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Amsterdam Business School
The impact of Organizational Culture on Management Control
Systems
Name: Kevin Kradolfer
Student number: 10884289
Thesis supervisor: dr. ir. S.P. van Triest
Date: 22 January 2017
Word count: 13068
MSc Accountancy & Control, specialization Control
Faculty of Economics and Business, University of Amsterdam
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Statement of Originality
This document is written by student Kevin Kradolfer who declares to take full responsibility for
the contents of this document.
I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion
of the work, not for the contents.
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Abstract
This study uses the survey method to investigate the influence of the perception of
organizational culture on the use of management controls systems, specifically the use of
performance measures. The results indicate that individual employees subscribe to different
organization cultural values. All four cultural types on the flexibility/control and
internal/external continuum exist within one single organization. The results also reveal that
these different cultural perceptions don’t have a significant impact on the choice of financial,
nonfinancial or subjective performance measures by employees.
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Contents
1 Introduction ............................................................................................................................................ 6
2 Theory and Literature Background ..................................................................................................... 8
2.1 Agency Theory and Management Control Systems ................................................................. 8
2.2 Performance Measurement Systems ........................................................................................... 9
2.2.1 Subjective and objective PMS ............................................................................................ 10
2.3 Organizational Culture ................................................................................................................ 12
2.3.1 Perception of Organizational Culture ............................................................................... 14
3 Hypotheses Development .................................................................................................................. 16
4 The Research Method ......................................................................................................................... 18
4.1 Research Site ................................................................................................................................. 18
4.1.1 PCB Cycle .............................................................................................................................. 18
4.2 Sample ............................................................................................................................................ 21
4.3 Methodology ................................................................................................................................. 21
4.4 Constructs ..................................................................................................................................... 22
4.4.1 Independent Variable – Organizational Culture ............................................................. 22
4.4.2 Dependent Variable – Subjective versus Objective PMS .............................................. 23
4.4.3 Control Variables ................................................................................................................. 24
4.5 Survey respondents ...................................................................................................................... 24
4.6 Validity and Reliability ................................................................................................................. 25
5 Results ................................................................................................................................................... 27
5.1 Descriptive Statistics .................................................................................................................... 27
5.1.1 Organizational Culture ........................................................................................................ 27
5.1.2 Subjective versus Objective PMS ...................................................................................... 30
5.2 Sample reduction .......................................................................................................................... 30
5.3 Correlation .................................................................................................................................... 31
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5.4 Results of ANOVAs .................................................................................................................... 32
5.5 Hypotheses tests: Linear regression .......................................................................................... 34
6 Discussion, limitations and conclusions .......................................................................................... 36
References .................................................................................................................................................... 40
Appendices .................................................................................................................................................. 44
Appendix A – Questionnaire Instruments ........................................................................................ 44
Appendix B – Non-Response bias ...................................................................................................... 47
Appendix C – Details of Demographics ............................................................................................ 48
Appendix D – Results of tests with the full sample ......................................................................... 49
Appendix E – Logistic regression ....................................................................................................... 51
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1 Introduction
Organizational culture is relevant according to the management literature (e.g., Henri, 2006;
Dent, 1991). However, empirical evidence to support a relationship between organizational
culture and management control systems (MCS) is sparse (Bhimani, 2003). Henri (2006) is one of
the first to empirically investigate whether organizational culture impacts MCS. His study aims to
articulate and test the relationships between organizational culture and one component of MCS,
namely performance measurement systems (PMS) (Henri, 2006, p 77).
This study builds on and extends early work by Henri (2006) who seeks and succeeded to
establish an association between organizational culture and PMS. Henri investigates the
relationship between organizational culture and two attributes of PMS, namely the diversity of
measurement and the nature of use. Henri (2006, p 78) founds that organizational culture has a
direct effect on the diversity of measurement of performance measurement systems. Since this
early work, relatively little progress has been made in identifying the impact of this contingency
variable on the design and use of MCS.
This thesis extends previous management accounting literature by examining the
influence of organizational culture on the use of control systems. Henri (2006) operationalizes
organizational culture using the control versus flexibility orientation. This study extends that
orientation with the other main dimension of the Competing Values model of Quinn and
Rohrbaugh (1983): internal versus external orientation. This leads to the operationalization of
organizational culture in four types of cultural orientation, namely group, development,
hierarchical and rational culture. For the operationalization of MCS Henri (2006) focuses on the
diversity of measurement of performance measurement systems. This study investigates another
aspect of the MCS, namely the subjective or objective use of PMS. This is an important
characteristic of most incentive contracts for evaluating and rewarding employees. According to
Gibbs et al. (2004) theoretical research has suggested various plausible reasons for the use of
subjectivity in the assignment of bonuses. Empirical testing of these theories is rare. This study
helps to fill this gap.
According to Ittner & Larcker (2002) relatively little empirical evidence exists on the
factors associated with the choice of performance measures in incentive plans and most studies
have focused on CEO bonus contracts or business unit performance evaluation and have
ignored worker-level incentive plans. This study answers to their call for future studies to
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examine the determinants of worker incentive plans focusing on the perception of organizational
culture.
There are few accounts in PMS literature where lower and middle-level employees
consider PMS as something that supports them and that they can use for their own purpose
(Wouters and Wilderom, 2008). For this research, survey data is collected within a large Dutch
insurance company. This offers the opportunity to link perceptions of organizational culture to
the subjective use of PMS at the level of the individual employee. Specifically, this thesis will
adopt a contingency approach and use empirical analysis to identify the influence of
organizational culture on the subjective use of performance measures. Therefore this thesis
examines the following research question: Does the perception of organizational culture influence the
subjective use of performance measurement systems? The measured variables include the perception of
organizational culture and the subjective or objective use of performance evaluation.
The remainder of this thesis is organized as follows. The next section describes the
underlying theory and literature background. The following two sections present the hypotheses
development and the research methodology including the sample definition, data collection and
measurement of constructs. After that the results are analyzed followed by the discussion,
limitations and conclusion. This paper ends with the references and appendices.
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2 Theory and Literature Background
Management control is a critical function in organizations. Management control failures can lead
to large financial losses, reputation damage, and possibly even to organizational failure.
Therefore is widely accepted that good management control systems are important (Merchant
and Van der Stede, 2012, p 5). One of the most well known theories underlying management
control is the agency theory of Jensen and Meckling (1976).
In this thesis a contingency approach is adopted. There is no universally best
management control system that applies to all organizations. The contingency theory of Chenhall
(2003) describes the impact of contingency variables (i.e. strategy, external environment,
technology, organizational structure, firm size and culture) on MCS design. As an organization
strives to achieve effectiveness, it will seek to attain “fit” between the contingent variables and
the MCS (Auzair & Langfield-Smith, 2005). The identification of contextual variables potentially
implicated in the design of effective MCS can be traced back to the original structural
contingency frameworks developed within organizational theory.
2.1 Agency Theory and Management Contro l Systems
The essence of the agency theory of Jensen and Meckling (1976) is that a principal (the
shareholder) is not capable to entirely control the behavior of the agent (the manager or
employee). This theory is based on the assumptions that the principal and agent should have a
different risk characteristic, there is a conflict of interest between the principal and agent and
there is information asymmetry. The agent has more information than the principal. This can
lead to a misalignment of interests between principal and agent.
