Abstract
Performance management has been recognized as a success factor for high performing companies. Researchers produced a large body of knowledge trying to discover how performance management impacts performance. One insight from that research is that there is no single best way to performance management (Lee and Yang, 2011). On contrary, various approaches co-exist in different settings and in different companies. Consequently, the question now is to understand which approach is most beneficial given the specific circumstances – the contingencies – of the company. This PhD work provides an overview of the recent contingency research in performance management and is built around two questions: 1) what type of performance management is used by companies given their specific contingencies, and 2) what is the performance impact of PM under different contingencies. Building on Covaleski et al. (2003) and Gerdin and Greve (2004) a literature review framework is created and methodological issues are considered.
By Timur Pasch, PhD cand., OU Heerlen, Supervisor Arco van de Ven
Introduction
The body of performance management research grew dramatically in the last decade. Bititci et al. (1997) define performance management as a “process by which the company manages its performance in line with its corporate and functional strategies and objectives”. According to them, it is the objective of that process to provide an integrated control system, where the corporate and functional strategies are deployed to all business processes, activities, tasks and personnel, and feedback is obtained through the performance measurement system to enable appropriate management decisions. The ultimate purpose of that process is to improve company performance.
Many researchers study the performance consequences of PM. However, empirical results are often unclear and contradictory (Langfield-Smith, 1997). For example, one group of authors claim that PM is beneficial and leads to performance gains (Ittner et al., 2003; Said et al., 2003; van der Stede et al., 2006), another group of authors found no impact (Ittner and Larcker, 1995) and the last group found negative impact (Ittner and Larcker, 1997). Such unclear empirical evidence limits theory development and therefore additional research needs to be performed.
It has been argued that additional research can benefit from the insights provided by the contingency theory which may help to resolve existing contradictions and lead to a creation of consistent body of knowledge (Ittner and Larcker, 2001; 2009). Chenhall, 2003 provides an overview of contingency-based studies in management accounting. The central message of the contingency theory is that success of any management control initiative (e.g. performance management) is dependent on the contingencies of the company (Govindarajan, 1988; Chenhall, 2003; 2006). Contingencies are factors that are potentially significant for the implications of performance management. These can be externally given (e.g. environmental uncertainty, competition) or internally created (e.g. strategy) (Ittner and Larcker, 2001).
Contingency research in performance management area has its roots in the management accounting and control literature (Chapman, 1997; Chenhall, 2003; Fisher, 1998; Jones, 1985; Otley, 1980). Applied to performance management, the contingency paradigm states that there is no universally appropriate performance management approach equally suitable for all companies in all circumstances (Jermias and Gani, 2004). Consequently, factors such as strategy, environmental uncertainty and size have to be aligned with the performance management to unleash its’ performance effect (Jääskeläinen et al., 2012; Jermias and Gani, 2004).
As a part of the set of rational agent models (Kilfoyle and Richardson, 2011), contingency theory is built on two assumptions: bounded rationality and equilibrium (Covaleski et al., 2003). The bounded rationality assumes that rational agents act to maximize their self-interest, but at the same time they are equipped with only limited cognitive resources (Covaleski et al., 2003). Thus, any initiative that aims at aligning individual behavior with the organizational interest must fail. For example, managers can make mistakes in designing organizational structure or develop sub-optimized processes, and employees’ responses to such mistakes will cause waste of resources and lower performance. On the other hand, the assumption of equilibrium implies that each organization can reach the state of “fit” which is “a combination of organizational and contingent characteristics [that] produces higher organizational performance than alternative combinations” (Covaleski et al., 2003). In the equilibrium state “an underlying congruence between context and structure [exists]” (Drazin and van de Ven, 1985). The consequence of the equilibrium assumption is that organizations either move towards the “fit” or they disappear from the market (Donaldson, 2001). With other words, properly “fitted” organizations have higher chances of survival.
This paper extends the research in three ways. First, it builds on prior work (Cadez and Guilding, 2008; Chenhall, 2003; Chenhall and Langfield-Smith, 2007) and provides a systematic overview of the empirical results in contingency research of performance management. For instance, adding to Chenhall (2003) this paper provides an overview of propositions raised in literature and summarizes supporting and contrasting evidence. Second, following Covaleski et al. (2003) and Gerdin and Greve (2004) results are compared in terms of study design, concepts used, operationalization and validity issues. Finally, gaps in research are identified and avenues for future research are proposed.
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References
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Business performance management research for high performance organizations 