Theresa Libby

The Balanced Scorecard: The Effects of Assurance and Process Accountability on Managerial Judgment

The balanced scorecard has been hailed as one of the major developments in management accounting in the past decade. Lipe and Salterio (2000) show that one of the key scorecard features, the inclusion of measures that are unique to the strategic objectives of a business unit, tend to be ignored by managers when making performance evaluation judgments. This study employs an adapted version of Kennedy’s (1993, 1995) debiasing framework to motivate two approaches to reducing this “common measures bias.” We examine whether increasing effort via invoking process accountability (i.e., requiring managers to justify to their superior their performance evaluations) and/or improving the perceived quality of the balanced scorecard measures (i.e., via assurance over the reliability and relevance of the performance measures) leads to managers’ increased usage of unique performance measures in their evaluations. Results suggest that either the requirement to justify an evaluation to a superior or the provision of an assurance report over all measures increases the use of unique measures in managerial performance evaluation judgments. Interestingly, the combination of the two approaches is not as powerful as the individual debiasers by themselves. Furthermore, we provide evidence that the common measures bias is not an easily correctable cognitive illusion that disappears when the potential for judgment inconsistency is pointed out to participants. Implications for theory and practice are discussed.

The influence of voice and explanation on performance in a participative budgeting setting

Abstract This paper examines the relationship between the use of a fair budgeting process and subordinate performance. Organizational justice theory is used to define a fair budgeting process as having two components: the subordinate’s involvement in the budgeting process, voice; and the communication of a rationale for the subordinate’s lack of influence over the final budget target the superior sets, explanation. Results indicate significant performance improvements when voice and explanation are combined as compared to voice alone.

THE EFFECT OF FAIRNESS IN CONTRACTING ON THE CREATION OF BUDGETARY SLACK

This paper explores the relationship between fairness in contracting and the creation of budgetary slack. A laboratory experiment was performed in which privately informed subjects were compensated under either a truth-inducing or slack-inducing incentive contract. Contracting processes were either fair or unfair as defined by procedural justice theory (Leventhal, 1980; Lind & Tyler, 1988). Under the slack-inducing contract, subjects exposed to the fair contracting process created significantly less slack than subjects exposed to the unfair contracting process. Slack created by subjects compensated under the truth-inducing contract was low and insensitive to the fairness or unfairness of the contracting process employed.

The Effects of Vertical Pay Dispersion: Experimental Evidence in a Budget Setting

Vertical pay dispersion is the difference in pay across different hierarchical levels within an organization (Milkovich and Newman 1996). While vertical pay dispersion may be useful in attracting, retaining and motivating highly skilled employees (Lazear and Rosen 1981; Lazear 1995; Prendergast 1999), our study investigates a potential disadvantage; specifically, the negative impact of perceived unfairness of vertical pay dispersion on employees’ budgeting decisions. We predict and find that high vertical pay dispersion motivates subordinates to misreport costs to a greater extent than low vertical pay dispersion. Furthermore, we predict and find that superiors, on average, exercise more lenient cost controls when vertical pay dispersion is high rather than low. Supplemental analysis indicates superiors are more lenient on average due to their aversion to inequity caused by vertical pay dispersion. Our results suggest that high vertical pay dispersion can compromise the overall corporate budgeting environment, where higher levels of misreporting by subordinates goes unchecked by superiors.

The Effects of Trust and Budget-Based Controls on Budget Gaming and Budget Value

Proponents of “beyond budgeting” suggest the major control problem in organizations today is the use of budgets for both planning and performance evaluation (Hope and Fraser 2003). Rigidly evaluating and rewarding managers relative to budget targets set at the beginning of the year motivates managers to play budgetary games which taints the budgeting and forecasting process. Contrary to this view, a recent survey of North American budgeting practices by Libby and Lindsay (2010) indicates a large proportion of the organizations sampled continue to use budgets for performance evaluation and control purposes and also offer budget-based bonuses to their managers as an incentive to perform. In addition, a large proportion of these firms appeared to be finding ways to get good value out of the budgeting process even though results indicated a negative correlation between budget value and managers’ perceptions of the degree to which budget gaming occurs in their organizations. The objective of the current study is to provide some insight into what drives higher versus lower budget value from the point of view of the business unit managers. Based on a review of the academic and practitioner literatures, we develop and test a theoretical model of the antecedents of budget gaming and budget value using additional data collected in the Libby and Lindsay (2010) survey. Results indicate good prior period performance is associated with less budget gaming, high budget emphasis is associated with higher budget gaming and increased interpersonal trust between lower and higher levels of management is negatively associated with budget gaming. By splitting the sample into high and low trust groups, we are able to show that lower level manager’s trust in higher level managers is key to explaining perceptions of budget value in our sample.

The effects of tournament horizon and the percentage of winners on social comparisons and performance in multi-period competitions

We examine the effects of two important tournament design features, tournament horizon and percentage of winners, on social comparisons and performance in a multi-period setting. Prior research has individually examined these two features, but has not examined their joint effects. Replicating prior research, we predict that a higher percentage of winners will result in better performance than a lower percentage of winners by inducing more social comparisons. We also predict that grand tournaments will result in better performance than repeated tournaments through their effects on the extent to which competitors will engage in social comparisons. We expect that relative to repeated tournaments, grand tournaments will encourage more social comparisons because the performance feedback provided to competitors will be more indicative of the likelihood of future period outcomes (i.e., winning or losing) than in a repeated tournament. We also examine the extent to which the percentage of winners moderates the strength of the predicted relations among tournament horizon, social comparisons and performance. Finally, we predict that in repeated tournaments using a higher percentage of winners will be more effective at sustaining effort in later periods but that these effects will be weaker for grand tournaments. Results from a laboratory experiment with 400 undergraduate student participants support these predictions. Moreover, we find no evidence that the percentage of winners influences the impact of tournament horizon on social comparisons or overall performance. We identify implications for theory and practice.

Groupcentric budget goals, budget-based incentive contracts, and additive group tasks

Purpose - – The purpose of this paper is to examine the effects of three different types of budget goals (egocentric individual, groupcentric individual and group) on group performance of an additive task, assigned within an individual budget-based incentive contract. While previous research has established that budget-based incentive contracts motivate higher group performance than piece rate contracts for additive group tasks, no studies, which we are aware of, have considered explicitly the type of goal within this context. Design/methodology/approach - – We conduct a 3 × 2 experiment in which we manipulate the presence of an individual goal (egocentric, groupcentric and absent) and a group goal (present and absent) on group performance of an additive task. Findings - – Group performance is higher for groups assigned groupcentric individual goals than for groups assigned egocentric individual goals, either alone or in combination with a group goal. Practical implications - – Egocentric individual goals may reinforce an individualistic orientation, which may work against the potential gains from having group members adopt more of a group focus. Originality/value - – This paper considers how groupcentric individual goals may improve group performance. The management accounting literature typically examines just egocentric individual goals.