Performance measurement & commitment

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Performance measurement & commitment

“The influence of commitment on the relation between

performance measurement systems and behaviour”

M. Kranenborg

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Performance measurement & commitment

“The influence of commitment on the relation between

performance measurement systems and behaviour”

Author: Marloes Kranenborg Student number: S1335251

Email address: marloes_kranenborg@hotmail.com University: University of Groningen

Faculty of Economics and Business Administration Master of Science in Business Administration

Specialisation Organizational and Management Control Supervision: First supervisor: Dr. M.P. van der Steen

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Preface

The document lying in front of you is the result of a research performed to finalize my education at the Faculty of Economics and Business Administration at the University of Groningen. Inspiration for the research was found during my internship at Deutsche Bank preceding this thesis.

This thesis was conducted in the last 6 months and its goal was to describe the possible influence of commitment on the relationship between performance measurement systems and behaviour. By means of an intensive literature study and an analysis some interesting propositions were found. Hopefully these propositions are a source of inspiration for others in order to discover new findings in this field.

I would like to thank several people for their support during the process of conducting this thesis. First, I would like to thank my first supervisor Dr. M.P. van der Steen for our cooperation during the writing of this thesis and the useful feedback he provided me with. I would also like to thank my second supervisor Drs. A. Smeenge for co-reading my thesis. Furthermore, I hereby seize the opportunity to express a word of gratitude to my family and friends. They gave me such great support in so many ways during the completion of my thesis.

With finishing this thesis my student career has come to an end which I look back on with great pleasure. Writing this thesis was a very valuable experience. Nevertheless, I am glad it is finished. Now I am looking forward to starting my career and being able to benefit from all the lessons I have learned during my education in Groningen at the university as well as in my free time.

Hopefully you will enjoy reading this thesis. Yours sincerely,

Marloes Kranenborg

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Executive summary

This paper discusses the possible influence of commitment on the relationship between the performance measurement system and employee behaviour. This influence is of significant importance to successfully develop and implement performance measurement systems into the organization with the ultimate goal to affect employee behaviour in a positive way.

The cause of this research is the fact that organisations still face difficulties in using performance measurement systems to influence behaviour. Because there is still little knowledge about the mechanisms that cause the positive effects of performance management, managers were interested whether behavioural factors could play a role in getting employees more performance driven. This resulted in research that found that behaviour- control philosophies are somehow related to commitment.

Although some researchers have been uncovering links between different types of commitment and work performance, there is still a call in recent research examining the behavioural consequences of a PMS as a key aspect of motivation and commitment. The underlying reason for this research is that in between the field of PM there is no clear insight in the specific characteristics that stimulate desirable behaviour of employees. So the question here is; Does commitment influence the relationship between PMS and behaviour in a specific way? Does it affect the effectiveness of the measurement system?

This research aims to describe the possible influence of commitment on the relationship between PMS and behaviour. This insight is of significant importance to successfully develop and implement performance management in to the organization with as ultimate goal to affect employee behaviour in a positive way. This way, managers are able to optimize the effectiveness of the performance measurement system and lead the organisation in the proper direction. The research question that needs to be answered is:

In which ways does commitment influence the relationship between PMS and behaviour?

This research is conducted from a behavioural or cognitive theory and is performed by doing an intensive literature study and an analysis based on this literature study. The main research question will be answered by first providing an answer to all of the sub questions and analyzing the found variables.

A general conclusion of commitment and behaviour in the PMS context is that commitment has a major influence on the relation between performance measurement systems and behaviour.

The general findings supporting this conclusion are presented in the form of propositions in the analysis of the research. The different forms of commitment as well as the foci to which the commitment is related each have a different influence on the relationship between PMS and behaviour. The three basic elements of the PMS which are the PMS measurements, the alignment of those measurements and managerial influence play a determining role in the way commitment can influence behaviour.Affective commitment is a stronger determinant of the PMS resulting in the desired behaviour than continuance commitmentis. This results in the fact that behaviour-based control is a stronger indicator of desired behaviour and performance than outcome-based control when commitment is involved.

This research contributes to the literature because (1) it links commitment to the relationship between PMS and behaviour which gives great insights in an undeveloped research area (2) cognitive evaluation theory is integrated in the research which ads a unique psychological perspective. (3) recommendations for practice are provided from a management-centred analysis. (4) areas for future research are discussed.

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1 Introduction

New performance measurement systems are implemented or improved on an ongoing base. According to recent research regular use of these systems leads to better organisational results (Ahn, 2001; Ittner et al., 2003; Lawson et al., 2005; Said et al., 2003; Sandt et al., 2001; de Waal et al., 2004). However, a lot of this research has only gone into the design and implementation of a performance management system and into the effects that performance management has on organizational results (see a.o. Schiemann and Lingle, 1999; de Waal, 2002; Lawson e.a., 2005). Researchers have known for a long time that performance measurement systems have a strong influence on the behaviour of managers and employees (Kaplan and Norton, 1993) and can be used to contribute to the implementation of the organisation’s strategy (Skinner, 1971). Although this issue has gotten more attention these past years and researchers are increasingly focussing on the factors which cause performance management to work (Malina and Selto, 2000; Vakkuri and Meklin, 2003; Neely e.a., 2004), there is still little knowledge about the mechanisms which cause the positive effects of performance management (Bourne e.a., 2000, 2005).

Simons (2000) clearly states that performance management systems cannot be designed without taking human behaviour into account. In the field of performance measurement there should be challenging goals that are feasible and support decision making. These goals should be viewed as drivers of behaviour and not as results only. Therefore many researchers state that both the structure of the performance measurement system and the performance-driven behaviour of an organisation need to be of a high quality in order to make the performance measurement system successful. (Lipe and Salterio, 2000; Martins, 2000). This interested managers especially because they were wondering whether behavioural factors could play a role in getting employees more performance driven. De Waal (2002) identified behavioural factors that are of importance to the success of a new performance management system because they have a positive influence on performance-driven behaviour. Within this study, the term “behavioural factors” is used twofold:

(1) For activities of organisational members that can be observed; and

(2) For preconditions that allow organisational members to show certain behaviour. These aspects relate to those factors that can influence behaviour in performance management more effectively and partly determine the success of the organisation where results should be gained. The emphasis on the factors that influence positive behaviour of employees is clearly been underexposed in previous literature and deserves more extensive research (Martins, 2000).

