-
Management Accounting Research 18 (2007) 312342
The impact of reliance on incentive-based compensationschemes,
information asymmetry and organisational
commitment on managerial performanceVincent K. Chong a,, Ian
R.C. Eggleton b
a The University of Western Australia, Australiab The University
of Waikato, New Zealand
Abstract
This study examines the effects of information asymmetry and
organisational commitment on the relation betweenthe extent of
reliance on incentive-based compensation schemes and managerial
performance. The responses of 109managers, drawn from a
cross-section of Australian manufacturing companies, to a
questionnaire survey, wereanalysed by using a multiple regression
technique. The results provide evidence of higher managerial
performancefor managers with low organisational commitment and a
high reliance on incentive-based compensation schemes inhigh
information asymmetry situations. On the other hand, the results
show that the performance level of managerswith high organisational
commitment is unaffected regardless of the degree of information
asymmetry and the extentof reliance on incentive-based compensation
schemes. 2007 Elsevier Ltd. All rights reserved.
Keywords: Reliance on incentive-based compensation schemes;
Information asymmetry; Organisational commitment andmanagerial
performance
1. Introduction
Incentive-based compensation schemes are used by organisations
to align the interests of employeeswith owners (see Baker et al.,
1988). The primary reason why organisations use an
incentive-based
Corresponding author at: Accounting and Finance (M250), UWA
Business School, The University of Western Australia, 35Stirling
Highway, Crawley, WA 6009, Australia. Tel.: +61 8 6488 2914; fax:
+6 18 6488 1047.
E-mail address: [email protected] (V.K. Chong).
1044-5005/$ see front matter 2007 Elsevier Ltd. All rights
reserved.doi:10.1016/j.mar.2007.04.002
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 313
compensation scheme is to ensure that their employees efforts
can be channeled toward activities thatfacilitate the achievement
of organisational objectives (Flamholtz et al., 1985; Banker et
al., 1996a, 1996b,2001; Gibbs et al., 2004).1 Most of the research
examining the control system effects of compensationschemes is
based on an agency theory framework. Agency theory suggests that an
agent is capableof engaging in dysfunctional behaviours known as
adverse selection and moral hazard (Arrow, 1985;Baiman, 1982,
1990).2 The dysfunctional behaviours arise when the agent and the
principal have differentrisk preferences and conflicting goals.3
This is because agents, who possess more private informationabout
their task environment than their superior, are assumed to use this
private information to makedecisions in their self-interests. The
existence of private information is an illustration of
informationasymmetry (Baiman and Evans, 1983; Penno, 1984; Coughlan
and Schmidt, 1985; Dunk, 1993), whichrefers to subordinates who
possess more private information than their superior relating to
their area ofresponsibility (Dunk, 1993). Thus, it is argued that
when information asymmetry is high, dysfunctionalbehaviours are
more likely to occur than when information asymmetry is low (see
Eisenhardt, 1985; Prattand Zeckhauser, 1985).
Agency theorists posit that the principal can minimise moral
hazard problems by developing anincentive-based compensation scheme
(a control subsystem), which aligns the interests of principal
andagent (Eisenhardt, 1988, 1989; Kaplan and Atkinson, 1998, p.
681). A fundamental objective of anincentive-based compensation
scheme is to motivate individuals to exert effort to improve
performance.A recent study by Sprinkle (2000) found that the
reliance on an incentive-based compensation schemeimproves
individuals performance by motivating them to increase both the
duration and intensity oftheir effort. He found that incentives not
only motivate individuals to work longer on a task, but alsoserve
to enhance the quality of attention individuals devote to the task.
Previous incentive-contractingstudies (Chow, 1983; Waller and Chow,
1985; Chow et al., 1988) have proposed the use of incentive-based
compensation schemes for motivating truthful reporting by
subordinates. Specifically, these studiesfound that the reliance on
incentive-based compensation schemes can enhance individual
performance.However, Waller (1994) criticises these studies for
investigating economic incentive without explicitlyconsidering
other behavioural factors. Frederickson (1992) also argues that
conclusions drawn fromagency theory-based models that ignore
behavioural factors should be interpreted cautiously. In
addition,numerous studies (Baker et al., 1988; Kachelmeier, 1994,
1996; Luft, 1997; Evans et al., 2001; Merchantet al., 2003) argued
that better insights may be gained if the results of agency and
behavioural studiesare integrated. For example, it has been
asserted that a managers level of organisational commitment
1 From an agency theory perspective, an incentive-based
compensation scheme exerts two important functions: selectionand
effort effects. The selection effect role of incentive-based
compensation schemes can increase an organisations
overallperformance by attracting and retaining more productive
employees. On the other hand, the effort effect role of an
incentive-based compensation scheme can induce employees to exert
more effort to improve their performance. The focus of this paper
isto examine the effort effect function.
2 The agency literature refers to the problems of adverse
selection as pre-contractual problems, and to the problems of
moralhazard as post-contractual problems (see Arrow, 1985; Baiman,
1982, 1990). Adverse selection occurs before employment whenan
agent possesses private pre-contractual information or hidden
information about his or her own skill levels. He or she has
theopportunity to misrepresent his or her skill level to obtain a
higher paying position (see Chow, 1983). Moral hazard occurs
afteremployment when an agent possesses private post-contractual
information or hidden actions about his or her actions. The focusof
this paper is on moral hazard problems.
3 Risk preference refers to the degree of an agents or
principals preference for adventure rather than security (Pratt,
1964;Arrow, 1974).
-
314 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
(a behavioural factor at the individual level) is as important
as the extent of reliance on an incentive-based compensation scheme
for motivating effort (see Simon, 1991). Prior studies (e.g.
Mathieu andZajac, 1990; Randall, 1990; Nouri and Parker, 1998)
argued that organisational commitment may havethe potential for
improving work outcomes such as subordinates performance.
Furthermore, it has beenfound that subordinates with high levels of
organisational commitment are more likely to use their
privateinformation to pursue organisational goals, while
subordinates with low levels of organisational commit-ment are more
likely to use their private information largely to pursue
self-interest (see Nouri and Parker,1996).
Thus, it seems likely that the effects of the extent of reliance
on incentive-based compensation schemeson performance may depend
not only on the degree of information asymmetry present, but also
on themanagers level of organisational commitment. While these
linkages have been recognised in the literature,there have been no
studies that attempt to evaluate the three-way interactive effects
between the degreeof information asymmetry, subordinates levels of
organisational commitment and the extent of relianceon
incentive-based compensation schemes affecting managerial
performance. This gap in the accountingliterature, which remains
unexplored, constitutes the motivation for this paper.
This paper is organised as follows. In the next section, the
theoretical framework underlying the studyis developed. This leads
to the statement of hypotheses. Subsequent sections address the
method, results,discussions, and limitations of the study.
2. Hypotheses development
2.1. The relation between incentive-based compensation schemes
and performance
An incentive-based compensation scheme refers to the extent to
which pay incentives (such as bonusor profit sharing) are used as
the compensation strategy in an organisation (see Balkin and
Gomez-Mejia,1990). As noted earlier, prior incentive-contracting
studies (e.g. Chow, 1983; Waller and Chow, 1985;Chow et al., 1988)
have provided empirical evidence to support the view that reliance
on incentive-basedcompensation schemes can affect individual
performance by inducing a higher level of effort on the partof
subordinates.
Several non-accounting studies (Gomez-Mejia et al., 1987;
Eisenhardt, 1988; Tosi and Gomez-Mejia,1994) have also found
support for reliance on incentive-based compensation schemes in
aligning principaland agent interests, and alleviating moral hazard
problems. Furthermore, the sales-force compensation andhuman
resources management literature also provides evidence to support
the argument that reliance on anincentive-based compensation scheme
provides an incentive for the agent to trade off the cost of
increasedeffort for higher reward. Thus, it is argued that a high
reliance on incentive-based compensation schemesis more likely to
enhance an agents performance than a low reliance on
incentive-based compensationschemes. Such a general conclusion
should not be drawn however, because a number of empirical
studieshave found that reliance on incentive-based compensation
schemes does not always enhance individualperformance (see Jenkins,
1986; Gerhart and Milkovich, 1992; Kohn, 1993; Jenkins et al.,
1998). Otherstudies (e.g. Arkes et al., 1986; Ashton, 1990; Bonner
et al., 2000) found reliance on incentive-basedcompensation schemes
sometimes even caused performance to deteriorate. Such mixed
results suggestthe need to examine the link between the extent of
reliance on incentive-based compensation schemesand individual
performance.