Management control is the process to mitigate this risk by influencing behavior of
employees to increase probability that employees carry out organizational objectives and
strategies, i.e. act in the organization’s best interest. Flamholtz et al. define control “as attempts
by the organization to increase the probability that individuals will behave in ways that will lead
to the attainment of organizational objectives” (1985, p. 35). The task of directing employee’s
efforts for the attainment of organizational objectives has always been of the utmost importance.
Organizations use a combination of mechanisms, including personal supervision, standard
operating procedures, position descriptions, performance measurement and reward systems to
control over the behavior of employees. Taken together, these mechanisms constitute the
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organizational comprehensive management control system. As King and Clarkson (2015)
propose, the MCS is part of the control solution.
MCSs have been characterized in many different ways. These include, for example, the
conceptual framework of Merchant & van der Stede (2012). Their framework consists of a
management control system composed of result controls, action controls and personnel and
cultural controls. Result controls define performance measures and reward good results (and
punish bad results). Employees are accountable for delivered results. Action controls focus on
employee behavior to ensure that employees perform actions beneficial to the organization (or
do not perform actions harmful to the organization). Personnel and cultural controls are bases
on self-control and social control, based on intrinsic motivation and ethics. Other examples of
often-used characteristics of MCS design in research are the levers of control of Simons (1994),
more or less bureaucratic MCS (Auzair and Langfield-Smith, 2005) and the performance
measurement systems framework by Ferreira and Otley (2009). Especially Ferreira and Otley use
a very comprehensive approach on MCS (as they call it performance management systems). They
conceptualize PMS as the “evolving formal and informal mechanisms, processes, systems and
networks used by organizations for conveying the key objectives and goals elicited by
management, for assisting the strategic process and ongoing management through analysis,
planning, measurement, control, rewarding, and broadly managing performance, and for
supporting and facilitating organizational learning and change” (2009, p. 264) resulting in an
extended framework. Parts of their performance management systems framework are the key
performance measures and the performance evaluation.
2.2 Performance Measurement Systems
Performance measures are used at different levels in organizations to evaluate success in
achieving their objectives, key success factors, strategies and plans, and thus satisfying the
expectations of different stakeholders. Agency models (e.g. Feltham and Xie, 1994) demonstrate
that performance measurement systems should include any performance measure that provides
incremental information on the actions the principal wishes to motivate in order to promote
congruence between the principal’s objective and that of the agent. A common distinction is
between financial (or accounting) measures and nonfinancial (or operational) measures.
Designing a perfectly complete PMS remains challenging, if not impossible, and would
require nothing less than the expression of all relevant aspects of performance in quantitative
terms (financial and nonfinancial), estimation of the tradeoffs among such dimensions of
performance in the setting of targets for performance measures, and consideration of
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interdependencies between different organizational units (Wouters and Wilderom, 2008).
Performance measures used at lower levels in the hierarchy become increasingly noisy as
interdependencies among units within the firm increase (Abernethy et al., 2004) because the
indivisibility of certain resources makes the attribution of performance to individual employees
or units within the firm increasingly difficult.
Nevertheless, the area of performance evaluation represents a critical part of control
activities (Ferreira and Otley, 2009). Evaluation involves assessing the performance of individuals
or groups against the pre-established goals and standards, based upon the information provided
by the measurement system and the personal observation of the superior. Rewards are outcomes
of behavior which are desirable to a person and which can be either extrinsic or intrinsic.
Extrinsic rewards are administered after the evaluation process, usually conducted by the
hierarchical superior. Rewards are expressions of approval and recognition by senior
management through financial rewards (bonuses and salary increases). This relates to the core of
the agency theory that it is necessary to provide an employee incentive to exert efforts in the best
interest of the company and that these incentives are not provided by mere the payment of fixed
salary (Jensen and Meckling, 1976).
The effectiveness of extrinsic rewards in channeling work behavior is reduced when
inequity is perceived. Its effectiveness is further reduced when employees do not accept the
evaluation based upon which reward decisions are made (Flamholtz et al., 1985). Acceptance of
evaluation depends upon the perception that the evaluation is fair and valid. Performance
evaluations can be objective, subjective, of fall in between these two extremes. The use of
subjective evaluations has the important advantage of enabling evaluators to correct for
identifiable flaws in performance measurement (Gibbs et al., 2004).
2.2.1 Subjective and objective PMS
Effective performance measures provide accurate, informative and timely indications of the
individual’s contribution to firm value (or other organizational goals), at low risk to the employee
(Gibbs et al., 2004). When quantitative performance measures are effective, objective formula
incentives are likely to be used intensively. However, objective performance measures often
distort incentives (e.g. because they are incomplete or prone to manipulation) or impose undue
risk on the employee (e.g. because they include uncontrollables).
Therefore the performance evaluation procedures of most organizations allow
supervisors some level of discretion in evaluating the performance of their subordinates.
Discretion enables supervisors to provide a more accurate and complete picture of employees
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performance than would be the case were their evaluations based solely on available objective
performance indicators (Gibbs et al. 2004). Subjectivity (qualitative assessments), opposed to
objective performance measurement, is the judgment based on personal impressions, feelings,
and opinions rather than external facts.
While performance measures can differ along many dimensions, the objective/subjective
distinction is one of the most common. Objective criteria measure (financial or non-financial)
results, not behaviors (Hoffman et al., 1991). Bommer et al. (1995) have a practical definition of
the difference between objective and subjective performance measures. They define objective
measures as direct measures of countable outcomes, whereas subjective measures consist of
supervisor ratings of employee performance. Baker et al. (1988, 1994) define subjectivity as the
extent to which the person responsible for the evaluation has a direct personal influence on the
rating. Therefore, subjective performance measurement is based on personal impressions,
feelings, and opinions rather than external facts. Subjective measurements are non verifiable, i.e.,
a third party cannot verify the correctness of the subjective assessment. The measure solely
consists of information from within the relation between supervisor and employee, outside
information isn’t included. For example, customer satisfaction on itself is a subjective measure,
but as a performance measure for incentive use, it is considered as an objective (non-financial)
performance measure. It isn’t influenced by the personal impressions, feelings and opinions of
the supervisor.
Subjectivity can be useful in mitigating various problems faced in assigning rewards
through formulas based on quantitative performance measures. The use of subjectivity allows
evaluators to exploit any additional relevant information that arises during the measurement
period to the benefit of both the organization and the employee. The organization can benefit
through improved incentive alignment and the employee can benefit through reduced risk
(Gibbs et al., 2004).
In bonus assignment, subjectivity can arise in several ways, which are often used in
combination. First, all or part of a bonus is based on subjective judgment about performance.
Second, the weights on some or all quantitative measures are determined subjective. Or, third, a
subjective performance threshold or override is used, in which case a subjective determination as
to whether to pay a bonus is made based on measured performance and other factors (Gibbs et
al., 2004). Subjectivity is also an important element of implicit incentives given (e.g. promotions,
job assignments and threat of termination).
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Performance measurement and evaluation processes are an important source of ethical
dilemmas in organizations (Maas and Torres-González, 2011). Organizations need to ensure that
their procedures and information systems allow managers to make unbiased appraisals. Yet,
research in psychology, management, and accounting indicates that many employees feel that
subjective evaluations are sometimes inaccurate and unfair. The study of Ittner et al. (2003, p.
725) suggests that psychology-based may be equally or more relevant than economics-based
explanations in explaining the firm’s measurement practices.