We have already discussed that a lot of research agrees about the fact that control systems have an impact on employees’ thoughts and feelings and certain behaviors. The literature found that behaviour- control philosophies are somehow related to commitment. It was found that this concept has a relation with acceptance of authority, teamwork and review, a lack of extrinsic motivation, a greater interest in serving the organisation, participative decision making, less use of pay as a control mechanism and an innovative and supportive culture (Anderson and Oliver, 1997).

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measurement systems but research examining these or other consequences has been limited (Kaplan and Norton 1996, 2000; Rucci, Kim, and Quinn 1998). Lusch and Jaworski (1991) stated control systems do not have direct effects on performance; these effects are mediated by intervening states (e.g., job tension, motivation). One of these intervening states that have not been researched thoroughly is commitment. Eisenberger et al. (1986) researched the effects of behaviour based control and concluded that the more a system approaches behavior control, the more employees are thought to feel committed (and grateful) to the employer who assumes risk for them and gives them a more nurturing working climate. But could this commitment result in better organizational results? The conventional view was that overall commitment and performance were generally unrelated (Mathieu & Zajac, 1990). In the recent years commitment suddenly was seen as a mediating feature that, alongside other factors, has an influence on performance measurement systems. The relationship between commitment and control became scarcely researched. Because researchers have started to direct their efforts toward various foci and bases of commitment, some progress has been made in uncovering links between different types of commitment and work performance (Becker et al., 1996; Meyer et al., 1989). The study of Webb (2004) identifies and tests features unique to the cause-effect structure of strategic performance measurement systems (SPMS) that are likely to affect an important antecedent to managerial performance: goal commitment. This is important because research shows difficult goals are significantly more likely to lead to performance gains if individuals are committed to achieving them. Two features are predicted to affect goal commitment: (1) the strength of the cause-effect links among the non-financial and financial performance measures contained in a performance measurement system and (2) managers' beliefs in their ability to achieve the performance measurement non-financial goals. Results from an experiment conducted with experienced managers show both SPMS features have a positive effect on goal commitment.

There is a call in recent research examining the behavioural consequences of a PMS as a key aspect of motivation and commitment to assigned performance goals. Nowadays research has been limited to the possible influence of PMS on goal commitment. But what influence does commitment have on the relationship between PMS and behaviour? The underlying reason for this research is that in between the field of PM there is no clear insight in the specific characteristics that stimulate desirable behaviour of employees. So the question here is; Does commitment influence the relationship between PMS and behaviour in a specific way? Does it affect the effectiveness of the measurement system? This research is conducted from a behavioural or cognitive perspective and intends to describe the possible influence of commitment on the relationship between PMS and behaviour. This insight is of significant importance to successfully develop and implement performance management in to the organization with as ultimate goal to affect employee behaviour in a positive way. This way managers are able to optimize the effectiveness of the performance measurement system and lead the organisation in the proper direction.

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2 Research design

This part of the thesis will address the design of the research and the methodology followed. First the identified problem will be described and the goal of this thesis will be formulated. The main research question will be answered by outlining the sub-questions. After that the used research method is explained. To create an understanding of the main concepts used in this paper we also provide a definition of the key concepts. To get a final overview of this research a conceptual research model has been established and the structure of the research is graphically reflected.

2.1 Problem statement

The problem statement is the main input for the research. The problem statement can be subdivided in the research objective, the research question and restrictions and prerequisites (De Leeuw, 2001).

2.1.1 Research objective

The general purpose of this paper is to explore the possible influence of commitment on the relationship between performance measurement systems and behaviour. First the concepts of performance measurements systems, behaviour and commitment are explained. When these concepts are clear we try to explore the relation between the 3 variables by integrating and analysing the relevant theory. Moreover we will try to give recommendations for practice based on our analyses and discuss areas for future research.

2.1.2 Research questions

The aim of this research is to describe the possible influence of commitment on the relationship between performance measurement systems and behaviour. To reach this goal first the main question of the research is defined. The supporting sub questions will serve as the input for the development of an answer to the main question

In order to achieve the research objective the following research question is developed

In which ways does commitment influence the relationship between PMS and behaviour?

The main research question will be answered by first providing an answer to the following sub questions:

1 What are performance measurement systems?

When the concept of performance measurements systems is explained this can be used to describe behaviour in that light.

2 What is behaviour in the context of performance measurement systems?

The concept of behaviour should be clearly defined because it is one of the variables that can be directly or indirectly influenced by commitment.

3 What is the relationship between performance measurement systems and behaviour?

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4 What is commitment?

Commitment is the main concept of the research and has been scarcely researched in the past. Especially in the light of performance management there is not a clear concept about its components and use. So this sub question is important in creating a general concept to use in the analysis.

5 What is the influence of commitment on performance measurements systems and behaviour?

This sub question can be answered by analysing all of the previous sub questions and by using them as input to answer this important question

6 What are the recommendations for practice and the areas for future research?

This part would be subtracted from the conclusion of the analysis because when we know what the influence of commitment on the relationship between performance measurement systems and commitment is we can recommend creating commitment in a certain way so that the performance measurement systems will generate desirable behaviour. This will be presented in the form of an analysis.

2.1.3 Restrictions and prerequisites

Restrictions and prerequisites indicate the limitations to which the used research methods and the results of the research are liable (de Leeuw 2001, 85). De Leeuw makes a distinction between two kinds of restrictions called product-limitations and prerequisites and process- limitations and prerequisites.

Process-limitations and prerequisites imply something about the process of the research like the time in which the research is conducted and by who it is conducted. In this case the process limitations are that it takes one semester to finish the master thesis and it is conducted by a master student with the specialisation in organisation management and control. Product-limitations and prerequisites are about the reliability and the validity of the used literature. In this case the used literature is of scientific value. Also the used theories and models generally used in scientific articles. The goal of this paper is not to generalise its findings but to encourage discussion about the subject and to incite to further research.