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 315
2.2. Standard agency theory view: the moderating role of
information asymmetry on the relationbetween incentive-based
compensation schemes and performance
Standard agency theory suggests that the relationship between
the extent of reliance on incentive-based compensation schemes and
performance is moderated by the degree of information
asymmetrybetween the superior and subordinate. Information
asymmetry refers to a situation whereby the agents(subordinates)
are in possession of more local or private information than their
principal (superior) relatingto their area of responsibility (Dunk,
1993). The standard agency theory model assumes that the agenthas
private information to which the principal cannot costlessly gain
access, and the agent is assumedto be work-averse and risk-averse
(Baiman, 1990). It is the information asymmetry, and agents
work-aversion and risk-aversion, which prohibit the rst-best
(cooperative) solution from being achieved byself-interested
behaviour. Hence, moral hazard problems occur when the principal is
not able to observethe level of effort exerted by the agent. Thus,
it is argued that the agent will attempt to avoid work
unlessincentives are provided to motivate effort (Baiman, 1982,
1990; Kaplan and Atkinson, 1998).
Relying on standard agency theory, it is argued that a high
reliance on incentive-based compensationschemes is more appropriate
when information asymmetry is high rather than low. The rationale
for thisproposition is that under such situations, subordinates are
in possession of private information unknown tothe superior. Such
situations are conducive for subordinates to engage in
opportunistic behaviours. Thus,it follows that moral hazard
problems are more likely to be high. The existence of moral hazard
problemscreates the information impactedness situations.
Information impactedness arises when subordinates,who possess
valuable and unique local information, are reluctant to disclose or
convey it truthfully. Ithas been suggested that incentive-based
compensation schemes can be used to mitigate the problemsconcerning
the withholding of information by subordinates (Kaplan and
Atkinson, 1998). In summary,a high reliance on incentive-based
compensation schemes would be an appropriate motivational
controltool to encourage subordinates to exert greater effort to
enhance their performance when informationasymmetry is high rather
than when it is low.
Thus far, the agency theorists have concluded that a match
between a reliance on incentive-basedcompensation schemes and the
level of information asymmetry can enhance managerial
performance.However, such a conclusion is subject to one further
qualification. This is because standard agency theoryhas been
criticised for its simplicity and narrowness (e.g. McKean, 1975;
Collard, 1978; Noreen, 1988;Baiman, 1990). Specifically, standard
agency theory assumes that subordinates actions are endoge-nously
derived, and based on well-specified preferences and beliefs
(Baiman, 1990). In addition, thestandard agency theoretical
framework tends to disregard the existence and possible influence
of otherbehavioural factors such as the subordinates level of
organisational commitment. Standard agency the-ory cannot explain
why some agents are willing to sacrifice their self-interest in
order to benefit theinterest of the organisation. A possible
explanation for such behaviour may be the fact that some ofthese
agents are highly committed to their organisation. These
individuals with high organisationalcommitment want the
organisation to succeed. If these individuals consider that
improving their ownperformance helps to enhance overall
organisational performance, they may be willing and motivatedto
exert effort to serve the organisation by doing just this. Thus, it
can be concluded, that standardagency theory assumes that all
individuals, regardless of the level of their organisational
commitment,are motivated solely by self-interest. The next section
discusses the effect of information asymmetry andreliance on
incentive-based compensation schemes on performance under different
levels of organisationalcommitment.
-
316 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
2.3. The effects of organisational commitment
Organisational commitment is defined as an employees
identification with and involvement in theorganisation (Mowday et
al., 1979).4 As noted earlier, we argue that standard agency theory
assumes thatindividuals possess low levels of organisational
commitment and are motivated solely by self-interest. Thisstrict
assumption is rather unrealistic as the behavioural literature
(e.g. Otley and Pierce, 1996; Nouri andParker, 1996, 1998; Lord and
DeZoort, 2001; see also Porter et al., 1974; Angel and Perry, 1981)
indicatesthat while the managers with low levels of organisational
commitment are motivated to pursue self-interest,managers with high
levels of organisational commitment are motivated to pursue
organisational interest.Individuals with high organisational
commitment are characterised by a strong belief in, and
acceptanceof, the organisations goals and values, and a willingness
to exert considerable effort on behalf of theorganisation (Porter
et al., 1974; Angel and Perry, 1981). This suggests that
individuals with strongorganisational affiliations may be motivated
to pursue organisational interests without the opportunity
forpersonal gain. The idea that individuals can be strongly
motivated to pursue organisational interests is alsofound in the
literature (see e.g. Ouchi, 1981; Birnberg and Snodgrass, 1988).
For example, Birnberg andSnodgrass (1988) argue that employees in
Japanese firms have cooperative utility functions that valuethe
pursuit of organisational goals. Conventional utility function,
which is commonly assumed in agencyliterature, is not applicable to
these individuals (i.e. highly committed individuals) as
conventional utilityfunction focuses exclusively on the individuals
self-interest rather than organisational interests. Thus, itfollows
that when this assumption underpinning standard agency theory is
abandoned, the predictions ofagency theory are inappropriate. In
other words, standard agency theory cannot adequately explain
thebehaviour of those individuals with high levels of
organisational commitment. Our study proposes thatwhether
individuals are predisposed to pursuing self or organisational
interests depends on the levels oftheir organisational
commitment.
Thus, the existing agency and behavioural literature seem to
suggest that the relationship between theextent of reliance on
incentive-based compensation schemes and managerial performance is
likely to beinfluenced by the degree of information asymmetry and
the subordinates level of organisational commit-ment. This suggests
that the integration of agency and behavioural theoretical
frameworks would providefurther insights into the relationships
between the extent of reliance on incentive-based
compensationschemes and subordinates performance.
2.4. The three-way interaction hypothesis
Table 1 shows the expected performance for the eight possible
combinations of the three-way interactionbetween the extent of
reliance on incentive-based compensation schemes, information
asymmetry, andorganisational commitment affecting managerial
performance.
As discussed earlier, standard agency theory predicted that
individuals with low levels of organisationalcommitment are
interested in pursuing self-interest rather than organisational
interests. Under low infor-
4 Organisational commitment may be conceptualised in the
following two ways: affective and continuance commitment (seeMeyer
et al., 1990). This paper employs the affective (attitudinal)
commitment conceptualization of organisational commitment.Such
commitment is characterised by two factors: (1) a strong belief in
and acceptance of organisational goals and values; and (2)a
willingness to exert considerable effort on behalf of the
organisation (Porter et al., 1974; Angel and Perry, 1981).
Continuancecommitment refers to the perceived costs associated with
leaving the organisation (Becker, 1960; see also Meyer et al.,
1990).
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 317
Table 1Expected managerial performance for the eight possible
combinations between organisational commitment, information
asym-metry and reliance on an incentive-based compensation
scheme
Cell Information asymmetry Incentive-based compensation scheme
Expected managerial performance
Panel A: Low organisational commitment sub-sample1 Low Low
Moderate/unclear2 Low High Moderate/unclear3 High Low Low4 High
High High
Cell Information asymmetry Incentive-based compensation scheme
Expected managerial performance
Panel B: High organisational commitment sub-sample5 Low Low
Moderate/high6 Low High Moderate/high7 High Low High8 High High
High
mation asymmetry situations, it is expected that managers with
low levels of organisational commitment(i.e. less committed
managers) may not have the private information by which to
materially enhancetheir performance. Additionally, under such
conditions the moral hazard problems are also likely to below.
Therefore, a low reliance on incentive-based compensation schemes
would be a more appropriatecontrol tool under such situations.
However, even when the reliance on incentive-based
compensationschemes is high, subordinates may not possess the
private information which would enable them tomaterially enhance
their performance. This suggests that when reliance on
incentive-based compensationschemes is high, subordinates, while
having the extrinsic incentive to improve their performance, will
notbe in a position to obtain it since under low information
asymmetry situations the subordinate has littleinformation that is
not known to the superior.
The aforementioned discussion suggests that managers with low
levels of organisational commitmentare unwillingly to exert
additional effort when reliance on incentive-based compensation
schemes is low,as there is no extrinsic incentive to do so under
low information asymmetry situations. Thus, we expectthat the
performance level of managers with low levels of organisational
commitment will be low whenthe extent of reliance on
incentive-based compensation schemes and the degree of information
asymmetryare both low.
Standard agency theory predicts that when the extent of reliance
on incentive-based compensationschemes is high, individuals are
motivated to exert effort to improve their performance. But, it is
unclearif the positive effect on performance will be significant
enough when the extent of reliance on anincentive-based
compensation scheme is high, since they may not be in a position to
possess the nec-essary information to enhance their performance
materially. Thus, we expect that the performance levelof managers
with low organisational commitment will remain unaffected when the
extent of reliance onincentive-based compensation schemes is high
and the degree of information asymmetry is low.
Standard agency theory predicts that the performance level of
managers with low levels of organisa-tional commitment will improve
when a high reliance on incentive-based compensation schemes
occursunder high information asymmetry situations. The rationale
for this view is based on the argument thatless committed managers
will continue to exert additional effort, with the help of their
privately-held
-
318 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
information, as long as they believe that doing so is worthwhile
in order to improve their performance.These managers are interested
in using their private information primarily to pursue
self-interest. Thisview is consistent with standard agency theory,
which predicts that individual performance is an increas-ing
function of performance-contingent incentive. Several previous
studies reported that incentive-basedcompensation schemes have a
positive effect on efforts and individual performance (e.g. Chow,
1983;Waller and Chow, 1985; Bailey et al., 1998; Sprinkle, 2000).