As discussed in the accounting literature on performance measure selection a wide array of
objective performance measures will usually be available, and these measures can be used in any
possible combination to provide an overall indication of the employees job performance in a
specific period (Gibbs et al., 2004). Following Baker et al. (1988), therefore organization’s
evaluation procedures can range from very subjective to very objective.
2.3 Organizat ional Culture
Following Martin (1992) one variable that offers promise in the study of culture is organizational
culture (as cited by Chenhall, 2003, p. 154). It is possible that a strong organizational culture may
dominate national culture in het work situation. Organizational culture is a broad concept about
which a consensus has yet to be reached. Notions of shared beliefs, values, assumptions, and
significant meanings are commonly associated with culture (Henri, 2006, p. 79). This thesis
follows Henri (2006) and attempts to capture the underlying value structure that creates meaning
in organizational settings. Culture is operationalized as the shared values (what is important) that
interact with an organization’s structures and control systems to produce behavioral norms (the
way we do things around here). Quinn and Rohrbaugh (1983) developed the Competing Values
model. The Competing Values model is used as a mean to define types of organizational cultures
and to interpret the characteristics of those cultures (Denison and Spreitzer, 1991).
The Competing Values framework focuses on the competing tensions and conflicts
inherent in any human system. Primary emphasis is placed on the conflict between stability and
change, and the conflict between internal organization and external environment. The model
incorporates two sets of competing values along two axes: (1) the control/flexibility dilemma,
which refers to preferences about structure, stability, and change, and (2) the internal/external
dilemma, which refers to differences in organizational focus. From these two axes emerge four
quadrants reflecting four types of culture, namely rational, hierarchical, development and group
(Henri, 2006; Denison and Spreitzer, 1991). Each of the four types of cultural orientation
represents one of the four major models in organizational theory.
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The Competing Values framework focuses on the competing tensions and conflicts
inherent in any human system: primary emphasis is placed on the conflict between stability and
change, and the conflict between the internal organization and the external environment. The
first axis reflects the competing demands of change and stability. One end of the axis represents
an emphasis on flexibility, change and spontaneity, whereas the other represents a
complementary focus on stability, control, and order. The second axis reflects the conflicting
demands created by the internal organizations and the external environment. One end of the axis
represents a focus on integration and buffering to sustain the existing organization and is person-
oriented, while the other represents a focus on competition, adaption, and interaction with the
environment.
The Competing Values model thus enables four resulting cultural types of organizational
orientations to be posited: group, development, hierarchical and rational. Each of the four types
of cultural orientation represents one of the four major models in organizational theory. These
four cultural types, along with their different underlying assumptions about motivation,
leadership, and effectiveness are described below.
Group Culture: The group culture in the upper left quadrant of Figure 1 has a primary
concern with human relations. The purpose tends to be group maintenance. Belonging, trust,
teamwork and participation are core values, and primary motivational factors include attachment,
cohesiveness and membership (Denison and Spreitzer, 1991, p. 5).
Development Culture: The development culture in the upper right quadrant of Figure 1
also emphasizes flexibility and change, but maintains a primary focus on the external
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environment. This orientation emphasizes growth, resources acquisition, creativity, and adaption
to the external environment. Key factors include growth, stimulation, creativity, risk taking, and
variety (Denison and Spreitzer, 1991, p. 5).
Rational Culture: The rational culture in the lower right quadrant of Figure 1 emphasizes
productivity, performance, goal fulfillment, and achievement. The purpose of organizations with
emphasis on the rational culture tends to be the pursuit and attainment of well-defined
objectives. Key factors include competition, goal oriented, structure, efficiency and productivity
(Denison and Spreitzer, 1991, p. 5).
Hierarchical Culture: The hierarchical culture in the lower left quadrant of Figure 1
emphasizes internal efficiency, uniformity, coordination, and evaluation. The focus is on the
logic of internal organization and the emphasis is on stability. Key factors include execution of
regulations, security, order, rules and conservative and control (Denison and Spreitzer, 1991, p.
5).
2.3.1 Perception of Organizational Culture
Organizational culture is produced and reproduced through action and interaction. But it is not
just lodged in people’s minds. Culture is public, the product of minds, between minds (Dent,
1991). According to Henri (2006, p. 80) and Denison and Spreitzer (1991, p. 6) no organization
is likely to adopt only one culture. The difference in knowledge, beliefs and values of individual
employees create different meaning systems within an organization. Moreover, cultures in
organizations are not independent of their social context. They are interpenetrated by wider
systems of thought, interacting with other organizations and social institutions, both importing
and exporting values, beliefs and knowledge (Dent, 1991). Therefore, in the concept of an
organization as a culture, it is sensible to recognize the possibility and likelihood of distinct
subcultures existing among managerial teams, occupational groups, members of different social
classes and so on (Dent, 1991, p. 709). Employees create cultures that underlie the quasi-
corporate culture by forming groups around the multiple identities within the organization, for
example, relating to subject specialism, length of tenure of role or geographic location of one’s
home (Lumby, 2012). Some may be dominant-cultures and others counter-cultures.
Quinn (1988) goes a step further and states that in every organization all four cultural
types of the Competing Values framework exist (as cited by Henri, 2006, p. 80). No organization
is likely to adopt only one culture. Instead, each organization has its distinctive cultures based on
a combination of values. The four cultures described above should be thought of as ideal types
defined by the Competing Values model. As mentioned before, organizations are unlikely to
15
reflect only one culture; rather, one would expect to find combinations of each culture type, with
some type being more dominant than others (Denison and Spreitzer, 1991). One underlying
assumption of the Competing Values model is the importance of balance. When one cultural
orientation is overemphasized, an organization may become dysfunctional and the strengths of
the cultural orientation may even become weaknesses. For example, too much flexibility or
spontaneity can become chaos; too much order and control can result in rigidity. Denison and
Spreitzer (1991) recognizes that the most effective organizational culture isn’t the one that has
incorporated the characteristics of all four cultural types, but nonetheless recognize that balance
represents the capacity to respond to a wide set of environmental conditions.
Al previous mentioned papers considering the perception of organizational culture
(except Henri, 2006), sought to apply the perspective of organizational culture in an empirical
setting through qualitative research. The purpose of the undertaken field studies is to explicate a
mode of theorizing of organizational culture. The mode of theorizing is interpretive, getting
underneath surface of culture in organizational settings. Henri (2006) uses the Competing Values
framework in a quantitative approach to study the differences in the perception of organizational
culture. His sample consists of top manager of different firms. Therefore, his level of analysis is
different than in this study, where the sample consists of employees within one single
organization. Landekic et al. (2015) and Demir et al. (2011) also study the difference in the
perception of organizational culture within one single organization using the Competing Values
framework. Landekic et al. (2015) studies the organizational culture of Croatian Forests Ltd. The
research site of Demir et al. (2011) is a Turkish pharmaceutical company. They both found
quantitative empirical evidence that all four cultural types of the Competing Values framework
exist within one single organization.
As a typology based on general characteristics of organizational cultures is used, this
study does not attempt to highlight the unique qualities of an organization’s culture, but rather
the perception of subcultures within an organization by individual employees. Recognizing that
the perception of organizational culture by individual employees will vary widely within an
organization (Landekic et al., 2015 and Demir et al., 2011). This perception of organizational
culture is shaped by the difference in knowledge, beliefs, values and social context of individual
employees.