2.2 Research method

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2.3 Definition of key concepts

In this section some key definitions are given in order to enhance the reading and the understanding of this thesis

Performance measurement

PM can be defined as the process of quantifying the effectiveness and the efficiency of an action. Measurement is the process of quantifying and actions lead to performance (Neely et al, 2005).

Performance measurement system

A performance measurement system (PMS) is a set of criteria which are used to quantify the effectiveness and the efficiency of an action (Neely et al., 2005).

Behaviour in the context of PMS

An individual's observable response in a given situation with respect to a given target (Ajzen, 2002).

Commitment

Commitment is (a) a force that binds an individual to a course of action of relevance to a target and (b) can be accompanied by different mind-sets that play a role in shaping behaviour (Meyer and Herscovitsch, 2002).

2.4 Conceptual research model

In order to graphically reflect the possible link between commitment and the influence of PMS on behaviour which is the research domain of this paper the following conceptual research model is provided

Figure 1: Conceptual research model

PMS Behaviour

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2.5 Structure of the research

To enhance the understanding and the outline of this research the structure of the research is explained here. The research is going to be presented in 9 chapters.

Chapter 1 contains the introduction of this research; what is the main theme of this research and how is it connected to literature. Chapter 2 will deal with the methodology used in this research, the problem statement and the research objectives. The further lay-out of this research consists of a literature study and contains chapters 3 till 6. Chapter 3 will deal with Performance Measurement Systems (PMS). Questions will be discussed such as: What are performance measurement systems? What types of PMS are there and what are the effects of PMS. This chapter will discus the most widely known types and is meant to create a general view of PMS. Chapter 4 will discus behaviour in the context of PMS. What is behaviour and how can it be interpreted in the context of PMS. Afterwards Chapter 5 will discuss the relationship between the two variables of behaviour and PMS and which variables influence this relationship. Chapter 6 will be about the variable studied in this thesis; commitment. Here questions will be discussed such as: What is commitment and what are the effects of commitment. Chapter 7 will analyse the influence of commitment on the relationship between PMS and behaviour. The conclusions of this research as well as the recommendations for practice will be presented in chapter 8. Finally the limitations of this research and areas for future research will be discussed in chapter 9.

Figure 2: Research lay-out

Chapter 1 introduction Chapter 2 Methodology

Literature Study Chapter 3 PMS

Chapter 4 Behaviour

Chapter 5 Relation PMS and behaviour Chapter 6 Commitment

Chapter 7 analysis

Influence of commitment on relationship PMS & behaviour

Chapter 8 conclusion -propositions

-main conclusion

-recommendations for practice

Chapter 9 recommendations -limitations

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3 Performance Measurement Systems

In this chapter the concept of performance measurements systems is explained. The goal of this chapter is to get a good insight of performance measurement systems which are used further in this paper to describe behaviour. In order to get familiar with the background of PMS in its wider context, management control is discussed in the first paragraph. In this paragraph the different forms of control that can be distinguished are explained and the difference between tight and loose control is amplified. In the second paragraph we arrive at the primary topic of this chapter, performance management. In this paragraph the concept of PM is explained in detail. Also the 3 most important aspects of the PMS are explained. Furthermore some different types of PMS are briefly discussed. In paragraph 3 the role of Key Performance Indicators (KPI’s) in performance management is clarified. Explained is what key performance indicators are, why they are used and when they are effective. Finally in paragraph 4 it is stated that PMS are not always effective. Therefore some side effects of performance measurement systems are discussed.

3.1 Management control

In this paragraph the origin of performance management systems, management control is discussed. This is done by introducing the concept management control and distinguishing different forms of control. By discussing these concepts this paragraph will help in providing a useful insight in the base for the concept of PMS which will be discussed further in this paper.

3.1.1 What is management control?

Organisations are social entities which will be formed systematically to pursue goals, and who don’t exist without some form of control (Otley & Berry, 1980). Performance measurement is only one method of control in the organisation theory. In order to understand performance measurement and its indicators we first explain the wider framework of management control. According to Anthony (2001) management control is a process that managers use to make sure that the goals of the organisation are effectively and efficiently pursued and to obtain the necessary resources in order to achieve them. Anderson and Oliver (1987) state that a control system is "an organization's set of procedures for monitoring, directing, evaluating, and compensating its employees”. Maciariello et al. (1994) state that management control is concerned with coordination, resource allocation, motivation, and performance measurement and draws upon a number of academic disciplines. It involves extensive measurement and it is therefore related to (management) accounting. Second, it involves resource allocation decisions and it therefore requires contribution from economics. Third, it is related to social psychology especially organizational behaviour because MC involves communication and motivation.

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If organisations could always rely on their employees there would be no need for an MCS. But unfortunately this is not the case. There are three different reasons for using management control systems (Merchant 2003, p. 7)

1. Lack of direction (unclear goals)

2. Motivational problems (tension between personal and organisational goals) 3. Personal limitations (lack of education, information, knowledge and intelligence)

Management Control Systems (MCS) are developed to assist organisations with the implementation and use of management control. The ultimate goal of management control systems is to realize goal congruence. Goal congruence enforces people to action which realigns with their own goals as well as the goals of the organisation. Not only performance measurement is important here as well as other methods to stimulate and encourage the behaviour of employees to act in favour of the organisation (Merchant, 2003; Ouchi, 1979; Simons, 1995). MC provides instruments like performance measurement which realigns these goals through an active process with a focus on the behaviour of the employees (Merchant and Van der Stede, 2003).

3.1.2 Forms of control

Throughout this paper we use the previous discussed management control definition of Anderson and Oliver (1987) which states that a control system is "an organization's set of procedures for monitoring, directing, evaluating, and compensating its employees”. There can be found many management control theories in the literature. The theory of management control used in this thesis is that of Merchant and van der Stede (2003) that relies on the object of management control. Four different kinds of management control are distinguished which are frequently used in the literature to describe the interaction between control and performance measurement.