The essence of this theoretical argument isthat individuals are
motivated to exert more effort when they believe that the
additional effort will increasetheir performance, which in turn,
will result in them receiving more rewards. In addition, the
findings ofnumerous prior empirical accounting studies (see Libby
and Lipe, 1992; Kennedy, 1993, 1995; Stone andZiebart, 1995) also
strongly support the suggestion that incentives stimulate increased
effort for managerswith low levels of organisational commitment.
Kennedy (1993) argues that individuals will not exert anyeffort in
making judgments unless they perceive it to be worthwhile. Hence,
it can be concluded that underconditions where high information
asymmetry exists, managers with low levels of organisational
com-mitment will exert greater effort to perform when the reliance
on incentive-based compensation schemesis high rather than when it
is low. In summary, we propose that the performance level of
managers withlow levels of organisational commitment will be higher
when the extent of reliance on incentive-basedcompensation schemes
is high rather than low under high information asymmetry situations
(i.e. Cell4 > Cell 3, see Table 1)
It is argued that managers with high levels of organisational
commitment (i.e. highly committedmanagers) are motivated to pursue
organisational interests rather than self-interest (Nouri and
Parker,1996; see also Porter et al., 1974; Angel and Perry, 1981;
Eisenhardt, 1989). Lincoln and Kalleberg(1990), for example,
conclude that highly committed individuals will expend effort on
behalf of theorganisation even when such effort does not result in
the individual receiving any additional compensationor
opportunities for career advancement.
As noted earlier, the predictions of standard agency theory are
inappropriate for highly committedmanagers as this theory cannot
adequately explain their attitudes and behaviours. These highly
committedmanagers are indifferent to the extent of reliance on
incentive-based compensation schemes because thepursuit of
organisational goals and values is important to them. They are
willing to exert additionaleffort to gather job-relevant
information to enhance their decisions regardless of the extent of
relianceon incentive-based compensation schemes and the degree of
information asymmetry. It is expected, thatunder high information
asymmetry situations, these highly committed managers are also
willing to sharetheir privately-held information with their peers
and superiors, and use the private information primarilyto pursue
organisational goals regardless of the extent of reliance on an
incentive-based compensationscheme. Thus, we expect that the
performance level of managers with high organisational
commitmentwill remain unaffected by the extent of reliance on
incentive-based compensation schemes and the degreeof information
asymmetry (i.e. Cell 5 = Cell 6 = Cell 7 = Cell 8, see Table
1).
Accordingly, the following hypotheses are tested:
H01 (:). There is no statistically significant three-way
interaction between information asymmetry,reliance on
incentive-based compensation schemes and organisational commitment
affecting managerialperformance.
HA1 (:). The performance level of managers with low
organisational commitment will be higher whenthe extent of reliance
on incentive-based compensation schemes is high rather than low
under highinformation asymmetry situations.
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 319
HA2 (:). The performance level of managers with high
organisational commitment will remain unaf-fected by the extent of
reliance on incentive-based compensation schemes and the degree of
informationasymmetry.
3. Research method
3.1. Sample selection
Data for this study were collected from a sample of senior
managers selected from business sub-unitsof 176 manufacturing firms
with more than 100 employees using a mail survey method. These
firmswere randomly chosen from the list of manufacturing firms
published in Kompass Australia (1996). Thenames of 225 senior
managers were gathered. The criteria for inclusion in the sample
were as follows:(1) the companies must have at least 100 employees;
and (2) the respondents were required to haveresponsibility for
operations of their business sub-units. Telephone calls were made
to each manager toensure that the above criteria were met and to
ascertain whether the manager was willing to participatein the
research project. This resulted in a sample of 179. Forty-six
managers were not included in thefinal sample for a number of
reasons. Some failed to meet the criteria. Others could not be
contacted andsome had retired or left the companies. Furthermore,
some of the companies had ceased to operate orhad moved.
Each participant was sent a questionnaire together with a cover
letter and a prepaid self-addressedenvelope for the questionnaire
to be returned directly to the researcher.5 Questionnaires were
pre-codedto enable non-respondents to be traced and follow-up to be
executed. A follow-up letter and anothercopy of the questionnaire
were sent to those who had not responded after three weeks. Of the
179 ques-tionnaires distributed, 147 were returned, giving a
response rate of 82%.6 A total of 16 questionnaireswere excluded
from the study for incomplete responses and 10 for unreliable
responses.7 In addition,12 respondents who had a mean score of less
than 24 on the scale for the information asymmetryconstruct were
also excluded from the data analysis.8 This left the study with 109
useable responses.The mean age of the respondents was 47 years. On
average, the respondents had worked for theirpresent company for 10
years and had been in their current position for 7 years. The
average number ofemployees in the respondents areas of
responsibility was 143 and the companies had an average of
694employees.
5 The present study utilised the survey method because it
provides accessibility to a large sample and enables the collection
ofdata for many variables. To ensure external validity, this study
used a random sample and established instruments developed inprior
studies.
6 The high response rate was the result of the telephone calls
made by one of the researchers to each participant. Such anapproach
whereby each of the potential participants was spoken to personally
was undertaken to ensure that they would becommitted to the
research project, and would complete and return the
questionnaires.
7 We conducted diagnostic measures for identifying influential
observations. Our results reveal that 10 cases have exceeded
therecommended threshold based on the Studentised residuals,
Mahalanobis distance and Cooks distance (see Hair et al.,
1998).Consequently, we excluded these 10 outliers from our study. A
test of the regression results based on 119 (before the exclusionof
the 10 outliers) and regression results based on 109 (after
exclusion of the 10 outliers) show no statistical differences.
8 A total score of less than 24 indicates that information
asymmetry did not exist (see Dunk, 1993 for a
detaileddiscussion).
-
320 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
3.2. Measurement of variables
3.2.1. Information asymmetryInformation asymmetry was measured
based on a six-item, seven-point Likert-type scale developed
by Dunk (1993). A factor analysis confirmed the unidimensional
nature of the information asymmetryconstruct. The results indicate
satisfactory construct validity (Kerlinger, 1964) in which all six
items wereloaded above the 0.5 level of the first factor
(Eigenvalue = 3.787; total variance explained = 63.12%). Theuse of
the information asymmetry scale yielded a Cronbach Alpha
coefficient (Cronbach, 1951) of 0.88,which indicates satisfactory
internal reliability for the scale (Nunnally, 1967).
3.2.2. Organisational commitmentOrganisational commitment was
measured by a nine-item short-form version of the
organisational
commitment questionnaire (OCQ) developed by Mowday et al.
(1979). The short-form seven-pointLikert-type scale instrument was
used because acceptable levels of reliability and validity have
beenreported in the prior literature (see Angel and Perry, 1981;
Price and Mueller, 1981; Blau, 1987; Nouri,1994; Collins et al.,
1995; Nouri and Parker, 1996, 1998; Chong et al., 2006). A factor
analysis of thenine-item OCQ was conducted to examine its
dimensionality. A factor analysis with varimax rotationindicated
that except for items 1 and 9, which loaded on the second factor,
all other seven items loadedon the first factor. The first factor
(Factor I called value commitment), which accounted for 36.60% of
thetotal variance explained, contains seven items interpreted here
as indicating identication with organi-sational values. The second
factor (Factor II called effort commitment), which accounted for
22.84% ofthe total variance explained, contains two items
interpreted here as indicating a willingness to exert effortin
order to keep the organisation successful. Consistent with prior
accounting studies (e.g. Nouri, 1994;Nouri and Parker, 1996, 1998;
Chong et al., 2006) which have used this instrument the scores of
the nine-items were summed to form a composite measure of
organisational commitment. The significant positivecorrelation
between the average scores of the two factors (r = 0.295, p <
0.01) allowed their scores to beaggregated to provide the overall
score for the instrument (Brownell, 1985). The Cronbach alpha
coeffi-cient (Cronbach, 1951) was 0.80, which indicates
satisfactory internal reliability for the scale
(Nunnally,1967).
3.2.3. Incentive-based compensation schemeThe incentive-based
compensation scheme variable was measured by a two-item, five-point
Likert-
type scale developed by Balkin and Gomez-Mejia (1990). The
positive correlation between the twoitems (r = 0.863, p < 0.01)
allowed their scores to be aggregated to provide the overall score
for theinstrument (Brownell, 1985). A factor analysis confirmed the
unidimensional nature of the incentive-based compensation scheme
construct. The results indicate satisfactory construct validity
(Kerlinger,1964) in which the two items are loaded above the 0.5
level on the first factor and have an Eigenvalueof 1.863, which
explains 93.16% of the total variance. The use of the measure
yielded a Cronbach alphacoefficient (Cronbach, 1951) of 0.93, which
indicated high internal reliability for the scale
(Nunnally,1967).