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3 Hypotheses Development
Following the work of Henri (2006), Bhimani (2003) and Dent (1991), I intend to
examine the extent to which the perception of organizational culture becomes embedded in the
use of management control systems. Henri (2006) found consistent evidence that organizational
culture has a direct effect on the diversity of measurement of PMS. This perception of
organizational culture is shaped by the difference in knowledge, beliefs, values and social context
of individual employees. Dent (1991, p. 728) claims that “cultural knowledge in organizations
vests organizational activities with symbolic meaning”. And Bhimani (2003) discusses that a
management accounting system that is more reflective of the organization culture values of one
group, is likely to be seen as being more successful by that group. These different studies indicate
that the perception of organizational culture influence the use of performance measurement
systems. All organizations contain simultaneously the opposites control and flexibility values, and
internal and external values (Quinn, 1998). Since a cultural orientation has a polar opposite
(Denison and Spreitzer, 1991), I will refer to the notion of “dominant type” following Henri
(2006). I will refer to the notion of “dominant type” in order to capture the specific position of
each employee on the control/flexibility and internal/external continuum. Hereafter, control
value employees will refer to employees reflecting a control dominant type, while flexibility value
employees will refer to those reflecting a flexibility dominant type. Also, internal value employees
will refer to employees reflecting a dominant internal focus, while external value employees will
refer to employees reflecting a dominant external focus.
The first cultural values that are polar opposites are the control versus flexibility values.
The key characteristics of the control values are among others well-defined objectives, goal
orientation, structure and efficiency, thus a cybernetic approach. By definition, a cybernetic logic
is more compatible with control values than flexibility values. Indeed, predictability, order, goal
clarity and formality are more compatible with a cybernetic logic. Control values are associated
with stability, enforced roles and bureaucracy (Henri, 2006). The control values have therefore
key characteristics that are consistent with the use of objective PMS.
In contrast, flexibility values mirror change, teamwork and cohesion. Key characteristics
are trust, spontaneity, change, creativity and openness. According to Gibbs et al. (2004) these are
characteristics that relate to the use of subjective bonuses. They find that the use of subjective
bonuses is positively related to organizational interdependencies (noisy and fail to encourage
cooperation) and the level of trust between the employee and the manager. The consistency
17
between the characteristics of flexibility/control values and a subjective/objective use of PMS
are presented in figure 2. Therefore I formulate the next hypothesis:
Hypothesis 1: Employees with a perception of a flexibility (control) dominant cultural type
tend to use more subjective (objective) performance measures.
The second cultural values that are polar opposites are the internal orientation versus the
external orientation. The key characteristics of the internal orientation are among others
uniformity, stability, order and control. The key factors of the opposite external orientation are
among others external environment, risk taking, development and growth. These are also
characteristics of a prospector strategy, which according to Chenhall (2003) require a more
informal and open MCS characterized by more subjective long-term controls. Gibbs et al. (2004)
find that organizations make greater us of subjectivity in awarding bonuses to mitigate
distortions or reduce risk. Next to this Govindarajan (1984) found that a subjective evaluation
style is related to uncertainty. The more uncertain the external environment the more open and
externally focused the MCS. As mentioned, these characteristics are also key characteristics of
the external cultural orientation. Therefore I formulate the next hypothesis:
Hypothesis 2: Employees with a perception of a dominant internal (external) orientation
tend to use more objective (subjective) performance measures.
These two hypotheses lead to the theoretical model as presented in figure 2. The theoretical
model reflects the influence of the flexibility/control orientation and external/internal
orientation as pairs of competing values on the subjective/objective use of PMS.
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4 The Research Method
4.1 Research Site
The research site is a large Dutch insurance company with 3600 employees. As Dent (1991)
mentions in his study it is sensible to recognize that there are distinct subcultures existing among
managerial teams, occupational groups, and members of different social classes within an
organization. To study if the perception of organizational culture defers between employees at
the research site, organizational units are recognized. These functional departments are based on
the organogram of the insurance company. The recognized organizational units are the
functional departments under the CEO (Audit), CFO (BSM, Tax/Legal, Financial Shared
Services, Reporting and Control), COS (HR, Communications and General Office), CTO
(Strategy & Change and ITC), CRO (Risk) and the Front Office (which has sponsorship of
different board members) divided in Life Corporate, Individual Life and Non-Life (P&C).
4.1.1 PCB Cycle1
The performance metrics used in determining the periodic assessment, bonus decisions,
and career path of the employees at the research site are organized through the PCB cycle. PCB
is an abbreviation for performance and competence evaluation. The PCB cycle is the basis for
the dialogue between the employee and the supervisor. Together they discuss how the
deployment of talents, development of skills, and ambition of the employee can contribute to the
needs of the organization. Every year there are three PCB meetings; a planning meeting, a
performance review and evaluation. Agreements are made about performance measures and
competences and the progress and ambitions are discussed. Finally, the assessment of
performance is made. The difference between performance and competences is considered next.
The performance of an individual is application of his or her knowledge, skills and
attitudes, and the interplay with the practice setting. The level of performance varies when the
clinical scenarios change and the individuals apply skills accordingly. Based on the above,
competency is the ‘skill’ and ‘competence’ is an attribute of a person (Khan and Ramachandran,
2012). Competence is an idealized capacity that is located as a psychological or mental property
or function and performance is the production of actual utterances. In short, competence
involves ‘knowing’ and performance involves ‘doing’.
1 Source: company policy document
19
Sustainable employability is a shared responsibility of the employee and the employer. The
organization beliefs that it is of the utmost importance that talents of the employees are
optimally used, so that the employees are motivated and that they work with pleasure and in a
healthy condition. Self-knowledge plays a central role. The PCB Cycle consists of three stages.
The first stage of the PCB cycle is the planning meeting. Planning forms the core of the
cycle. A good preparation by the employee is necessary. Agreements for the upcoming year are
made and the performance measures and competences to work on are determined. The
organization demands an active and self-directed attitude of the employee. Therefore the
employee prepares for the planning meeting by formulating performance measures and
competences based on the organizational objectives and the talents and development needs of
the employee. These measures are forwarded to the supervisor before the planning meeting. By
linking the objectives of the department with personnel objectives, the employees are considered
to work on both with pleasure and effectiveness. The performance measures are divided in result
measures and competence measures and are primarily determined by the employees themselves
as input for their planning cycles for the upcoming year. The manager assesses these suggested
performance measures and agrees with them or makes some remarks or suggestions. After the
planning cycle the performance measures are agreed upon and are therefore a joint consultation
between the employee and the supervisor.. After the planning part of the PCB cycle they
employee has approximately four to six result measures and two to four competence measures.
Competence measures require a lot of attention because they require change of behavior and
skills.
The organization demands that performance measures are measurable or observable.
Performance measures that are measurable are objective measures and could be financial (e.g.
cost, profit, return measures) or nonfinancial (e.g. customer satisfaction, number of errors).
Performance measures that are observable are more subjective (e.g. development of certain
behavior). For example if an employee wants to develop his or her visibility in the organization
an measurable objective performance measure could be the number of internships undertaken at
20
other departments. On the other hand the development of visibility in the organization could
also have an observable subjective performance measure such as the change in introvert
behavior. The latter depends much more on the relation between the employee and his or her
supervisor. Therefore you could say that there is a distinction between the measurable objective
performance measures, which exist outside the relation between the employee and the
supervisor, and the observable subjective performance measures, which depends on the
relationship between the employee and the supervisor. The employee is free to choose either one
of them in the preparation of the planning meeting.