1 Results Control (Management Control based on results) 2 Action Control (Management Control based on actions)

3 Personal Control (Management Control through recruiting and selection) 4 Cultural Control (Management Control through group values)

According to Merchant & Van der Stede (2003), results control, action control, personnel and cultural control apply to every MCS. Depending on the situation they occur alone or in a combination. There is no optimal form and every form has its advantages and disadvantages. Another way to classify MCS is that of Anderson and Oliver (1987). This classification is very similar to the results and action control classification of Merchant and van der Stede (2003). For this research it is a very suitable one because it has a strong link with the indicators of performance measurement systems. According to Anderson and Oliver (1987) control systems can be characterized as points along a continuum anchored by two "alternative" and polar managerial strategies labelled "outcome control" and "behaviour control".

Outcome based control

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higher rewards. This can have a positive influence on motivational problems. Through this approach outcome based controls influences employees to attend to action which leads to the desired result (Merchant 2003; p. 26).

Behavioural control

A behaviour-based control system is typified by high levels of supervisor monitoring, direction and intervention in activities. It is also one of the most direct control forms of MC because of the fact that employees behave effectively because their behaviour is controlled (Merchant 2003, p. 85). Behaviour based control is based on pre set norms and rules. It involves subjective and more complex methods of evaluating performance. Performance evaluation on inputs is more subjective because inputs can not be objectively measured. Also because inputs are not always observable there must be decided to what degree inputs generate outputs. In behavioural-based control systems employees have the security of a salary base in stead of the more variable salary of outcome based control systems. This climate were the employer assumes risk for the employees reduces short term pressure (Eisenberger et al.). One of the reasons why behaviour based control is effective is because the management can identify clearly which rules should or should not be followed and how to follow them. Therefore employees know what behaviour is desired. Management encourages employees to participate in training and to learn. This creates more room for employees to maintain their own initiative, be entrepreneurial, motivated and innovative between the set boundaries.

We argue that output and behaviour control are polar opposites and that management may elect to position its strategy at various levels between these extremes. But no single control system is the best in all circumstances. Therefore some organisations make use of a hybrid form that contains aspects of both behavioural and outcome based control. Other similar theories of management control are that of the goal of management control (Simons 1995) and the feasibility of management control (Ouchi, 1979)

3.1.3 Tight and loose control

An other important factor that characterises management control is the degree to which the MCS can be described as tight or loose.

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3.2 Performance measurement

In the previous paragraph we discussed the origin of Performance Measurement (PM), Management Control. In this paragraph the main topic of this research is taken into consideration. First we are going to shed a light on the meaning of performance management and discuss why PMS is important. Also we explain the 3 most important aspects of the PMS. After that we briefly review the most frequently used PMS types. This paragraph provides insights about an important variable of this paper, the PMS. These insights can be used later on in this paper when explaining the other variables. The ultimate goal of this paragraph is to provide the appropriate knowledge which can be used to eventually answer the research question.

3.2.1 What is Performance Measurement?

According to the definition of Neely et al. (2005) performance measurement (PM) can be defined as the process of quantifying the effectiveness and the efficiency of an action. Performance Measurement is the process of quantifying and actions lead to performance (Neely e.a., 2005).

Performance measurement is mainly used for two reasons (Neely, 1998): - To determine the organisations position and to decide what can be improved - To influence the behaviour of employees

When the organization is viewed as a complex organism seeking to survive its competitive environment, performance measurement systems serve as a key contributor to the coordination and control capabilities of the firm. Organizations use performance measurement systems to monitor and control specific activities; to predict future internal and external states and to monitor it relative to its goals, to make decisions within needed time frames and to alter the firm’s overall orientation or behaviour. (Simons, 2000). The measures of the PMS can influence behavior based on outcome or behavioural based implications. Other authors come with additional reasons and argue that performance measurement is also an important factor in decision making, change, communication, allocation of resources, motivation and long term focus (Sinclair en Zairi 1995). In this paper the most important feature of performance measurement is that in can influence behaviour.

The widely accepted model of performance measurement adheres to three basic principles: performance should be clearly defined; performance should be accurately measured; rewards should be contingent upon measured performance (Austin and Gittell, 2002). PM mostly uses quantitative indicators that indicate to what extent organisational goals are met regarding the performance of the whole organisation or a part of the organisation. Performance measures are seen as an informational resources used to monitor the organizational impact of strategy implementation (Simons, 1995). Measurement systems are comprised of multiple measures. They can be objective or subjective. Objective measures can be independently measured and verified. Subjective ones cannot. Measures are also typically classified as financial or non-financial. Financial measures are typically derived from or directly related to chart of accounts Non-financial measures are measures not found in the chart of accounts, such as customer satisfaction scores or product quality measures. Measures can also be leading or lagging. Leading indicators are designed to measure future performance. Lagging measures provide information about past performance and typically do not provide insight into future performance (Simons, 2000).

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PMS, the use of management control, manager and employee behaviour and performance (De Waal, 2003).

Andersen and Oliver (1987) argue that next to the reward structure of the performance measurement system, monitoring, directing and evaluating serve to motivate employees in a way that it influences them to perform the desired behaviour. These methods should be treated as interrelated decisions that collectively describe the management's control system. This so called “net effect” of control systems is perceived by employees and is of critical influence on their job-related cognitions, attitudes, and behaviors (Andersen and Oliver, 1987).

In order to keep up with the changing goals and needs of the organisation the performance measurement system has to be periodically reviewed. This important finding arises from the growing attention to performance measurement in these times of changing consumer needs, fierce competition and modified improvement programs. (Neely, 1999).

Looking at these factors one can state that performance management is important to a diversity of subjects in organisations every day life. But it is also just a small part of the continuous search to improvement in organisations. If performance measurement is not acting upon its results it is costly and does not add value to the organisation (Neely and Bourne, 2000). For this reason performance measurement should be part of a system where in order to achieve the organisations goals performance is assessed, actions are undertaken and decisions are made. The system of a PMS consists of three important areas as discussed above. These areas are:

- The measurements of the PMS which are based on behavioural or outcome based control. - The alignment of those measurements.