3.2.4. Managerial performanceManagerial performance was measured
by an instrument using a self-rating scale developed by
Mahoney et al. (1963, 1965). This scale has been used
extensively and found to be reliable in other man-
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 321
Table 2Inter-correlation matrix for each dimension of managerial
performance (n = 109)
1 2 3 4 5 6 7 8 9
1 Planning 1.0002 Investigation 0.338 1.0003 Coordinating 0.513
0.392 1.0004 Evaluating 0.351 0.610* 0.413 1.0005 Supervising 0.536
0.304 0.450 0.343 1.0006 Staffing 0.459 0.390 0.397 0.536 0.540
1.0007 Negotiating 0.308 0.373 0.407 0.452 0.269 0.514 1.0008
Representing 0.346 0.526* 0.517 0.540 0.244 0.431 0.347 1.0009
Overall performance 0.528 0.421 0.605 0.543 0.590 0.583 0.510 0.528
1.000
All correlation coefficients are significant at p < 0.001
level (two-tailed test).* Correlation coefficients that violate the
criterion.
agement accounting studies (Lau et al., 1995; Chong, 1996; Chong
and Chong, 2002; Chong and Eggleton,2003).9 This nine-dimensional,
seven-point Likert-scale instrument comprises eight items relating
to var-ious managerial activities, plus one overall performance
dimension. The eight managerial activities are:planning,
investigating, coordinating, evaluating, supervising, staffing,
negotiating and representing (seeMahoney et al., 1963, 1965). To
test for the validity and reliability of the managerial performance
scale,analyses were undertaken to ensure that the measure met two
criteria: (1) the eight sub-dimensions mustaccount jointly for at
least 55% of the variation in the overall performance rating (see
Mahoney et al.,1963, 1965), and (2) the eight sub-dimensions must
be reasonably independent of each other.
To test the first criterion, i.e. to find out how much of the
global rating variance was explained bythe eight managerial
activities, the overall rating was regressed on the ratings of the
eight separatemanagerial activities in a single multiple
regression. The resulting R2 indicates that the eight
separatedimensions explained 62% (n = 109) of the variance in the
overall performance rating. These values com-pare favourably with
the claim of Mahoney et al. (1963, pp. 105107) that the eight
separate dimensionsshould account for approximately 55% of the
variance of the overall rating, with the remaining 45%
beingjob-specific.
To test the second criterion, i.e. to assess whether the eight
separate dimensions were reasonablyindependent of each other,
Pindyck and Rubinfelds (1976) method was used. According to this
method,the correlation between any two independent variables in a
sample should be less than the correlation ofeach variable with the
dependent variable. Prior studies (see e.g. Brownell and McInnes,
1986) have usedthis method to assess the independent dimensions of
the managerial performance scale. Table 2 presentsthe matrix of the
intercorrelations among the eight separate dimensions of managerial
performance,
9 This scale has been criticised for higher leniency error and
lower variability error in the observed score than superior
ratings(see e.g. Prien and Liske, 1962; Thornton, 1968; Lau et al.,
1995). However, Heneman (1974) found that superiors ratingsof
performance were more lenient than self-ratings. Some studies
(e.g., Prien and Liske, 1962; Thornton, 1968; Heneman,1974) have
found that halo errors (intercorrelations among performance
sub-dimensions) are also more common with superiorsratings. Halo
error refers to the tendency of raters to make global assessments
of the variable and to be unable to differentiatetheir assessments
on the various dimensions (Brownell, 1995, p. 45). Brownell (1995)
argued that self-rated performance is lesssusceptible to halo
error, especially if the ratings are sought on a number of
dimensions (as with Mahoney et al.s performancescale). Self-raters
are able to discriminate among performance dimensions. Further,
self-assessment instruments can producemore reliable and
uninhibited responses from respondents when they are assured of
anonymity and/or confidentiality.
-
322 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Table 3Descriptive statistics and Pearson correlation matrix for
the independent and dependent variables (n = 109)Variable Mean
Median S.D. Actual range Theoretical range Pearson correlaton
matrix
Min Max Min Max IA OC ICS PERF
Information asymmetry(IA)
5.44 5.50 0.83 4.00 7.00 4.00 7.00 1.00
Organisationalcommitment (OC)
5.40 5.44 0.72 3.00 7.00 1.00 7.00 0.05 1.00
Incentive-basedcompensation scheme(ICS)
3.20 3.00 1.51 1.00 5.00 1.00 5.00 0.07 0.20* 1.00
Managerial performance(PERF)
5.86 6.00 0.90 2.00 7.00 1.00 7.00 0.23* 0.10 0.08 1.00
* Significant at p < 0.05 level (two-tailed test).
and with the dependent variable (overall performance). The
results in Table 2 reveal that only two ofthe possible 28
comparisons violate this criterion. Thus, the eight dimensions
appear to be reasonablyindependent.10
A further test revealed that when the eight sub-dimensions were
summed to construct a compositemanagerial performance score, they
were significantly correlated (r = 0.763, p < 0.001) with the
overallperformance rating. The above tests strengthen the
confidence of the validity and reliability of the useof Mahoney et
al.s scale to measure managerial performance. Consistent with prior
accounting studies(e.g. Lau et al., 1995; Chong, 1996; Chong and
Chong, 2002; Chong and Eggleton, 2003), the hypothesestesting was
based on the overall performance rating of the Mahoney et al.s
scale as the dependent variable.
4. Results
Table 3 presents the descriptive statistics and Pearson
correlation matrix for the independent anddependent variables of
this study.
The hypothesis H01 advanced in this paper was tested using the
following models11:
PERF = b0 + b1IA + b2ICS + b3OC + b4IA ICS + b5IA OC + b6ICS OC
+ e (1)
10 To further assess whether the eight separate dimensions are
reasonably independent of each other, a rotated factor analysiswas
conducted by forcing the eight factors since Mahoney et al.s scale
is expected to consist of eight independent dimensions.It is argued
that if the eight dimensions are independent of each other, they
should load on eight different factors. In other words,the results
of the factor analysis will show only one item to be loaded
significantly on each factor, and no two factors share thesame
item. The results of the rotated factor analysis are shown in
Appendix A and reveal that there are eight factors present.Each
factor consists of only one item, with the highest factor score, as
indicated by the shaded box.11 We used deviation scores, which were
based on the overall mean score minus the raw scores, for all
independent variables
in our regression models. Thus, a low raw score has a positive
deviation score and a high raw score has a negative deviationscore.
We conducted tests on the adequacy of the multiple linear
regression models and the results of the residual and normalityof
probability plots indicate that the normality assumptions
underlying the regression models were not violated. These
resultsprovide support for the use of multiple regression analysis
and add confidence to the validity of the statistical results
obtained.
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 323
Table 4Results of multiple regression analysis of managerial
performance on information asymmetry, reliance on an
incentive-basedcompensation scheme and organisational
commitment
Variables Coeff. Eq. (1) (Two-way) Eq. (2) (Three-way)Est. p
Est. p
1-tailed 1-tailed
Constant b0 5.900 0.001 5.896 0.001Information asymmetry (IA) b1
0.250 0.009 0.263 0.007Incentive-based compensation scheme (ICS) b2
0.057 0.164 0.052 0.186Organisational commitment (OC) b3 0.139
0.129 0.096 0.220IA ICS b4 0.037 0.289 0.085 0.118IA OC b5 0.017
0.460 0.065 0.355ICS OC b6 0.112 0.092 0.095 0.129IA ICS OC b7
0.214 0.049R2 0.092 0.116F-value 1.716 1.898p< 0.063 0.039
R2 explained by three-way interaction term = 2.4%.
PERF = b0 + b1IA + b2ICS + b3OC + b4IA ICS + b5IA OC + b6ICS OC
+ b7IA ICS OC + e (2)
Where PERF: managerial performance; IA: information asymmetry;
ICS: incentive-based compensationscheme; OC: organisational
commitment; and e: error term.
Hypothesis H01. Hypothesis H01 states that there is no
statistically significant three-way interactionbetween information
asymmetry, reliance on incentive-based compensation schemes, and
organisa-tional commitment affecting managerial performance. To
test this hypothesis, managerial performancewas regressed on
information asymmetry, incentive-based compensation scheme and
organisationalcommitment. The results reported in Table 4 (see Eq.
(2)) indicate there is a statistically significant(p < 0.049)
three-way interaction between information asymmetry, reliance on
incentive-based compensa-tion schemes and organisational commitment
affecting managerial performance. Accordingly, hypothesisH01 can be
rejected.
The introduction of the three-way interaction term in Eq. (2)
results in an increase in R2 (from 9.2% to11.6%), indicating that
the three-way interaction between information asymmetry, reliance
on incentive-based compensation schemes and organisational
commitment improved the predictive ability of the model.