The second formal PCB meeting is the performance review halfway the year. The progress
on the performance and competence objectives over the first half-year is discussed and the
employee and the supervisor look ahead to the second half of the year. The employee prepares
this meeting by filling in the performance form. As a preparation the employee could ask
feedback from colleagues or customers. During the meeting the progress on the objectives is
discussed with the supervisor and if necessary actions are taken if the employee is behind
schedule to meet the objectives. This doesn’t include changing the performance measures or
objectives. The performance measures or objectives are set in the planning meeting at the
beginning of the PCB Cycles and no changes are made during the year.
The last stage of the PCB cycle is the evaluation. At the end of the year an evaluation
meeting is scheduled. The employee fills in the appraisal form as a preparation for the evaluation
meeting and therefore assess his or her performance as first. This rating can be supported by
feedback of colleagues or clients and by collecting evidence of performance and competence
development. At the evaluation meeting the assessment of the employee is discussed with the
supervisor and they determine how the outcome of the performance measures and competence
development relates to the objectives set in the first stage of the PCB cycle (the planning
meeting). Based on this the reward is set. The organization stresses specifically that the
performance evaluation isn’t one-way traffic. As an employee you have a lot of influence on the
evaluation outcome. In the preparation of the evaluation the employee rates the result on every
performance and competence measure. If the supervisor and the employee couldn’t come to an
agreement on the evaluation of a performance measure the supervisor has the final call.
The objectives set in the planning meeting are the basis of the evaluation. The realized
results and the development on the competences are rated on a five items assessment level
(inadequate, adequate, good, very good and excellent). The assessment of the result measures
and competence measures determine the variable compensation (bonus) and the periodic reward
21
(salary raise). This is done using a formula that calculates the average assessment of the individual
performance measures. It also happens that a subjective performance threshold or override is
used because the determined objectives on the performance measures are not achieved cause of
circumstances outside the influence of the employee. A subjective adjustment to the
performance evaluation is made on the objective performance measures.
The organization stresses specifically that the employee has a significant influence on the
PCB cycle. The employee prepares every step in the PCB cycle (planning, performance and
evaluation). Therefore the employee has a great influence whether subjectivity is used or not.
According to Briers and Hirst (1990) this is participative performance evaluation, referring to the
extent to which employees contribute to the evaluation of their own performance. The employee
decides whether measurable (objective financial or nonfinancial measures) or observable
(subjective) performance measures are used. Next to this a subjective adjustment to the
performance evaluation of objective measures can be made in the evaluation meeting. Therefore
you could say that there is a distinction between an evaluation based on measurable objective
performance measures, which exist outside the relation between the employee and the
supervisor, and an evaluation based on the observable subjective performance measures, which
depends on the relationship between the employee and the supervisor. All or part of an
evaluation (bonus) could be based on subjective judgment about performance.
4.2 Sample
The sample consists of individual employees of the large Dutch insurance company. The random
sample will contain employees with different functions, departments and levels of education.
Because a sample of employees of a single organization is used, there is no need to control for
the other contingency variables next to culture (i.e. strategy, external environment, technology,
organizational structure and firm size). Every employee in the sample has the same exposure to
these variables. Conform Merchant et al. (2011) this provides relatively pure tests of the effects
of organizational culture. The one-company setting allows me to control for many potentially
relevant factors that vary across organizations and industries to focus on the differences of
organizational culture perception.
4.3 Methodology
Considering the research question, the lack of public databases with relevant data and
accessibility to an interesting sample, this study consists of survey research. For the process of
data collection, I have requested the employees to participate in the survey with an email directly
22
addressed to them. The purpose of the survey and the confidentiality of the data are explicitly
stressed out in the email. The survey is conducted as an online web-based survey. The
advantages of online surveys are increased speed of response, lower cost and less data entry than
mail surveys (Crawford, Couper and Lamias, 2001). The survey implementation follows two
steps: (1) initial mailing and, (2) follow up.
4.4 Constructs
The questionnaires used in the survey are presented as Appendix A.
4.4.1 Independent Variable – Organizational Culture
Organizational culture is measured using one section of the Institutional Performance Survey
(IPS) developed at the National Center for Higher Education Management Systems. The validity
of this instrument has been demonstrated and it has been used in an accounting setting (Henri,
2006). Denison and Spreitzer (1991) mention in their paper that the applicability of the model is
at several levels of analysis. The model can be applied at both the individual and the organization
level.
Respondents are asked to distribute 100 points among the four ideal cultural types along
each of the following four dimension of culture: department character, department leader,
department cohesion, and, department emphases. For each dimension, respondents must
distribute 100 points among four sentences where department A refers to group culture,
department B refers to development culture, department C refers to hierarchical culture, and
department D refers to rational culture.
The aim of the questionnaire is to capture the specific position of each employee on the
control/flexibility and internal/external continuum (i.e. dominant type). The dominant-type
score is derived from a cultural-type score and a value score. First, the cultural-type score is
compiled for each culture by averaging the ratings obtained on the four dimensions. For each
employee, the sum of the four cultural types equals 100. Second, the value score is computed for
the control/flexibility and internal/external continuum as follows:
Flexibility-value score = (Group-culture score + Development-culture score)
Control-value score = (Hierarchical-culture score + Rational-culture score)
23
Internal-value score = (Group-culture score + Hierarchical-culture score)
External-value score = (Development-culture score + Rational-culture score)
Third, the dominant-type scores are obtained by subtracting the control-values score from the
flexibility-values score and by subtracting the external-values score from the internal-values
score. Considering that the flexibility and control value scores and the internal and external value
scores are the extremes of a competing values continuum, a different score captures the specific
position of each employee on these two continuums. A positive score on the flexibility/control
continuum indicates a flexibility dominant type, while a negative score indicates a control
dominant type. Subsequently a positive score on the internal/external continuum indicates an
internal dominant type, while a negative score indicates an external dominant type. Each mix of
control/flexibility and internal/external values will provide a different dominant-type score
ranging from -100 to 100. Figure 4 illustrates different combinations of value scores and the
dominant-type score resulting.
4.4.2 Dependent Variable – Subjective versus Objective PMS
The use of subjective or objective performance measurement is measured using a construct from
the study of Indjejikian and Matejka (2012). The validity of this instrument has been
demonstrated. Following Bouwens and Van Lent (2007) I ask for the actual weight placed on a
range of performance measures (rather than determining each by Likert scales or to force
respondents to rank measures). Performance measures could in fact be (almost) equally
important. The instrument asks employees to state the percentage of their latest PCB Cycle that
depends on (1) financial measures, (2) nonfinancial measures and (3) subjective evaluations.
Whereby the financial and nonfinancial measures are objective, measurable measures outside the
relation between the employee and the supervisor. The subjective evaluation consists of non-
measurable measures within the relationship between employee and the supervisor.
24
The aim of the questionnaire is to capture the specific position of each employee on the
subjective/objective continuum (i.e. dominant type). The dominant-type score is derived from a
subjective and objective value score. First, Financial Measures is the weight on measurable
financial measures, Nonfinancial Measures is the weight on measurable nonfinancial measures
and Subjective is the weight on non-measurable subjective performance measures. The study
focuses on the use of subjective or objective performance measurement. Secondly, subjective
performance measurement is directly measured with the variable Subjective. Objective
performance measurement (Objective) is determined by the sum of Financial Measures and
Nonfinancial Measures. By definition, Subjective + Objective = 100.