- Managerial influence and feedback.

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3.2.2 Types of Performance Measurement Systems

There are different types of performance measurement systems. A performance measurement system is defined as a set of criteria which are used to quantify the effectiveness and the efficiency of an action (Neely e.a., 1995). Key performance indicators are measurements used to quantify the actions of the PMS in order to achieve the set goals of the organisation. In this paragraph the most commonly used systems are briefly reviewed.

The Balanced Scorecard (BSC)

The Balanced Scorecard is a well known framework which integrates the relations between goals, activities and results with the management process. The BSC uses traditional financial performance measurements but also involves operational performance.

(Kaplan and Norton, 1995). The BSC is based on 4 perspectives: 1. Financial: financial health of the organisation

2. Customers: How do customers view the organisation 3. Internal processes: The organization’s main assets

4. Innovation and learning: The organisation as an ongoing improving entity which creates value The fist one is a traditional financial performance measure and the remaining three are of operational nature. The BSC shows where improvements have been established and forces the management to focus on a few measurements that are of crucial importance to the organization (Kaplan and Norton, 1995). Norreklit (2000) criticizes the BSC for being to static as well as being a top-down approach which results in a difficult implementation on lower level.

Key Performance Indicator scorecard (KPI Scorecard)

According to Kaplan and Norton (2001) many organisations claim to use the balanced scorecard because they use a mix of financial and non financial performance measures. In fact they use more or less the same measurements and classify them in four perspectives that look like the categories of the BSC. In fact those measurements seem to be similar to the BSC but they are not compatible to the four perspectives of the BC or there is no link between the perspectives. A KPI scorecard can be useful if strategy is implemented top-down. The indicators can function as guidelines for teams and individuals so that they can contribute to the goals of the organisation.

The European Foundation for Quality Management Excellence model (EFQM)

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Value based management (VBM)

Though value creation is the main approach in value based management (VBM), it is also focused on better decision making through value-based performance measures in all levels of the organisation. (Koller, 1994). It is meant to provide decision makers at all levels of the organisation with the right information and incentives to make value creation decisions. Value based management aligns a company’s overall aspirations, analytical techniques and management processes with the key drivers of value. VBM is based on a value creating mindset taken together with management processes and systems. A value creation mindset means that the ultimate goal of the organisation is maximizing value and that managers have an analytical understanding of which performance variables drive the value of the organisation. Management processes and systems encourage managers and employees to behave in a way that maximizes the value of the organisation. Together they can have a sustained impact.

Economic value added (EVA)

According to Cagle (2003), Economic Value Added (EVA) is developed as an overall measure of financial performance. EVA is both a specific performance measure and the basis for a larger performance measurement framework (Otley, 1999). It most directly measures shareholder value. Additionally the

EVA measure is meant to developa value creationculture when used in financial management practices

and when linked to compensation. It is designed to give managers better information and motivation to make decisions that will create shareholder value. EVA is complementary to the Balanced Scorecard and can be coupled with it in order to balance short-term productivity improvements and long-term growth goals (Otley, 1999, Kaplan and Norton, 2001). Top management understanding of the measure as well as support is essential for EVA to be successful.

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3.3 The role of Key Performance Indicators in performance

measurement

In this paragraph Key Performance Indicators (KPI’s) will be introduced as a key instrument of performance measurement systems. First we explain the concept of KPI’ and define its role in performance management. It will become clear that KPI’s not only measure performance but also can influence behaviour. Second we are going to determine when KPI’s are effective. This is important because KPI’s are the measurements on which the PMS is based. These measurements influence the behaviour of employees and ultimately determine the effectiveness of the PMS. These ideas and insights are necessary in order to analyse behaviour in the context of PMS and ultimately linking commitment to that relation.

3.3.1 What are Key performance indicators?

Key performance indicators are criteria that provide information about the performance of an object. These measurements are registered toguarantee long term success of the organisation, localise strengths and weaknesses and to influence behaviour (De Waal, 2004). KPI’s can be attributed to an individual, a team or a department (Bauer, 2004).

The role of KPI’s in performance measurement is difficult to explain. This is because the term KPI’s is used for multiple purposes and it includes several measurements and indicators. According to Beatham (1994), KPI’s are used as a generic termfor measuring performance. In more specified definitions KPI’s are seen as those measurements of performance to which the success of organisation as a whole can be attributed or at least those measurements that are of importance to the organisation.

A performance measurement system is effective when it stimulates desired behaviour which will lead to the aimed results and does not encouragedysfunctional behaviour. Behaviour is a very important feature in the definition of PM because KPI’s do not only measure performance but also influence behaviour. Key performance indicators are important aspects of the performance measurement systems and performance directed behaviour can be seen as behaviour that can be influenced. One must realize that what’s been measured by Key Performance Indicators will be seen as important by employees. Therefore employees will adapt their behaviour to achieve a better result based on the measurements of the PMS (Denton, 2002).

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3.3.2 Effective Key Performance Indicators

We already discussed the main definition of KPI’s but we did not explain when KPI’s are effective in performance measurement. This will be the central topic of this paragraph.

Effectiveness of Key Performance Indicators

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3.4 Side effects of Performance Measurement Systems

In the first paragraph we briefly discussed the effects of management control. If a PMS is completely effective it will entirely control the behaviour of employees. In practice this is never really the case. This may be due to several side effects of the PMS that have to be taken into account. It is important to know which side effects can occur during performance management in order to keep track of the goals of the organisation and perform corrective actions if necessary. This way the goals of the organisation are actively pursued.

The costs of performance measurement

Management critics agree that the usage costs of management control systems is the most important but yet inevitable side effect. The costs occur mainly because of (Merchant, 2003; Anthony, 1989; Simons, 1995):

- Dysfunctional behaviour because of wrongly interpreted goals. - Gaming by building in slack.