Hypotheses HA1 and HA2. To test the alternative Hypotheses HA1
and HA2, and to assist in the interpre-tation of the interactive
effect results presented in Table 4, both information and asymmetry
and relianceon incentive-based compensation scheme were
dichotomised at their respective raw score medians.12
The following regression models were used to test the main
effect and the two-way interaction effectbetween reliance on
incentive-based compensation schemes, and information asymmetry
under the low
12 The results were similar when the independent variables were
dichotomised at the mean.
-
324 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Table 5Results of multiple regression analysis of managerial
performance on information asymmetry and reliance on an
incentive-basedcompensation scheme
Variables Eq. (3) (main effect) Eq. (4) (two-way)Coeff. Est. p
Est. p
1-tailed 1-tailed
Panel A: Low organisational commitment sub-sample (n =
52)Constant b0 5.805 0.001 5.827 0.001Information asymmetry (IA) b1
0.200 0.131 0.203 0.121Incentive-based compensation scheme (ICS) b2
0.213 0.023 0.221 0.017IA ICS b3 0.250 0.032R2 0.095 0.158F-value
2.570 3.012p< 0.044 0.020R2 explained by two-way interaction
term = 6.3%
Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p
1-tailed Est. p 1-tailed
Panel B: High organisational commitment sub-sample (n =
57)Constant b0 5.984 0.001 5.980 0.007Information asymmetry (IA) b1
0.296 0.007 0.313 0.006Incentive-based compensation scheme (ICS) b2
0.049 0.217 4.901 0.221IA ICS b3 0.042 0.274R2 0.122 0.128F-value
3.761 2.600p< 0.015 0.031R2 explained by two-way interaction
term = 0.6%
and high organisational commitment sub-samples.
PERF = b0 + b1IA + b2ICS + e (3)PERF = b0 + b1IA + b2ICS + b3IA
ICS + e (4)
where PERF: managerial performance; IA: information asymmetry;
ICS: incentive-based compensationscheme; and e: error term.
Eqs. (3) and (4) were used to test the main effect and the
two-way interaction effect, respectively. Asshown in Table 5, Panel
A, the interaction between information asymmetry and reliance on
incentive-based compensation schemes on managerial performance was
found to be statistically significant for thelow organisational
commitment sub-sample, but not statistically significant for the
high organisationalcommitment sub-sample (see Table 5, Eq. (4): p
< 0.032, Panel A, and p < 0.274, Panel B, respectively).These
results provide initial support to hypothesis HA1. It is noteworthy
that with the low organisationalcommitment sub-sample, the
introduction of the two-way interaction term in Eq. (4) results in
a substantialincrease in R2 (from 9.5% to 15.8%), indicating that
the two-way interaction between the degree ofinformation asymmetry
and the extent of reliance on incentive compensation schemes
improved thepredictive ability of the model.
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 325
Table 6Mean performance of low organisational commitment
sub-sample
In addition, the results shown in Table 6, Panel A, indicate
that the mean managerial performancescore is highest in the high
information asymmetry and high reliance on incentive-based
compensa-tion scheme cells (Cell 4 = 6.75 > Cell 1 = 5.50; Cell
2 = 5.56, and Cell 3 = 5.50). Statistical support forour results is
further provided by a post hoc test of multiple comparisons
(Bonferroni t-test); and areshown in Table 6, Panel B. Furthermore,
the steep slope of the high reliance on incentive-based
com-pensation scheme line in Fig. 1 provides additional evidence of
the sensitivity of the managers withlow organisational commitment
under high information asymmetry situations. Taken together,
theseresults are consistent with our theoretical expectation, that
the performance level of managers with loworganisational commitment
will be high when the extent of reliance on incentive-based
compensationschemes is high and the degree of information asymmetry
is high, and therefore provide strong support forhypothesis
HA1.
Hypothesis HA2 states that the performance level of managers
with high organisational commitmentis unlikely to be affected by
the extent of reliance on incentive-based compensation schemes and
the
-
326 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Fig. 1. The impact of the interaction between reliance on an
incentive-based compensation scheme and information asymmetryon
managerial performancelow organisational commitment sub-sample.
degree of information asymmetry. This suggests there will be no
significant two-way interaction betweeninformation asymmetry and
reliance on incentive-based compensation schemes in the high
organisa-tional commitment sub-sample. As expected, the results
reported in Table 5, Panel B indicate thatthe coefficient of the
two-way interaction term (b3) is not significant (p < 0.274, Eq.
(4)). Note thatthe introduction of the two-way interaction term in
Eq. (4) results in a very marginal increase in R2(from 12.2% to
12.8%).
In addition, the results shown in Table 7, Panel A, indicate
that the mean managerial performancescores remain relatively
unaffected by the degree of information asymmetry and the extent of
reliance onincentive-based compensation schemes. Fig. 2 provides a
graphical presentation of the results. Further-more, the results of
a post hoc test of multiple comparisons (Bonferroni t-test) are
shown in Table 7, PanelB. Taken together, these results are
consistent with our theoretical expectation that the performance
levelof managers with high organisational commitment is unlikely to
be affected by the extent of reliance onincentive-based
compensation schemes and the degree of information asymmetry, and
therefore providesupport for hypothesis HA2.
5. Conclusion, limitations and suggestions for future
research
The purpose of this study was to investigate the interactive
effects of the degree of information asym-metry, managers levels of
organisational commitment and the extent of reliance on
incentive-basedcompensation schemes on managerial performance. The
results of this study demonstrated that twocontingent variables,
namely information asymmetry and organisational commitment, can be
usefullyexamined jointly. The results indicate that whether
reliance on incentive-based compensation schemes
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 327
Table 7Mean performance of high organisational commitment
sub-sample
enhances managerial performance depends on whether subordinates
behaviour can be easily and read-ily motivated. This in turn
depends upon their level of organisational commitment, as
organisationalcommitment affects the level of effort subordinates
will exert on the job.13
Specifically, the results of our study reveal that the
performance level of managers with low levelsof organisational
commitment was high when the extent of reliance on incentive-based
compensationschemes and the degree of information asymmetry were
both high (see hypothesis HA1). This result lendssupport to
standard agency theory predictions which assumed that individuals
are: (1) effort-averse and
13 Recall that the organisational commitment scale consists of
two sub-dimensions (see Section 3.2.2). Further analysis usingeach
of the two sub-dimensions, in turn, as the independent variables in
the model was undertaken. The results of these dimensionsanalysis
were similar to those of the global analysis, which relied on the
composite measure of the organisational commitmentmeasure.
Appendices B and C provide the results of the dimensions analysis.
Overall, the results provide evidence of therobustness of our
empirical findings.
-
328 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Fig. 2. The impact of the interaction between reliance on an
incentive-based compensation scheme and information asymmetryon
managerial performancehigh organisational commitment
sub-sample.
risk-averse; (2) possess low levels of organisational
commitment; and (3) are motivated solely by self-interest. It is
noteworthy that when the assumptions of standard agency theory are
relaxed, the role of anincentive-based compensation scheme is not
important. For example, the results of hypothesis HA2 revealthat
the performance level of managers with high levels of
organisational commitment remained relativelyunaffected by the
degree of information asymmetry and the extent of reliance on
incentive-based compen-sation schemes. Taken together, the results
of this study contribute to the management accounting literatureby
responding to calls (e.g. Eisenhardt, 1988; Waller, 1994, 1995;
Merchant et al., 2003) to integrate theo-ries, such as agency
theory and behavioural theory, to better understand the joint
effects of an agency factor(e.g. information asymmetry) and a
behavioural factor (e.g. organisational commitment) on the
relationbetween the extent of reliance on incentive-based
compensation schemes and managerial performance.14
The results of this paper have practical implications for the
selection and placement of managers aswell as for the effective
design of incentive-based compensation schemes. An organisation is
only asstrong as the people it comprises. Thus, decisions made
about whom to select and who to reject fororganisational membership
are critical to the companys ability to derive competitive
advantage throughits human resources. Bowen et al. (1991), for
example, argue that firms should look at individuals interms of
their long-term potential to contribute to the organisation, as
opposed to a short-term focus onmeeting the requirements of one
specific job. As such, the emphasis should be on matching the
poten-tial employees personal attributes and characteristics to
those of the organisational culture. In addition,the results of
this paper indicate that not all individuals are positively
affected by a high reliance onincentive-based compensation schemes.
The results suggest that a high reliance on an incentive-based
14 Eisenhardt (1988), for example, compared the agency and
institutional perspectives on organisational control, and
concludedthat relying on multiple theories in research can enhance
our understanding of phenomena.
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 329
compensation scheme is an appropriate motivational tool for
managers with low levels of organisa-tional commitment under high
information asymmetry situations, but is dysfunctional for such
managersunder low information asymmetry conditions. Further, a
company should consider the use of policiesthat increase the
commitment of its managers to the companys goals and values; as
such policiesare also important to the effective implementation of
appropriate control tools such as incentive-basedcompensation
schemes.
