William B. Tayler

The Balanced Scorecard as a Strategy-Evaluation Tool: The Effects of Implementation Involvement and a Causal-Chain Focus

This paper uses an experiment to examine whether involvement in scorecard implementation can mitigate the effects of motivated reasoning that occur when the scorecard is framed as a causal chain rather than merely as a balanced set of measures. Psychological research on motivated reasoning suggests that managers will evaluate and interpret data in ways consistent with their preferences, increasing their tendency to arrive at conclusions that are consistent with their desired conclusions (Kunda 1990). Consistent with that research, results of my study show that managers who are involved in selecting strategic initiatives perceive those initiatives as having been more successful than managers who are not involved in the initiative-selection process (holding constant actual scorecard performance). Results further suggest that simply framing the scorecard as a causal chain is not sufficient to mitigate these effects. However, results show that framing the scorecard as a causal chain, in conjunction with involving managers in the selection of scorecard measures, mitigates the effects of motivated reasoning tied to manager involvement in initiative selection.

Norms, Conformity, and Controls

Research in behavioral economics suggests that in addition to their traditional incentive effects, formal control systems can influence psychological motivations. We extend this literature by demonstrating experimentally that formal controls directly influence people’s sense of what behaviors are appropriate in the setting (personal norms), and indirectly alter people’s tendency to conform to the behavior of those around them (descriptive norms). These effects persist even after the controls are changed, so that the effects of current controls can be strongly influenced by past control strength. Our results support those who are incorporating psychological factors into principal-agent models (such as Fischer and Huddart [2008]), and suggest that those models should be further modified to incorporate correlations between personal norms and conformity to descriptive norms.

Strategy Selection, Surrogation, and Strategic Performance Measurement Systems

Strategic performance measurement systems operationalize firm strategy with a set of performance measures. A consequence of such alignment is the tendency for managers to lose sight of the strategic construct(s) the measures are intended to represent, and subsequently act as though the measures are the constructs of interest, a phenomenon referred to as surrogation. We investigate how involvement in strategy selection affects managers’ propensity to exhibit surrogation. We predict and find that strategy selection reduces surrogation. Surprisingly, we do not find that engaging in strategy deliberation, a key process underlying strategy selection, reduces surrogation. Thus, managers’ involvement in the actual choice of strategy appears to be both a necessary and sufficient condition to mitigate surrogation. Our paper broadens understanding of factors that influence surrogation, such as the effects of different aspects of managers’ strategic involvement and buy-in. Further, by documenting how managers behave within (as opposed to simply with) strategic performance measurement systems, we highlight the potential for managers to endogenously influence the effectiveness of such systems.

Margin Trading, Overpricing, and Synchronization Risk

We provide experimental evidence that relaxing margin restrictions to allow more short selling can exacerbate overpricing, even though it reduces equilibrium price levels. This is because smart-money traders initially profit more by front-running optimistic investor sentiment than by disciplining prices. When short selling is not possible, competitive pressures among arbitrageurs rapidly drive prices to the equilibrium. However, the risk of margin calls slows the convergence process, because arbitrageurs who sell short too early face substantial losses if they are unable to synchronize their trades with other arbitrageurs (as in Abreu and Brunnermeier. 2002. Journal of Financial Economics 66(2--3):341--60; 2003. Econometrica 71(1):173--204). The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Compensation or Feedback: Motivating Performance in Multidimensional Tasks

Employees often perform tasks with multiple dimensions. In this study, we examine how employees’ performance on multidimensional tasks differs under different control structures. We conduct two experiments in which we manipulate the presence of compensation controls and the presence of feedback controls on multiple task dimensions. Our findings suggest that when employees are compensated on multiple dimensions they commit to multiple goals and divide their attention among those task dimensions. However, when feedback controls are implemented on one task dimension with compensation controls on another dimension, employees can improve performance on individual dimensions as well as their overall task performance. As a result, we find that employee performance on a multidimensional task can be higher when firms compensate employees on one task dimension and provide feedback on the other task dimension than when firms compensate on both task dimensions. This study highlights the benefits of complementing compensation-based controls (i.e., incentive pay) with non-compensation based controls (e.g., feedback), and provides a theoretical basis to help explain the prevalence of this approach in practice.

Controls and the Asymmetric Stickiness of Norms

This study investigates how formal control systems and the behavior of peers influence behavior in accounting settings. We manipulate formal controls and peer behavior (social norms) in a laboratory experiment, allowing us to precisely investigate the interactive effect of these two factors on behavior. We provide evidence that weak controls lead to more socially-interested behavior, while strong controls lead to more self-interested behavior. We also provide evidence that individuals conform more to social norms that conflict with the behavior that formal controls induce. Finally, we find that individuals preferentially attend and conform to the self-interested actions of peers (as opposed to the socially-interested actions of their peers), causing self-interested norms to be “stickier�? than socially-interested norms for behavior. Our results suggest that the interaction of formal controls and normative influence will lead to a gradual movement toward noncompliance with management expectations or regulatory requirements in accounting contexts.

Sooner or Later: The Effects of Timing on Managers’ Discretionary Weighting of Multiple Performance Measures

We investigate whether the weights managers place on multiple performance measures for the purpose of determining performance-contingent pay depend on whether weights are determined before or after employees exert effort. We propose that, while the overall purpose of determining these weights (to guide employees toward desired actions) is unaltered by timing, managers frame the weighting decision differently depending on timing. Specifically, prior to employee effort, managers frame the decision as one intended to motivate employee effort in line with firm objectives. After employee effort, managers frame the weighting decision as one intended to evaluate employee effort in a way that can be justified to the employee as fair. Thus, we expect, and find, that managers weight measures that are more congruent with firm objectives more heavily when weightings are determined ex ante (before employee effort) and weight measures that more precisely capture employee effort more heavily when weightings are determined ex post. This effect is mitigated when ex post measure outcomes indicate relatively favorable outcomes for more congruent measures. Our study contributes to academics’ and practitioners’ understanding of the factors that influence managers’ weighting of multiple performance measures, the implications of which are integral to the effectiveness and efficiency of a firm’s performance measurement and compensation system.

Controls, Trust, and Reciprocity

This study investigates the effects of formal controls on trust and reciprocity within organizations. Prior research finds a positive effect of controls on trust-based cooperative behavior in settings where people work together and may benefit from each other’s behavior. Other work suggests that this result could be driven by control-induced reciprocity rather than control-induced trust. If this is the case, then controls may have less of a positive effect, or no effect, in relationships that do not involve direct interaction. We test the extent to which controls improve trust and reciprocity by comparing the effect of controls in a setting where people do not work together directly, but where behaviors can be observed (in other words, a setting where reciprocity is less likely to influence behavior), to a setting where people work together and can benefit from each other’s work. We find that controls increase cooperative behavior in both settings, but that controls increase this behavior significantly more in the setting where participants work together and can benefit from each other’s work (i.e., where reciprocity is more likely to occur). This suggests that both trust and reciprocity are enhanced by controls, and that controls will enhance cooperative behavior more in more interactive settings.