- Delay in feasibility because of slow procedures. - Negative attitudes

PMS and consistency with organisation strategy

The PMS could be wrongly applied if performance indicators and performance drivers are not consistent withthe organisation strategy (McMahan, 2005). This is the case in many organisations. The result is that the used indicators do not show the real accomplishments and are not of any predictive value. Another consequence of performance indicators and performance drivers that are not consistent with the organisation strategy is that employees could be pursuing multiple goals (cross-purposes). This shows that the influence that PM has on performance should be recognised as an essential part of the organisations strategy (Kaplan and Norton, 1992, p. 71; 1993, p. 134).

Linking rewards to performance

It is common to link rewards to performance but there can be some factors that have to be taken into consideration. According to Kaplan and Norton (1996) there can be potential difficulties in integrating performance indicators and incentives. It proves to be a difficult task in many organisations to decide the importance of every indicator. This is a problem because if an indicator is wrongly been marked as very important it can cause exceptional and unreasonable high rewards that are not in balance with the accomplished performance which can cause gaming. Employees can keep their results up artificial even if this is not in the best interest of the organisation but in their one interest. One method to diminish this problem is to use subjective performance evaluation which can intercept dysfunctional behaviour and gaming (Ittner and Larcker, 1998).

Diminishing the entrepreneurial spirit and creativity

Management control systems also tend to diminish the entrepreneurial spirit and creativity in organisations because of the standard procedures that often arise when PMS is implemented (Merchant and Van der Stede, 2003).

Law of diminishing effectiveness

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- provides transparency and trust between managers and professionals

- contains indicators that serve stakeholders so that they sympathize with the PMS - can adapt to changing circumstances

Toneutralise the tension between culture of consensus and the culture of performance measurement the interaction and consensus between managers and professionals should be enhanced.

The goal of this chapter is to get a good insight in the variables and concepts of the performance measurement system. These insights are necessary to answer the question of how the PMS relates to behaviour which is discussed in chapter 5.

The most important result of this chapter is the finding that the PMS consist of three different components - KPI’s are the measurements that are used in behavioural- and outcome-based PMS to influence behaviour. These measurements can be behavioural- or outcome-based. This concept is important because it holds a reward structure that is of great influence on employee behaviour (Andersen and Oliver, 1987).

- Alignment of those measurements. This is important because when performance measures, rewards and goals or targets do not mutually reinforce each other it will create dysfunctional behaviour and erratic performance (Hopwood, 1974).

- Managerial influence. This part of the PMS is important in using the PMS as an effective management control system by motivating the employees (Malina and Selto, 2000). Also monitoring, directing and evaluating influences employees to perform the desired behaviour (Andersen and Oliver 1987).

These methods should be treated as interrelated decisions that collectively describe the management's control system. This so called “net effect” of control systems is perceived by employees and is of critical influence on their job-related cognitions, attitudes, and behaviors (Andersen and Oliver, 1987).

In the table below the most important findings of this chapter are summarized in order to answer the sub question of this research: What are performance measurement systems?

Most important findings of chapter 3

The main reason for using management control systems is the tension between personal and organisational goals (motivational problems).

The measures of the PMS can influence behavior based on outcome- or behavioural-based implications. Performance measurement models adhere to three basic principles: performance should be clearly defined; performance should be accurately measured; rewards should be contingent upon measured performance Managerial influence is an important factor in PMS and contains feedback as its most important asset. KPI’s are the measurements on which the PMS is based. These measurements influence the behaviour of employees and ultimately determine the effectiveness of the PMS.

A performance measurement is seen as effective when its stimulates desired behaviour.

Table 1: Most important findings of chapter 3

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4 Behaviour

We use the cognitive theory to discuss behaviour in the context of performance measurement. By means of this theory, behaviour is further explained to make clear how behaviour arises when performance measurement is involved. This theory is chosen because it involves several behavioural modification thoughts which we can use to analyse the relationship between PMS and behaviour.

Behaviour can be influenced by the PMS and therefore the concept of behaviour should be clearly defined. In order to do this properly we first provide a definition of behaviour in the context of PMS which we can use throughout the paper. In the second paragraph we explain the cognitive theory which we use to provide a basic assumption to further discuss behaviour. We use this theory to explain how individual behaviour is influenced by different aspects of the PMS. In paragraph 3 we look at another concept that can be linked to individual behaviour: scripts. In order to understand this concept we explain different aspects of scripts that can occur in the PMS and its effect on individual behaviour in paragraph 4. The importance of feedback in shaping an individuals behaviour is discussed here as well.

4.1 Definition of behaviour in the context of PM

Ajzen (2002) defines behaviour as: an individual's observable response in a given situation with respect to a given target. He also discusses that behavioural intention is an important factor in the organizational context. Behavioural intention is an indication of an individual's readiness to perform a given behaviour. It is assumed to be the immediate antecedent of behaviour (Ajzen, 2002). It is based on an employee’s attitude towards behaviour, subjective norm, and perceived behavioural control. The individual’s intention to engage in a given behaviour is the best predictor of that behaviour according to Ajzen (2002). He also argues that behavior is a function of compatible intentions and perceptions of behavioral control in a way that only when perceived behavioral control is strong, a favorable intention produces the desired behaviour.

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4.2 Cognitive theory

The cognitive theory is used to discuss behaviour in the context of performance measurement. By means of this theory, behaviour is further explained to make clear how behaviour arises. In the cognitive theory performance management is seen as behaviour modification. Therefore it consists of different thoughts and ideas that can link the concept of performance measurement to that of behaviour. This theory is used in order to create a basic assumption about this linkto further discuss behaviour.

Horngren (1962) mentions the importance of human behaviour in determining the effectiveness of accounting systems. Epstein and Westbrook (2001) agree that employee behaviour can be measured as action component in the company by measuring learning, workload, reward, recognition and culture. Consistent with this view the cognitive theory discusses motivational aspects and their consequences for behavioural and results control. (Deci and Ryan, 1985).