A number of limitations of this study should be noted. First,
this study did not consider othervariables which might be
significant to the design of effective incentive-based compensation
sys-tems and their impact on managers performance. For example, at
the organisational (macro)-level,the potential variables that might
affect incentive-based compensation scheme design and manage-rial
performance include the organisations strategies (Fisher and
Govindarajan, 1993; Chong andChong, 1997; Langfield-Smith, 1997),
and the external environment (Chong and Chong, 1997; Mia andClarke,
1999; Chong and Rundus, 2004). At the individual (micro)-level, the
potential variables includedecision-makers cognitive styles
(Awasthi and Pratt, 1990) and personality traits (Chong and
Eggleton,2003).
Second, this study focused only on the extent of the use of
incentive-based compensation schemes byorganisations to address
their agency problem (i.e. moral hazard). It has been suggested
that monitoringsystems, which provide information about the agents
behaviour, is another alternative approach availableto the
principal to address the agency problem (see Eisenhardt, 1989).
Conlon and Parks (1990) suggestinvestigating whether theoretical
matches between incentive-based compensation schemes and
monitor-ing systems produce better performance than mismatches
between these variables. Milgrom and Roberts(1992), on the other
hand, propose that both incentive-based compensation schemes and
monitoringsystems can be used either as substitutes or
complements.15 Thus, it is plausible that incentive-based
com-pensation schemes and monitoring systems could interact to
affect an agents performance. In addition,prior studies (see e.g.
Fatseas and Hirst, 1992) have examined the types of compensation
schemes (suchas fixed-pay and piece-rate) on individuals
performance. Future research to explore the joint and inter-active
effects of incentive-based compensation schemes, monitoring
systems, and types of compensationschemes on performance would be
worthwhile.
Third, the sample comprised only senior-level managers drawn
from large manufacturing companiesin the Perth and Sydney
metropolitan areas; consequently, the results are potentially
generalisable tothe Australian managerial populations, but are
restricted to a similar level of management. In
particular,generalising the results to non-manufacturing industries
should be viewed with caution. Future researchmay extend and
replicate this work focusing on other industries, such as the
financial services sector, andretailing industries. Fourth, the use
of self-rating scales to measure perceptions are likely to have
highermean values (higher leniency error) and a restricted range
(lower variability error) in the observed scorecompared to more
objective methods (Prien and Liske, 1962; Thornton, 1968). Future
research mightusefully incorporate superiors ratings of their
managers to compare with the managers self-ratings as ameans of
assessing the validity of the construct.
15 Milgrom and Roberts (1992) suggest that incentive-based
compensation schemes and monitoring systems act as substitutesif
either managerial effort or the outcomes of managerial effort can
be accurately assessed. When the effort can be accuratelymeasured,
a monitoring system will result in outcomes desired by the
principal. When the outcomes are accurately measured,the
incentive-based compensation scheme can be designed in ways that
align the agents and the principals interests. Otherresearchers
(e.g. Holmstrom, 1979; Shavell, 1979) also suggest that both
incentive-based compensation schemes and monitoringsystems are
likely to result in benefits to the principal.
-
330 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Finally, this paper relied on the standard principal-agent
theory model which consists of a single-period and single-agent
phenomena. Such a model has been criticised for its simplicity and
narrowness(see e.g. McKean, 1975; Collard, 1978; Noreen, 1988;
Baiman, 1990; Indjejikian, 1999). Thus, futureresearch can extend
this study by relying on experimental design methodology to explore
the impact ofthe reliance on incentive-based compensation schemes
on performance in multi-period and multi-agentsettings.
Despite the above limitations, this study developed and tested
an interactive model of incentive-basedcompensation system design,
an important and complex area of management accounting research.
Mostimportantly, the results of this paper contribute and extend
the existing knowledge of the managementaccounting literature in
the area of management control systems design, and provide a useful
basis forsubsequent theoretical development in the field and
related empirical analyses.
Acknowledgements
The authors would like to thank A. Rashad Abdel-Khalik, Michael
Bromwich (the Editor), AmyLau, Chong Man Lau, Lokman Mia, two
anonymous reviewers, and participants of the research sem-inars at
Griffith University and the University of Western Australia for
their helpful comments andsuggestions on earlier drafts of this
paper. An earlier version of this paper was presented at the
2003Accounting and Finance Association of Australia and New Zealand
(AFAANZ) Annual Conference, Bris-bane, Australia and the 2006
American Accounting Association (AAA) Annual Meeting.
Washington,D.C. USA.
Appendix A. Factor analysis of managerial performance scale (n=
109) (Rotated factor matrix)
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 331
Appendix B. Additional results with the effort dimension of
organisational commitment as oneof the independent variables
See Tables B.1B.4 and Figs. B.1 and B.2.
Table B.1Results of multiple regression analysis of managerial
performance on information asymmetry, reliance on an
incentive-basedcompensation scheme and effort dimension of
organisational commitmentVariables Coeff. Eq. (1) (Two-way) Eq. (2)
(Three-way)
Est. p Est. p1-tailed 1-tailed
Constant b0 5.756 0.001 5.726 0.001Information asymmetry (IA) b1
0.337 0.002 0.245 0.013Incentive-based compensation scheme
(ICS)
b2 0.092 0.068 0.103 0.038Effort dimension of organisational
commitment (EFFORT) b3 0.249 0.013 0.241 0.012IA ICS b4 0.126 0.045
0.089 0.103IA EFFORT b5 0.067 0.319 0.149 0.136ICS EFFORT b6 1.380
0.442 0.015 0.412IA ICS EFFORT b7 0.306 0.001R2 0.139 0.244F-value
2.750 4.657p< 0.008 0.001
R2 explained by three-way interaction term = 8.5%.
Fig. B.1. The impact of the interaction between reliance on an
incentive-based compensation scheme and information asymmetryon
managerial performancelow effort dimension of organisational
commitment sub-sample.
-
332 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Table B.2Results of multiple regression analysis of managerial
performance on information asymmetry and reliance on an
incentive-basedcompensation scheme
Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p
Est. p
1-tailed 1-tailed
Panel A: Low effort dimension of organizational commitment
sub-sample (n = 45)Constant b0 5.815 0.001 5.796 0.001Information
asymmetry (IA) b1 0.537 0.002 0.403 0.014Incentive-based
compensation scheme (ICS) b2 0.058 0.258 0.083 0.171IA ICS b3 0.229
0.022R2 0.198 0.274
F-value 5.183 5.167p< 0.005 0.002R2 explained by two-way
interaction term = 7.6%
Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p
Est. p
1-tailed 1-tailed
Panel B: High effort dimension of organizational commitment
sub-sample (n = 64)Constant b0 5.612 0.001 5.600 0.001Information
asymmetry (IA) b1 0.145 0.159 0.115 0.209Incentive-based
compensation scheme (ICS)
b2 0.139 0.044 0.155 0.031IA ICS b3 0.108 0.128R2 0.057
0.077F-value 1.844 1.674p< 0.084 0.091R2 explained by two-way
interaction term = 2.0%
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 333
Table B.3Mean performance of low effort dimension of
organisational commitment sub-sample
-
334 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Table B.4Mean performance of high effort dimension of
organisational commitment sub-sample
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 335
Fig. B.2. The impact of the interaction between reliance on an
incentive-based compensation scheme and information asymmetryon
managerial performancehigh effort dimension of organisational
commitment sub-sample.
Appendix C. Additional results with the value dimension of
organisational commitment as oneof the independent variables
See Tables C.1C.4 Figs. C.1 and C.2.
Table C.1Results of multiple regression analysis of managerial
performance on information asymmetry, reliance on an
incentive-basedcompensation scheme and value dimension of
organisational commitment
Variables Coeff. Eq. (1) (Two-way) Eq. (2) (Three-way)Est. p
Est. p
1-tailed 1-tailed
Constant b0 5.814 0.001 5.813 0.001Information asymmetry (IA) b1
0.253 0.021 0.361 0.002Incentive-based compensation scheme (ICS) b2
0.136 0.027 0.099 0.071Value dimension of organisational commitment
(Value) b3 0.038 0.382 0.048 0.349IA ICS b4 0.054 0.245 0.101
0.121IA Value b5 0.096 0.300 0.074 0.361ICS Value b6 0.184 0.019
0.104 0.114IA ICS Value b7 0.493 0.001R2 0.114 0.208F-value 2.155
3.795p< 0.027 0.001
R2 explained by three-way interaction term = 9.4%.
