 years 13 years Education HBO+ MEAO HEAO,

post-doctoral auditor Economics HTS C ha ra ct er is ti cs o f m an ag er

Experience 30 years 14 years 4 years 15 years 17 years Delivery of

products or services

Production of silos and tanks

Financial services Accountancy services Services in process-management Production of flue gas systems Branche/sector Polyester, steel

industry

Finance Finance Finance Construction / Installation industry Turnover and

profit (in euros)

2009: 20 million turnover, 2 million profit 2008: 462 million turnover, 66 million loss 2009: 18 million turnover, 2 million profit (in region) 2009: 1 million turnover 2009: 40 million turnover FTE organisation 125 1000 5500 (Netherlands), 125 in region 10 600 Ch ar ac te ri st ic s o f o rg an iz at io n FTE in team interviewee 6 4 40 (in different teams) 10 5

Strategy Cost leadership Cost leadership Differentiation strategy Differentiation strategy Differentiation strategy Level of task uncertainty

Low Low Medium High Medium-high

C on ce pt s Level of environmental uncertainty

Low Medium Medium-Low High Low

Competence High High High High High

Openness High Medium - High High High High

Reliability High High High High High

Le ve l o f t ru st

Concern High Medium - High High High High Results controls Low High/ tight Low-Loose Low-loose Low-Loose Action controls

Low-Middle/Loose

High Medium Low-loose Low-loose Personnel

controls

High Low High High High

U se o f M C S

Cultural controls Middle-High Low Medium-high Medium Low Propositions

supported

- 1 & 3 4 2, 4 & 5 2, 4 & 5

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4. ANALYSIS

In the previous chapter we provided the results from the interviews of the empirical part of this research. In this chapter, we are going deeper into the propositions as they are set in the literature review. The goal of this analysis is to explore the differences between literature and practice and to explain to what extent the empirical findings lead to an adoption of the theoretical framework. Besides that, some remarkable findings from the cases are appointed. In table 2, a summary of the results from the interviews is given. We can see which proposition is supported by the cases and which supported are not supported by the cases. In some situations, no statement is possible due to the structure of the proposition. For example, in case A no statement is possible for proposition 2 due to a low level of uncertainty in case A.

Table 2: Summary of results

YES= Proposition supported, NO= Proposition not supported, X= No statement possible.

4.1 Uncertainty

In this paragraph we would like to explore the differences between literature and practice regarding the propositions about uncertainty. The propositions were described as following:

Proposition 1: If uncertainty is low, in particular the use of formal controls will lead to a higher level of interpersonal trust.

Proposition 2: If uncertainty is high, in particular the use of social controls will lead to a higher level of interpersonal trust.

Proposition 1 is supported in case B, but is not supported in case A. Manager A had some interesting comments about uncertainty. First of all, he mentioned that formal controls are

MAN A MAN B MAN C MAN D MAN E

Proposition 1 NO YES X X X

Proposition 2 X X X YES YES

Proposition 3 NO YES X X X

Proposition 4 X X YES YES YES

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not necessary in his organization because tasks are simple. Hereby, the risk of defaults is limited and therefore no formal control is needed. This is contrary to the literature about task uncertainty that is mentioned in the literature review. Manager A has indicated that formal controls are not necessary because of the limited size of the organization and a flat organizational structure, whereby the manager remains overview about activities and can intervene if necessary. According to the research of Davila (2005) smaller firms rely on social and economic judgments of managers to assign rewards. As the firm becomes bigger, reward systems become more formalized. Also Ouchi (1977) has found that results controls are more frequently used as the firm size increases. He argues that when an organization becomes larger, the number of levels of hierarchy grows, whereby social judgments of behavior are more difficult. In organization B, results controls are strongly used to guide and judge behavior. This organization is much larger. The top management has set strict goals to all employees, because they cannot control every employee in person. From this we can conclude that organizational size and structure is an important factor for the development of management control systems. In small firms, social controls are more often used to guide behavior, which lead to interpersonal trust. According to manager B, formal controls are positive for the level of interpersonal trust between him and his employees. Due to standard procedures and the reports, much information about employees performances is available and thereby manager B is capable to judge behavior and to make redirections if necessary. The realization of goals can be monitored and the manager can push employees towards the goals by marketing plans for example. So, in case B, formal controls lead to a higher level of interpersonal trust.