In cognitive theory the attribution bases are critical because the success of an outcome or behaviour based strategy is dependent on the employees perceptions on his or her attribution to the success or failure. Attribution encompasses three dimensions:

- Internal/external locus of causality

- Stability

- Controllability

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4.3 Individual behaviour & scripts

In this paragraph we discuss individual behaviour and scripts in the context of performance measurement systems. We use this concept in order to explain how individual behaviour is influenced by different aspects of the PMS. In order to understand this concept we explain different situations like novel and frequent situations that can occur in the PMS and its effect on individual behaviour. Also the importance of feedback in shaping individuals behaviour is discussed.

In the cognitive theory performance management is seen as behaviour modification. This implies making specific behaviour more or less often by systematically managing its cues and consequences. Because the cognitive approach in organisational behaviour is primarily focused on the individual the term behavioural self management is often discussed. Behavioural self management implies modifying ones own behaviour by managing cues, cognitive processes and consequences. Gioia and Poole (1984) use the same cognitive approach for understanding individual behaviour. They use scripts as a unique approach to describe, analyze and understand this behaviour. Gioia and Poole (1984) define scripts as ‘a schematic knowledge structure held in memory that specifies behaviours or event sequences that are appropriate for specific situations’. Scripts are helpful in understanding common organizational events such a formal meetings, decision situations, selection interviews, performance appraisals, and day-to-day employee interactions. They can be linked to predictable, conventional or frequent situations. Scripts can approach the way people think and can also explain how change occurs.

There are two types of scripts:

- cognitive scripts; mental representations of behaviours appropriate for given contexts - behavioural scripts; the performance of a set of behaviours (an activated script)

Scripts serve a dual role for employees. They enable the understanding of ongoing organizational events and they provide a guide to appropriate behaviour (Abelson, 1981). Scripts also guide the planning and execution of familiar or repetitive activities (Bower, Black, & Turner, 1979). Gioia and Poole (1984) discuss the evolution of scripts in relation to the behaviour of employees.

Script processing is normally considered an automatically and non conscious process (Gioia and Poole, 1984). The extension of scripts to organisational behaviour requires recognition that scripted behaviour is not always automatically understood and performed. This means that employees can know the appropriate patterns of behaviour for many situations and they consciously choose to perform these patterns. Different factors influence script processing:

Possible contingency factors affecting script processing

1 Action typicality Typical situations tend to evoke scripted behaviour.

2 Activation frequency Scripts more frequently used tend to become more automatic. 3 Activation recency Scripts recently enacted tend to be more accessible in

memory.

4 Priming Perceived purpose for information processing tends to cause script selection bias.

5 Information complexity Protoscripts tend to be enacted as information complexity increases.

6 Self-concept Need to preserve self-esteem can cause script selection bias.

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“Cues are simple familiar structures that cause individuals to evoke scripts” (Becker, 2004). When an individual responds to a cue it triggers action. A cue can evoke conscious or unconscious behaviour. When a cue evokes a script and the cue is recognized by the individual it leads to an unconscious action. In the case of a new scenario which is unknown to the individual it can lead to ‘sense making’. Sense making can also be evoked by a cue and occurs when individuals give meaning to the new experience. This is opposite to scripted actions because it is done conscious. Sense making can result in emotional discomfort when the individuals are not able to place the cue.

In organisations there are many situations were predictable actions and behaviours occur. Scripted behaviour occurs mostly because of the familiar and repeated character of these situations. These characteristics are present in the organisation in the form of rituals, procedures symbols and other institutionalised interactions. Performance appraisals can be ranged as these kind of interactions and appear to involve script-based understanding and behaviour (Feldman, 1981) because both the managers and subordinates are likely to have cognitively structured expectations about the interactive events or scenes that occur during performance measurement. A useful interpretation for this field is that it can be efficient to base decision making on scripts but it does not imply that the right decision is made. This is because of the fact that certain familiar situations occur and decision are made according to the matching script. Undesired actions are the result.

New scripts are generated by building upon previously internalized or schematized situation specific expectations of appropriate behaviour (Gioia and Pool, 1985). Script development and retention of a script is created by the learned behaviours on the job, the frequency of repetition of the behaviour and the degree of self and external reinforcement experienced (Gioia and Pool, 1985). The emphasis in this paper is on showing how cognitive systems guide the output of purposeful behaviour. The influence of feedback on performance is integrated with the same cognitive systems that control performance and the output of behaviour (Lord and Kernan, 1987).

This introduction of scripts is however limited to familiar situations, those in which sub goals, paths, and relevant environmental information are known. According to Gioia and Pool (1985) there are several ways that this focus can be broadened to other situations:

- Metascripts may be important in generalizing scripts from familiar to unfamiliar situations. Scripts are part of this larger cognitive system in which similar but distinct scripts are grouped. (Gioia and Poole, 1984). These scripts apply to slightly different contexts.

- If schemes are seen as autonomous cognitive units that can be reassembled one could generalize the ideas developed here for less familiar situations (Lord and Kernan 1987).

This approach directly addresses a fundamental and general psychological problem; linking cognitions and behaviour in a dynamic system.

We have to explore the concept of scripts more thoroughly in order to link them to the concept of behaviour. Therefore we discuss three important topics that are distinct in the script literature. These topics are:

- weak and strong scripts - novel and frequent situations

- the learning aspect of scripts, feedback

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4.4 Different aspects of scripts

In order to explore the concept of scripts in more depth we discuss three important topics that can be distinguished in the scriptal literature. These topics are:

- weak and strong scripts - novel and frequent situations

- the learning aspect of scripts; feedback

We need to make this distinction in order to explain the concept of behaviour in this light and in different situations. The next sub paragraphs will discuss the importance of these subjects in further detail.

4.4.1 Weak scripts and strong scripts

Employees can retain both weak and strong scripts. Weak scripts specify the particular behavioural events that are expected in a given situation. Strong scripts specify not only the expected behaviors, but their progressive sequence as well (Gioia and Poole, 1984). In this paragraph we explain the importance of weak and strong scripts and discuss several implications of them. We also explain the main differences between weak and strong scripts.

Implications of weak and strong scripts

Weak and strong scripts have several important properties.

- First, strong scripts usually are related to the goals of individual actors; they organize information around goals and can be evoked by informing observers about the goals of actors (Abelson 1981). - Second, scripts often incorporate multiple paths to goals. This is particularly important in

explaining the flexibility or adaptability of behaviour.