-
336 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Table C.2Results of multiple regression analysis of managerial
performance on information asymmetry and reliance on an
incentive-basedcompensation scheme
Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p
Est. p
1-tailed 1-tailed
Panel A: Low value dimension of organizational commitment
sub-sample (n = 48)Constant b0 5.862 0.001 5.869 0.001Information
asymmetry (IA) b1 0.094 0.312 -0.155 0.208Incentive-based
compensation scheme (ICS) b2 0.237 0.019 -0.203 0.035IA ICS b3
0.256 0.045R2 0.096 0.153F value 2.377 2.654p< 0.052 0.030R2
explained by two-way interaction term = 5.7%
Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p
Est. p
1-tailed 1-tailed
Panel B: High value dimension of organisational commitment
sub-sample (n = 61)Constant b0 5.845 0.001 5.832 0.001Information
asymmetry (IA) b1 0.449 0.001 0.474 0.001Incentive-based
compensation scheme (ICS) b2 0.035 0.322 0.038 0.305
IA ICS b3 0.134 0.053R2 0.154 0.193F-value 5.297 4.536p<
0.004 0.003R2 explained by two-way interaction term = 3.9%
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 337
Table C.3Mean performance of low value dimension of
organisational commitment sub-sample
-
338 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Table C.4Mean performance of high value dimension of
organisational commitment sub-sample
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 339
Fig. C.1. The impact of the interaction between reliance on an
incentive-based compensation scheme and information asymmetryon
managerial performancelow value dimension of organisational
commitment sub-sample.
Fig. C.2. The impact of the interaction between reliance on an
incentive-based compensation scheme and information asymmetryon
managerial performancehigh value dimension of organisational
commitment sub-sample.
References
Angel, H.L., Perry, J.L., 1981. An empirical assessment of
organisational commitment and organisational effectiveness.
Admin.Sci. Quart., 114.
Arkes, H.R., Dawes, R.M., Christensen, C., 1986. Factors
influencing the use of a decision rule in a probabilistic task.
Organi-sational Behav. Hum. Dec. Processes 37, 93110.
Arrow, K.J., 1974. Essays on the Theory of Risk Bearing. North
Holland Publishing Company, Amsterdam.
-
340 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Arrow, K.J., 1985. The Economics of Agency. In: Pratt, J.,
Zeckhauser, R. (Eds.), Principals and Agents: The Structure
ofBusiness. Harvard Business School Press, Boston.
Ashton, R.H., 1990. Pressure and performance in accounting
decision settings: paradoxical effects of incentives, feedback,
andjustification. J Acc. Res. 28, 148180.
Awasthi, V., Pratt, J., 1990. The effects of monetary
incentive-based on effort and decision performance: the role of
cognitivecharacteristics. Acc. Rev., 797811.
Bailey, C.D., Brown, L.D., Cocco, A.F., 1998. The effects of
monetary incentive on worker learning and performance in anassembly
task. J. Manage. Acc. Res. 10, 119131.
Baiman, S., 1982. Agency research in managerial accounting: a
survey. J. Acc. Lit., 154213.Baiman, S., 1990. Agency research in
managerial accounting: a second look. Acc. Organisations Society,
341371.Baiman, S., Evans III, J.H., 1983. Pre-decision information
and participative management control systems. J. Acc. Res.,
371395.Baker, G.P., Jensen, M.C., Murphy, K.J., 1988. Compensation
and incentive: practice versus theory. J. Finance 43,
593616.Balkin, D.B., Gomez-Mejia, L.R., 1990. Matching compensation
and organisational strategies. Strategic Manage. J., 153169.Banker,
R.D., Lee, S., Potter, G., Srinivasan, D., 1996a. Contextual
analysis of performance impact of outcome-based compen-
sation. Acad. Manage. J., 920948.Banker, R.D., Lee, S., Potter,
G., 1996b. A field study of the impact of a performance-based
incentive plan. J. Acc. Econ.,
195226.Banker, R.D., Lee, S., Potter, G., Srinivasan, D., 2001.
An empirical analysis of continuing improvements following the
implementation of a performance-based compensation plan. J. Acc.
Econ. 30, 315350.Becker, H., 1960. Notes on the concept of
commitment. Am. J. Sociology, 3242.Birnberg, J.G., Snodgrass, C.,
1988. Culture and control: a field study. Acc. Organisations
Society 13, 447464.Blau, G.J., 1987. Using a person-environment fit
model to predict job involvement and organisational commitment. J.
Vocational
Behav., 240257.Bonner, S.E., Hastie, R., Sprinkle, G.B., Young,
S.M., 2000. A review of the effects of financial incentives on
performance in
laboratory tasks: Implications for management accounting. J.
Manage. Acc. Res. 12, 1964.Bowen, D.E., Ledford Jr., G.E., Nathan,
B.R., 1991. Hiring for the organisation, not the job. Acad. Manage.
Executive, 3551.Brownell, P., 1985. Budgetary systems and the
control of functionally differentiated organisational activities.
J. Acc. Res.,
502512.Brownell, P., McInnes, M., 1986. Budgetary participation,
motivation, and managerial performance. Acc. Rev., 587600.Brownell,
P., 1995. Research Methods in Management Accounting. Coopers and
Lybrand and Accounting Association of
Australia and New Zealand.Chong, V.K., 1996. Management
accounting systems, task uncertainty and managerial performance: a
research note. Acc.
Organisations Society, 415421.Chong, V.K., Chong, K.M., 1997,
Autumn. Strategic choices, environmental uncertainty and SBU
performance: a note on the
intervening role of management accounting systems. Acc. Bus.
Res., 268276.Chong, V.K., Chong, K.M., 2002. Budget goal commitment
and informational effects of budgetary participation on
performance:
a structural equation modelling approach. Behav. Res. Acc. 14,
6586.Chong, V.K., Eggleton, I.R.C., 2003. The decision-facilitating
role of management accounting systems on managerial perfor-
mance: the influence of locus of control and task uncertainty.
Advances Acc. 20, 165197.Chong, V.K., Rundus, M., 2004. Total
quality management, market competition and organisational
performance. Brit. Acc. Rev.
36, 155172.Chong, V.K., Eggleton, I.R.C., Leong, M.K.C., 2006.
The multiple roles of participative budgeting on job performance.
Advances
Acc. 22, 6795.Chow, C.W., Cooper, J.C., Waller, W.S., 1988,
January. Participative budgeting: effects of a truth-inducing pay
scheme and
information asymmetry on slack and performance. Acc. Rev.,
111122.Conlon, E.J., Parks, J.M., 1990. Effects of monitoring and
tradition on compensation arrangements: an experiment with
principal-
agent relationships. Acad. Manage. J., 603622.Collard, D., 1978.
Altruism and Economy: A Study in Non-Selfish Economies. Oxford
University Press, New York.Collins, F., Lowensohn, S.H., McCallum,
M.H., Newmark, R.I., 1995. The relationship between budgetary
management style
and organisational commitment in a not-for-profit organisation.
Behav. Res. Acc., 6579.Coughlan, A.T., Schmidt, R.M., 1985, April.
Executive compensation, management turnover, and firm performance:
an empirical
investigation. J. Acc. Econ., 4366.
-
V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18
(2007) 312342 341
Cronbach, L.J., 1951, September. Coefficient alpha and the
internal structure of tests. Psychometrika, 297334.Dunk, A.S.,
1993, April. The effect of budget emphasis and information
asymmetry on the relation between budgetary partici-
pation and slack. Acc. Rev., 400410.Eisenhardt, K.M., 1985,
February. Control: organisational and economic approaches. Manage.
Sci., 134149.Eisenhardt, K.M., 1988, September. Agency and
institutional-theory explanations: the case of retail sales
compensation. Acad.
Manage. J., 488511.Eisenhardt, K.M., 1989, January. Agency
theory: an assessment and review. Acad. Manage. Rev., 5774.Evans
III, J.H., Hannan, R.L., Krishnan, R., Moser, D.V., 2001. Honesty
in managerial reporting. Acc. Rev. 76 (4), 537559.Fatseas, V.A.,
Hirst, M., 1992. Incentive effects of assigned goals and
compensation schemes on budgetary performance. Acc.
Bus. Res., 347355.Fisher, J., Govindarajan, V., 1993.
Incentive-based compensation design, strategic business unit
mission, and competitive strategy.
J. Manage. Acc. Res., 129144.Flamholtz, E.G., Das, T.K., Tsui,
A.S., 1985. Toward an integrative framework of organisational
control. Acc. Organisations
Society, 3550.Frederickson, J., 1992. Relative performance
information: the effects of common uncertainty and contract type of
agent effort.
Acc. Rev. 67 (4), 647669.Gerhart, B., Milkovich, G.T., 1992.
Employee compensation: research and practice. In: Dunnette, M.D.,
Hough, L.M. (Eds.),
Handbook of Industrial and Organisational Psychology. Consulting
Psychological Press, Palo Alto, CA, pp. 481569.Gibbs, M., Merchant,
K.A., Van der Stede, W.A., Vargus, M.E., 2004. Determinants and
effects of subjectivity in incentives.