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increases. These findings are consistent with the literature review and therefore, according to these cases, proposition 2 does not need adoptions. Thus, we can conclude that in these cases in particular social controls lead to a higher level of interpersonal trust in cases of high uncertainty.

The level of uncertainty is medium in organization C. In that case, the level of interpersonal trust is high. This can be the result of both formal controls as social controls; however, especially social controls are used in this organization. Particularly, the organizational strategy is an important factor for the development of a management control system as will be discussed in the next paragraph.

4.2 Organizational strategy

In this paragraph we would like to explore the differences between literature and practice regarding the propositions about organizational strategy. The propositions were described as following:

Proposition 3: In case of a cost leadership strategy, in particular the use of formal controls will lead to a higher level of interpersonal trust.

Proposition 4: In case of a differentiation strategy, in particular the use of social controls will lead to a higher level of interpersonal trust.

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reports about costs do not provide the desired benefits, because the management can overview the activities by their own. He has indicated that in case of a further growth of the number of employees, his organization is forced to appoint sub managers. As a result, then, more formal controls need to be implemented to maintain interpersonal trust. As mentioned in paragraph 4.1, in small organizations, social controls are more often used to guide employees instead of formal controls. Again, organizational size and structure is an important factor for the development of management control systems.

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4.3 Length of relationship

In this paragraph we would like to determine to what extent there exists support for the proposition about the length of a relationship between manager and employee. The proposition is as following:

Proposition 5: In the mature stage of a relationship, a high level of interpersonal trust leads to a looser level of management control.

Proposition 5 is not supported in cases A, B and C, but does find support in cases D and E. Manager D and E do both state that they use looser controls as the relationship matures under the condition that there are positive experiences with that employee. Positive experiences lead to a higher level of interpersonal trust. The other managers have different reasons for not supporting this proposition. Manager A indicates that management control is loose after all. It becomes not looser as the relationship continues. Also manager C mentions that formal control is loose in the begin stage of the relationship as well. Therefore there is a little effect on management control systems as the relationship matures. According to manager C, management control is largely the same for each employee within the organization and does not become looser as the relationship matures. Time and money spent on coaching and personal development depends on the needs and ambitions of each individual employee instead of the length of the relationship. However, in case of positive experiences, employees in organization C grow into a higher function level as the relationship matures. So, this confirms that the level of interpersonal trust of the manager in its employees increases over time. Manager B agrees with the proposition but indicates that he is not capable to reduce formal control as the relationship matures. This is because most formal control mechanisms are set and implemented by the top management. Manager B can not make adjustments to those mechanisms.

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condition to sustain that conclusion. Furthermore, the manager should be capable to make adjustments to formal control systems.

4.4 Size and structure

We can conclude that the five propositions of this research are largely supported by the empirical findings from the cases. However, there seems to be another important factor in the development of management control systems and the development of interpersonal trust, namely organizational size and structure. This factor is even dominant to the level of uncertainty and the organizational strategy. Manager A has indicated that formal controls are not used because of the limited size of the organization. The manager retains the overview about activities and can intervene if necessary without using formal controls. If the organizational size should grow, then more divisions and sub managers should be appointed. In that case, formal controls would be used to remain the overview about the activities within that company. We can conclude that in small firms, social controls are more often used to guide behavior, which lead to interpersonal trust. Small firms are generally defined as organizations with more than 500 employees and a minimal turnover of 20 million dollars (d’Amboise, Muldowney, 1988). This conclusion is consistent with the findings in the literature about organizational size and structure (Davila, 2005, Ouchi, 1977).

4.5 Management autonomy

Another important factor in the interaction between management control and

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money for the manager and the organization. Due to the influence of top management in organization B, the interaction between management control and interpersonal trust differs from the literature. According to the literature, in the mature stage of a

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5. CONCLUSION

In this last chapter, we provide an answer to the research question of this paper and give some final conclusions. Besides that, we describe the consequences of our findings for the literature of management control and the consequences of our findings for management control in practice. Furthermore, we give some limitations of this research and give recommendations for future research.

The interaction between interpersonal trust and management control in manager-employee relationships; a contingency perspective.