4.4.3 Control Variables
To augment the confidence that my findings are possibly attributable to the perception of
cultural differences, I control for the effects of size and years of experience. Variables that have
been argued to also affect incentive practices (e.g. Bouwens and Van Lent, 2007). I also collect
employee’s characteristics (i.e. gender, age and highest level of qualification) to assist in the
testing of possible non-response bias and as controls for the statistical analysis.
As an employees experience grows, there is an increasing likelihood that his or her
knowledge base exceeds that of the immediate superior. Size is the natural logarithm of the
number of employees that work in the department of the respondent. To study the existence of
different perceptions of organizational culture within the organization I also collect the
functional department the employee works at.
4.5 Survey respondents
The sample consists of 300 employees, which are randomly selected. Of these, 165 employees
filled out the survey. Twenty-five responses were identified as having significant missing values,
leaving a final sample of 140 respondents. This represents u usable response rate of 46.7%.
I screened the survey data for possible non-response bias by comparing the first and last
30 responses via t-tests (Armstrong and Overton, 1977). It is common practice to check for
non-response bias by comparing “early” and “late” respondents. I used the first 30 respondents
as “early” respondents and the last 30 respondents as “late” respondents. The result of the t-test
to check for significant differences in variable scores between early and late respondents can be
found in Appendix B. The variable nonfinancial measures, is significantly different between
“early” (mean = 46.53) and “late” (mean = 36.50) respondents.
25
Table 1 reports a recapitulation of the demographics from the sample respondents. Sixty-
two percent of the respondents are men and the employees are between the ages of 36 – 45 on
average. Most respondents have a HBO degree. The employees have about 6 – 10 years of
experience on average and works in a department with 6 – 10 colleagues.
For details of the demographics from the sample respondents see Appendix C.
4.6 Validi ty and Rel iabi l i ty
To establish content validity, existing and validated constructs used in existent literature have
been employed. Moreover, the questionnaire was pre-tested by two employees, an academic and
a fellow student. They were asked to complete the questionnaire and to provide comments on its
form and content. Some adjustments were made in terms of wording and presentation.
The reliability of each construct and its specific dimensions were assessed with
Cronbach Alpha coefficients. The Group culture and Development culture constructs exceeded
the recommended cut-off point of 0.70. The Hierarchical culture and Rational culture construct
don’t, but the Hierarchical culture (0.58) is nevertheless acceptable (see table 1).
26
The Rational culture construct has a low reliability (α = 0.39). The data showed that
removing the question about the department leader resulted in a higher reliability (α = 0.45) for
the Rational culture construct. Field (2013, p. 709) states that there are many reasons not to use
the general guidelines of interpreting Cronbach’s Alpha, not least of which is that they distract
you from thinking about what the value means within the context of the research you’re doing.
He goes on to say that when dealing with psychological constructs, values below .7 can,
realistically, be expected because of the diversity of the constructs being measured. Considering
that these constructs of the Competing Values framework are frequently used in studies about
organizational culture (for example Henri (2006), Landekic et al. (2015) and Demir et al. (2011)),
and that the Gronbach Alpha is relatively close to acceptable, the Rational culture construct is
considered usable.
27
5 Results
5.1 Descr ipt ive Stat is t i c s
5.1.1 Organizational Culture
As a typology based on general characteristics of organizational cultures is used, this
study does not attempt to highlight the unique qualities of an organization’s culture, but rather
the perception of subcultures within an organization by individual employees. Recognizing that
the perception of organizational culture by individual employees will vary widely within an
organization (Landekic et al., 2015 and Demir et al., 2011). This perception of organizational
culture is shaped by the difference in knowledge, beliefs, values and social context of individual
employees. I found quantitative empirical evidence that all four cultural types of the Competing
Values framework exist within one single organization. Table 3 shows the different functional
departments within the organization and the cultural emphasis of the employees working in that
department.
Hierarchical type of culture has, in the evaluation of the representative sample, achieved
the highest score, i.e. highest average value according to respondents’ responses (Mean = 28.22).
Nevertheless all four cultural types are almost equally represented within the organization. Even
within almost all functional departments are the four cultural types present in the perception of
the employees. The functional departments have different dominant cultural types but even
within these departments the cultural types are fairly equally represented. The more respondents
28
from a functional department the more evenly represented are the four cultural types. Therefore
I can conclude that all four cultural types of the Competing Values framework exist within one
single organization.
Table 4 presents descriptive statistics for each of the scores relevant for the independent
variable perception of organizational culture analysis. The dominant-type score on the
Flexibility/Control continuum has a negative mean (-6.29), which indicates that the employees in
the sample have more emphasis towards control. The dominant type score on the
Internal/External continuum has a positive mean (4.10). This indicates that the employees
perceive an internal dominant type. These summary scores are close to zero and therefore also
indicate that al four cultural types of the competing values are almost perceived equally within
the organization by the respondents. The minimum and maximal values of the different cultural
types range form 0.00 to 100.00 (and for the rational culture type 57.50). This indicates that on
an individual employee level very different perceptions on the extremes of the control/flexibility
and internal/external continuum exist within the organization.
To further analyze the differences in culture within the organization I summarize the
different functional departments in two distinct sub departments from which you should expect
that the characteristics and function within the organization are significantly different; the front
office and the back office. The front office of the organization deals with customers and is more
commercial. The back office deals with the administrative burden of the insurance company. The
front office consists of the functional departments communication, strategy & change, life
corporate, individual life and P&C. The back office consists of the functional departments audit,
BSM, tax/legal, financial shared services, reporting, control, HR, ITC and risk. Table 5 shows
29
these different departments and the cultural emphasis of the employees working in that
department.
Employees working in the front office and in the back office both emphasize towards
control. They score highest on average on the control value (Mean = 52.36 and 55.34). The
employees in the back office emphasize slightly more towards internal values (Mean = 52.55),
where employees of the front office don’t have a clear preference on the internal/external
continuum. Table 6 show the results of a t-test to examine whether there exists a difference
between the mean scores on the cultural emphasis between the front office and back office.
The results of table 6 indicate that there is no significant difference between the means of
the dominant type score on the Flexibility/Control and Internal/External continuum for the
front office and back office.
All previous scores and tests indicate that there are cultural differences within the
organization on an individual employee level but there is no dominant cultural emphasis within
the organization as a whole. All four cultural types exist almost equally within the organization.
Even within the summary departments front office and back office and the individual functional
departments the four cultural types exist almost equally. It appears that there is no significant
difference between the departments on its own.
30
5.1.2 Subjective versus Objective PMS
As discussed, performance measures can differ along many dimensions. The objective/subjective
distinction is one of the most common. Following Bouwens and Van Lent (2007) I ask the
employees for the actual weight placed on a range of performance measures (rather than
determining each by Likert scales or to force respondents to rank measures). Performance
measures could in fact be (almost) equally important. The instrument asks employees to state
the percentage of their latest PCB Cycle that depends on (1) financial measures, (2) nonfinancial
measures and (3) subjective evaluations. Whereby the financial and nonfinancial measures are
objective, measurable measures outside the relation between the employee and the supervisor.