Acc. Rev. 79 (2), 409436.Gomez-Mejia, L.R., Tosi, H.L., Hinkin,
T., 1987. Managerial control, performance, and executive
compensation. Acad. Manage.
J., 5170.Hair, J.F., Anderson, R.E., Tatham, R.L., Black, W.C.,
1998. Multivariate Data Analysis. Prentice-Hall International Inc.,
Sydney.Heneman, H.G., 1974, October. Comparisons of self and
superior ratings of managerial performance. J. Appl. Psych.,
638
642.Holmstrom, B., 1979. Moral hazard and observability. Bell J.
Econ., 7491.Indjejikian, R.J., 1999. Performance evaluation and
compensation research: an agency perspective. Acc. Horizon,
147157.Jenkins Jr., G.D., 1986. Financial incentives. In: Locke,
E.A. (Ed.), Generalizing from Laboratory to Field Settings. D.C.
Hearth
and Company, Lexington, Massachusetts, pp. 167180.Jenkins Jr.,
G.D., Mitra, A., Gupta, N., Shaw, J.D., 1998. Are financial
incentives related to performance? A meta-analytic review
of empirical research. J. Appl. Psych., 777787.Kachelmeier,
S.J., 1994. Discussion of an experimental investigation of
alternative damage-sharing liability regimes with an
auditing perspective. J. Acc. Res. 32 (Supplement),
131139.Kachelmeier, S.J., 1996. Discussion of tax advice and
reporting under uncertainty: theory and experimental evidence.
Contemp.
Acc. Res. 13, 8189.Kaplan, R.S., Atkinson, A.A., 1998. Advanced
Management Accounting, third ed. Prentice Hall, New Jersey.Kennedy,
J., 1993. Debiasing audit judgment with accountability: a framework
and experimental results. J. Acc. Res. 31 (2),
231245.Kennedy, J., 1995. Debiasing the curse of knowledge in
audit judgment. Acc. Rev. 70 (2), 249273.Kerlinger, F.N., 1964.
Foundations of Behavioural Research. Rinehart and Winston, New
York, Holt.Kohn, A., 1993. Why incentive plans cannot work. Harvard
Bus. Rev., 5463.Kompass Australia, 1996. Peter Isaacson,
Prahan.Langfield-Smith, K., 1997. Management control systems and
strategy: a critical review. Acc. Organisations Society,
207232.Lau, C.M., Low, L.C., Eggleton, I.R.C., 1995. The impact of
reliance on accounting measures on job-related tension and
managerial performance: additional evidence. Acc. Organisations
Society, 359381.Libby, R., Lipe, M.G., 1992. Incentives, effort,
and the cognitive processes involved in Accounting-related
judgment. J. Acc.
Res. 30 (2), 249273.Lord, A.T., DeZoort, F.T., 2001. The impact
of commitment and moral reasoning on auditors responses to social
influence
pressure. Acc. Organisations Society 26, 215235.Luft, J., 1997.
Fairness, ethics and the effect of management accounting on
transaction costs. J. Manage. Acc. Res. 9, 199216.Mahoney, T.A.,
Jerdee, T.H., Caroll, S.J., 1963. Development of Managerial
Performance: A Research Approach. South-Western
Publishing, Cincinnati, Ohio.
-
342 V.K. Chong, I.R.C. Eggleton / Management Accounting Research
18 (2007) 312342
Mahoney, T.A., Jerdee, T.H., Caroll, S.J., 1965, February. The
jobs of management. Ind. Relat., 97110.Mathieu, J.E., Zajac, D.M.,
1990. A review and meta analysis of the antecedents, correlates,
and consequences of organizational
commitment. Psychol. Bull., 171194.Merchant, K.A., Van der
Stede, W.A., Zheng, L., 2003. Disciplinary constraints on the
advancement of knowledge: the case of
organisational incentive systems. Acc. Organisations Society,
251286.McKean, R.N., 1975. Economics of trust, altruism, and
corporate responsibility. In: Phelps, E.S. (Ed.), Altruism,
Morality and
Economic Theory. Russell Sage Foundation, New York, pp.
2934.Meyer, J.P., Allen, N.J., Gellatly, I.R., 1990. Affective and
continuance commitment to the organization: evaluation of
measures
and analysis of concurrent and time-lagged relations. J. Appl.
Psych. 75 (6), 710720.Mia, L., Clarke, B., 1999, June. Market
competition, management accounting systems and business
performance. Manage. Acc.
Res., 137158.Milgrom, P., Roberts, J., 1992. Economics,
Organization and Management. Prentice-Hall, Englewood Cliffs,
N.J.Mowday, R., Steers, R., Porter, L., 1979. The measurement of
organisational commitment. J. Vocational Behav., 224247.Noreen, E.,
1988. The economics of ethics:a new perspective. Acc. Organisations
Society, 359370.Nouri, H., 1994. Using organisational commitment
and job involvement to predict budgetary slack: a research note.
Acc.
Organisations Society, 289295.Nouri, H., Parker, R.J., 1996. The
effect of organisational commitment on the relation between
budgetary participation and
budgetary slack. Behav. Res. Acc., 7490.Nouri, H., Parker, R.J.,
1998. The relationship between budget participation and job
performance: the role of budget adequacy
and organisational commitment. Acc. Organisations Society,
467483.Nunnally, J.C., 1967. Psychometric Theory. McGraw-Hill, New
York.Otley, D.T., Pierce, B.J., 1996. The operation of control
systems in large audit firms. Aud.: A J. Practice Theory 15,
6584.Ouchi, W.G., 1981. Theory Z. Avon, New York.Penno, M., 1984,
March. Asymmetry of pre-decision information and managerial
performance. J. Acc. Res., 177191.Pindyck, R.S., Rubinfeld, D.L.,
1976. Econometric Models and Economic Forecasts. McGraw-Hill, New
York.Porter, L.W., Steers, R.W., Mowday, R.T., Boulian, P.V., 1974.
Organisational commitment, job satisfaction, and turnover among
psychiatric technicians. J. Appl. Psych., 603609.Pratt, J.W.,
1964. Risk aversion in the small and the large firm. Econometrica,
122136.Pratt, J.W., Zeckhauser, R.J., 1985. Principals and Agents:
The Structure of Business. Harvard Business School Press,
Boston.Price, J.L., Mueller, C.W., 1981. A causal model of turnover
for nurses. Acad. Manage. J., 543565.Prien, E.P., Liske, R.E.,
1962. Assessment of higher-level personnel. III. Rating criteria: a
comparative analysis of supervision
ratings and incumbent self-rating of job performance. Personnel
Psychol., 187194.Randall, D.M., 1990. The consequences of
organizational commitment: methodological investigation. J. Org.
Behav., 361378.Shavell, S., 1979. Risk sharing and incentive in the
principal and agent relationship model. Bell J. Econ., 5573.Simon,
H.A., 1991. Organisations and markets. J. Econ. Perspect.,
2544.Sprinkle, G.B., 2000. The effect of incentive contracts on
learning and performance. Acc. Rev. 75 (3), 299326.Stone, D.N.,
Ziebart, D.A., 1995. A model of financial incentive effects in
decision-making. Organisational Behav. Hum. Dec.
Processes 61 (3), 250261.Thornton, G.C., 1968. The relationship
between supervisory and self-appraisals of executive performance.
Personnel Psychol.,
441456.Tosi Jr., H.L., Gomez-Mejia, L.R., 1994. CEO compensation
monitoring and firm performance. Acad. Manage. J., 10021016.Waller,
W.S., 1994. Discussion of motivating truthful subordinate
reporting: An experimental investigation in a two subordinate
context. Contemp. Acc. Res. 10, 721734.Waller, W.S., 1995.
Decision-making research in managerial accounting: Return to
behavioural-economics foundations. In:
Ashton, R.H., Ashton, A.H. (Eds.), Judgment and Decision-Making
Research in Accounting and Auditing. CambridgeUniversity Press, pp.
2954.
Waller, W.S., Chow, C.W., 1985 July. The self-selection and
effort effects of standard-based employment contracts: a
frameworkand some empirical evidence. Acc. Rev., 458476.
The impact of reliance on incentive-based compensation schemes,
information asymmetry and organisational commitment on managerial
performanceIntroductionHypotheses developmentThe relation between
incentive-based compensation schemes and performanceStandard agency
theory view: the moderating role of information asymmetry on the
relation between incentive-based compensation schemes and
performanceThe effects of organisational commitmentThe three-way
interaction hypothesis
Research methodSample selectionMeasurement of
variablesInformation asymmetryOrganisational
commitmentIncentive-based compensation schemeManagerial
performance
ResultsConclusion, limitations and suggestions for future
researchAcknowledgementsFactor analysis of managerial performance
scale (n=109) (Rotated factor matrix)Additional results with the
effort dimension of organisational commitment as one of the
independent variablesAdditional results with the value dimension of
organisational commitment as one of the independent
variablesReferences