- Third, the goal- and path-related content of scripts is organized in a hierarchical means-end structure. That is, lower-level goals are means by which higher-level goals are achieved, and this hierarchical organization structures both memory and behaviors. The "in-order-to" relation is also part of this hierarchical structure and links lower level goals such as doing well on work tasks with higher-level goals like getting a raise, when the lower-level activity is performed in-order-to accomplish the higher-level activity.

- Fourth, scripts often have clear temporal structures, based on in-order-to relations. Higher-level goals cannot be accomplished before necessary lower-level goals are completed.

- Fifth, script structures can easily incorporate new experiences (Abelson, 1981). This process is called "tagging," and can encode new information and tag it into a generic script structure.

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Weak scripts

Abelson (1981) argues that weak scripts bear a resemblance to other forms of cognitive and organized expectations about the potential behaviors of others and oneself. However weak scripts do not specify the exact sequence of these behaviors. They apply to situations were employees know what is going to happen in general, but they cannot predict a specific order (Abelson, 1981). Examples of such situations are problem solving meetings in management accounting or solving a potential conflict of interests. Choo (1989) states that these situations occur not because of a lack of prior scriptal knowledge but because the script has many complex "tracks". Tracks contain variations in procedures and behaviour (Abelson, 1981). Therefore the individual confronted with a weak script can never be sure which "track" will take place. Also script content and the grouping of events are quite variable (Lord and Kernan, 1987). Furthermore, within each "track", it is difficult to predict the specific sequence of events happening (Choo, 1989). Concluding we can state that weak scripts are associated with situations in which potential events are expected but the order of events is not predictable.

Strong scripts

Strong scripts contain expectations not only for the occurrence of events, but also for the progressive sequence of the events (Abelson, 1981; Choo, 1989). They apply to stereotypical and ritualistic occasions when employees know what will happen as well as the order in which it will happen. Choo (1989) argues that strong scripts are distinctive because of the relevance of learned associations between prior and consequent events. For strong scripts there is substantial agreement regarding events contained within a script and ways to parse events into meaningful sub groupings (Lord and Kernan, 1987). Therefore we argue that there are no different tracks within the scripts as discussed previously. Choo (1989) agrees and states that there are minimum variations or tracks associated with a generalized strong script.

Concluding we can state that strong scripts are associated with situations in which specific events as well as the order of events are predictable.

Some authors state that scripted behaviour is more or less automatic or unconsciously executed (Abelson, 1981). Others argue that this is not the case. Therefore conscious or unconscious processing of scriptal information is another distinction that must be made in script enactment. It results in automatic or less automatic behaviour. Literature states that weak scripts will require more conscious script processing than strong scripts which require less conscious or unconscious processing. This is because of the fact that strong scripts can get unitized. Therefore weak scripts results in less automatic scripted behaviours than strong scripts.

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4.4.2 Novel situations and familiar situation in script processing

An individual’s behaviour as well as the effectiveness or consequences of that behaviour in previous situations can serve as input to a script in the memory. This script specifies the behaviour likely to fit a present situation (Choo, 1989). In organisations some situations are familiar and fit into a generalized script. Other situations approximate a generalized script but differ in detail. In these situations distinguishing knowledge of these variations is required. As discussed before variations on a script theme are known as different "tracks" of a script (Abelson, 1981). This process allows a repertoire of related functional tracks to be retained. In this paragraph a distinction is made between conscious and unconscious script processing based on individuals encountering novel or familiar situations.

Most authors state that scripted organizational behaviour is performed unconsciously and is referred to as automatic script processing. (Gioia and Poole, 1984) disagree on this statement and argue that active cognition or controlled script processing occurs during the process of script development and when encountering novel situations. When an employee encounters a novel situation it does not actively process all informational cues anew in order to decide how to behave (Gioia and Poole, 1985). Rather they can depend on personal or consensual schemas to understand and respond to organisational situations. This indicates that little active information processing is needed. So even though some authors have viewed scripts as more or less automatically or unconsciously executed (Abelson, 1981; Langer, 1978), it is argued that treatment of the concept only as an automatic process is needlessly restrictive. People often consciously develop and monitor their scripts in organisations in a purposeful manner, for instance, to satisfy their needs, preferences or self interest or simply to create desirable impressions (Klein and Ritti, 1980; Snyder, 1977).

This opens the discussion on the concept of conscious and unconscious script processing or behaviour. Choo (1989) notes that where people are aware that certain situations require specific behaviors, scripted behaviors are not always spontaneously or unconsciously executed. This thought can be reflected on the PMS. He argues that people have the ability to reflect on what they are doing. Therefore it is logical to expect that they engage in a mixture of conscious and/or unconscious script processing.

Performance measurement & commitment

Performance measurement & commitment

“The influence of commitment on the relation between

performance measurement systems and behaviour”

Performance measurement & commitment

“The influence of commitment on the relation between

performance measurement systems and behaviour”

Preface

Executive summary

Table of contents

1 Introduction

2 Research design

2.1 Problem statement

2.1.1 Research objective

2.1.2 Research questions

2.1.3 Restrictions and prerequisites

2.2 Research method

2.3 Definition of key concepts

2.4 Conceptual research model

2.5 Structure of the research

3 Performance Measurement Systems

3.1 Management control

3.1.1 What is management control?

3.1.2 Forms of control

3.1.3

Tight and loose control

3.2 Performance measurement

3.2.1 What is Performance Measurement?

3.2.2

Types of Performance Measurement Systems

3.3

The role of Key Performance Indicators in performance

measurement

3.3.1 What are Key performance indicators?

3.3.2 Effective Key Performance Indicators

3.4

Side effects of Performance Measurement Systems

4 Behaviour

4.1 Definition of behaviour in the context of PM

4.2 Cognitive theory

4.3 Individual behaviour & scripts

4.4 Different aspects of scripts

4.4.1 Weak scripts and strong scripts

4.4.2 Novel situations and familiar situation in script processing