The subjective evaluation consists of non-measurable measures within the relationship between
employee and the supervisor. Table 7 presents descriptive for each of the scores relevant for the
dependent variable PMS use.
The scores indicate that within the sample the nonfinancial measures are on average used
the most (41.44%), followed by subjective evaluation (37.97%) and financial measures (20.59%).
This indicates that on average 62.03% of the used performance measures are measurable and
objective. An average of 37.97% of the performance measures are non-measurable subjective
measures within the relationship between the employee and the supervisor. The minimum and
maximal values of the different performance measures ranging from 0.00 to 100.00 indicate that
on an individual employee level very different types of performance measures are used within the
organization.
5.2 Sample reduct ion
Previous analysis of the cultural types within the organization and tests of significant difference
between these cultural types indicate that employees could not be classified unambiguously. To
ensure that for further analysis cultural groups had a clearly defined dominant type, employees
were categorized as control or flexibility value employees and internal or external value
31
employees if their absolute dominant-type score is greater than or equal to 10. Thus, the
employees having value scores ranging between 45 and 55 were deleted from the sample for
further analysis. While the selection of the cut-off scores is mostly arbitrary, employees deleted
were in a grey area and could not be classified unambiguously. After the deletion of 59 cases, the
sample consists of 81 employees. Table 8 shows that within this reduced sample, the differences
in mean values on the cultural emphasis between the departments is slightly more profound.
The results in table 9 indicate that even after the cut-off of the sample there is no
significant difference between the means of the dominant type score on the Flexibility/Control
and Internal/External continuum for the front office and back office.
All further analyses are made with the reduced sample without the employees that were in
the grey area. All analyses are also executed with the whole sample of 140 employees. The results
of these tests are included in Appendix D.
5.3 Corre lat ion
Table 10 shows the Pearson and non-parametric Spearman correlations between all the
constructs that were used in this study. As could be expected, the different performance
measures are negatively and significantly related to each other. The more an employee uses one
specific type of performance measure the less he or she could use other type of measures. Other
significant positive relations appear between the experience of an employee (tenure) and age and
32
education. Department size has also a significant positive relation with the experience of an
employee (tenure). Age is significant positively related with education. The correlations among
the other constructs are not sufficiently high to justify concerns with multicollinearity. Therefore
these results don’t provide some preliminary evidence for the hypotheses.
The correlations table with the full sample of 140 employees (see Appendix D) also shows
a significant positive relation between the dominant type score on the Internal/External
continuum and the size of a department (r=0.0197, p<0.05). Furthermore both correlations
show a significant negative relation between the dominant type score on the Flexibility/Control
continuum and Age (r=-0.227, p=<0.01 / r=-0.206, p<0.05). This indicates that the older the
employee the more emphasis towards control.
5.4 Results o f ANOVAs
A series of analysis of variance are conducted as a preliminary step to compare the use of the
different performance measures financial and nonfinancial (both objective) and subjective
between employees reflecting a control and a flexibility dominant type. After the earlier deletion
of 59 cases, 41 employees were classified as flexibility value employees and 40 employees were
classified as control value employees. Table 11 summarizes the results of ANOVAs and the
Kruskal-Wallis tests. The results suggest that there are no significant differences between
flexibility value employees and control value employees in the use of the difference performance
33
measures. If the 59 cases are included, the results (see table 2 of Appendix D) remain the same
except that the significance level of the use of nonfinancial measures and subjective measures
gets closer to a significance level of p < 0.05 (respectively the ANOVAs p = 0.063 and p =
0.058). The control variables are also not significantly different between the two groups.
The same analysis are conducted for employees reflecting a internal and a external
dominant type. Of the 81 cases, 54 employees were classified as internal value employees and 27
employees were classified as external value employees. Table 12 summarizes the results of
ANOVAs and Kruskal-Wallis tests. The results suggest that there are no significant differences
between internal value employees and external value employees. If the 59 cases are included, the
results (see table 3 of Appendix D) remain almost the same. The main difference between the
full sample and the partial sample is that with the full sample the mean gender of internal value
employees and external value employees is significantly different. Women tend to have a more
internally focus on average where men tend to have a more external focus (p < 0.05). The rest of
the main and control variables are not significantly different between the two groups.
34
5.5 Hypotheses t es ts : Linear regress ion
This paragraph presents the results from the three regression equations, which are summarized
in Table 13. Model A represents the first regression in which only the control variables and the
dominant-type score of the flexibility and control continuum are added as independent variables.
Model B represents the second regression in which the control variables and the dominant-type
score of the internal and external continuum are added as independent variables. In Model C,
next to the control variables, both dominant-type scores (flexibility/control and
internal/external) are added as independent variables. In al three models the use of different
performance measures (financial, nonfinancial and subjective) are used as dependent variables.
35
The first hypothesis states that flexibility dominant employees place more emphasis on
subjective performance measures. The regression shows there is no significant relation between
flexibility dominant employees and the use of subjective performance measures (b = -0.032, p ≥
0.05). The regression also shows that there is no significant relation between control dominant
employees and the use of financial and nonfinancial performance measures (respectively b =
0.018, p ≥ 0.05 and b = 0.014, p ≥ 0.05). Therefore this research finds no evidence to support
hypothesis 1.
The second hypothesis suggests that employees with a dominant internal focus place
more emphasis on the use of objective performance measures (financial and nonfinancial). The
results show no support for this statement as the regression shows these variables are not
significantly related (respectively b = -0.029, p ≥ 0.05 and b = 0.078, p ≥ 0.05). The regression
also doesn’t show evidence for the opposite side of this hypothesis, that employees with a
dominant external focus place more emphasis on the use of subjective performance measures (b
= -0.049, p ≥ 0.05). Therefore this research finds no evidence to support hypothesis 2.
The only significant relation the regression shows is between the control variable age and
the subjective use of performance measures (b = -6.340, p ≤ 0.05). The older an employee gets
the less he or she uses subjective performance measures. If the 59 cases are included, the results
of the regression (see table 4 of Appendix D) don’t show any significant relations. To further
analyze the hypotheses, and show that the results are relative robust, a logistic regression on the
main effects is performed. The results of this logistic regression (see Appendix E) show that the
aforementioned results of the hypothesis tests also hold with alternative specifications of the
variables. All test performed indicate that there is no significant relation between the perception
of organizational culture by employees and the use of different performance measures.
36
6 Discussion, limitations and conclusions
This thesis draws on prior research to identify if the perception of organizational culture is
relevant to the design of MCS, specifically performance measures. The theoretical framework of
this thesis combined literature from various perspectives, including areas that have received vast
attention in MCS studies, namely, performance measures use and culture as a contingency
variable. However, this study offers several new insights into the organizational culture and the
use of performance measures. The aim of this study was to provide a better understanding of the
relationship between the perception of organizational culture by employees and the use of
different performance measures.
Despite insights provided in previous research (e.g. Henri, 2006), the relationship
between the organizational culture and the use of PMS, especially on the level of the employee,
have been overlooked in current studies. Without neglecting the importance of other contingent
factors (e.g. environmental uncertainty, strategy, size, etc.), organizational culture is an
omnipresent factor which affects practically all aspects of organizational interactions. This study
is one of few in management accounting that examine the perception of organizational culture
within one single organization at the level of the individual employee. It draws on previous
research by Henri (2006). For the operationalization of MCS, Henri (2006) focuses on the
diversity of measurement of performance measurement systems. This study investigates another
aspect of the MCS, namely the subjective or objective use of PMS. This is an important
characteristic of most incentive contracts for evaluating and rewarding employees. According to
Gibbs et al. (2004) theoretical research has suggested various plausible reasons for the use of
subjectivity in the assignment of bonuses. Empirical testing of these theories is rare. This study
helps to fill this gap.
Considering the exploratory nature of this study, it tests the direct relationship between
the variable of organizational culture and MCS. Explicitly the effect of the perception of
organizational culture by individual employees on the subjective or objective (financial and
nonfinancial measures) use of performance measures is tested. The study results support those
of other investigations (e.g. Landekic et al. (2015) and Demir et al. (2011)), which suggest that
different employee groups can subscribe to different organization cultural values. The results
indicate that all four cultural types of the competing values framework almost equally exist within
the studied organization. There is no dominant cultural emphasis within the organization. Even
within and between functional departments there isn’t a significant difference in the perception
of the organizational culture. This supports the underlying assumption of the Competing Values
37
framework by Denison and Spreitzer (1991). They state that organizations are unlikely to reflect
only one culture; rather, one would expect to find combinations of each culture type, with some
type being more dominant than others. When one cultural orientation is overemphasized, an
organization may become dysfunctional and the strengths of the cultural orientation may even
become weaknesses. For example, too much flexibility or spontaneity can become chaos; too
much order and control can result in rigidity. The results of this study indicate that all four
cultural types exist within the studied organization and other than Denison and Spreitzer (1991)
suggest there is no dominant culture. In view of the organizational sector I expected a dominant
control and internal cultural emphasis. None of the scores and tests indicates that this
expectation is valid.
The absence of a dominant cultural perception within the organization could have
several possible explanations. First, because the study is executed within one single organization,
I examine differences between functional departments. There is less variance between functional
departments within one single organization than there should be between different
organizations. There are differences between the individual employees of the organization but
next to that there are no further contingencies. Secondly, employees could be more positive
about their functional department than they are about the rest of the organization or the
organization as a whole. The instrument to measure the cultural perception focuses on the
functional departments of the employees. Therefore the perceived culture could be less explicit
than it would be if the instrument to measure the cultural perception would focus on the
organizational culture as a whole (i.e. not on a department level). Third, the instrument to
measure the cultural perception (from the Institutional Performance Survey) could be not
profound enough to measure the differences in the perception of organizational culture within
one single organization. Although this instrument is developed to measure differences between
organizations, it is successfully used in studies within one single organization (Landekic et al.,
2015 and Demir et al., 2011).
Previous research (Bhimani, 2003) indicate that a PMS, which is more reflective of the
organization culture values of one group, is more likely to be seen as being more successful by
that group. Following the work of Henri (2006), Bhimani (2003) and Dent (1991), I studied the
extent to which the perception of organizational culture becomes embedded in the use of
management control systems. These different studies indicate that the perception of
organizational culture influence the use of performance measurement systems. This study
doesn’t find any empirical evidence to support that. There is no relationship between the
perception of organizational culture and the use of different performance measures. All
38
performance measures (financial, nonfinancial and subjective) are used intensively within the
organization. However there is no significant relationship between the position of employees on
the flexibility/control and internal/external continuum of the Competing Values framework and
the use of the different performance measures. A possible explanation is the lack of a dominant
organizational culture within the organization. All four cultural types exist almost equally within
the organization and therefore employees don’t perceive a specific dominant type of culture to
interact with the choice of performance measure. There is large variation in used performance
measure within the studied organization. Employees choose different performance measures but
I can’t link these choices with the difference in functional departments or the perception of the
organizational culture by individual employees. Therefore, the choice of subjective or objective
performance measures isn’t influenced by the perception of organizational culture. Results
suggest that the choice of performance measure might solely be influenced by the personal
preference of the employee, the relation between the manager and the employee and the
available performance measures within their department but not by the perception of the
organizational culture.
Theory about the perception of organizational culture (e.g. Denison and Spreitzer, 1991
and Henri, 2006) is based on research at a higher level than applied in this study. There is more
dissimilarity between different organizations than within one single organization. Within the
studied organization there is no dominant perception of organizational culture and therefore no
effect on the use of different performance measures. Based on this particular study, I can
conclude that other than between organizations, the perception of organizational culture isn’t
relevant within organizations. Culture doesn’t matter by the choice of performance measures.
Therefore, the perception of organizational culture doesn’t influence the subjective (or objective)
use of performance measures.
This study makes the following contributions. First, form a practical perspective; the
evidence has the potential to assist supervisors, managers and owners to understand the diversity
of cultures within an organization. With an understanding of the current state of organization’s
culture, individuals can create a profile of what an ideal profile of their organization would look
like given their industry, environment, and philosophy. Secondly, different than can be expected
from previous literature (Henri, 2006; Dent, 1991; Bhimani, 2003), the use of performance
measures isn’t related to the perception of organizational culture. By implementing performance
measures within an organization, the culture isn’t one of the variables that should be considered.
Therefore, this study contributes to existing literature about organizational culture and on the
relationship between this culture and performance measurement systems.
39
Interpreting the results of this study, several limitations must be acknowledged. First,
issues in the area of management control systems are typically complex en intertwined. This
research is based on simplified and partial settings. Therefore the explanations are tentative. The
practice patterns I observed could be shaped by other variables that are not yet well understood
or by interactions among a number of these and other relevant variables. Second, these findings
might not be generalizable to other settings. An obvious but important limitation is that it is
based on a single case study. The unit of analysis is that of the individual employee. Thus, I
cannot generalize these findings. That said, this study makes a contribution by providing detailed
data about the perception of organizational culture and the (lack of) impact of organizational
culture on the role of subjectivity and objectivity in incentive practices.
A number of directions for further research emerge form this study. As previously
mentioned, the instrument used in this study to measure organizational culture focuses on the
functional departments of the employees. This could be one of the reasons that there is no
perception of a profound dominant cultural emphasis within the organization. Future research
within one single organization could investigate if there is a difference on an individual employee
level between the perception of the organizational culture as a whole and the perception of the
organizational culture within the functional department of that employee. This requires that the
individual employees answer the questions of the survey twice. Moreover, future research could
focus on the elimination of specified constraints by exploring this topic on a higher level
between organizations. This requires access to a big enough sample of organizations with similar
working practices.
40
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44
Appendices
Appendix A – Quest ionnaire Instruments
Organizational Culture
These questions relate to the type of organizations that your department most resembles. Each
of these items contains four descriptions of departments. Please distribute 100 points among the
four descriptions depending on how familiar the description is to your department. None of the
descriptions is any better than the other; they are just different. You may divide the points in any
way you wish. For each question, please use all 100 points.
For example: In question 1, if the Department A seems very similar to yours, B seems
somewhat similar, and C and D do not seem similar at all, you might give 70 points to A and the
remaining 30 points to B.
1 – Department characteristics (please distribute 100 points)
- Department A is a very personal place. It is like an extended family. People see to share a
lot of themselves.
- Department B is very dynamic and entrepreneurial place. People are willing to stick their
necks out and take risks.
- Department C is very formalized and structures place. Bureaucratic procedures generally
govern what people do.
- Department D is very production oriented. A major concern is with getting the job done.
People are not personally involved.
2 – Department leader (please distribute 100 points)
- The head of Department A is generally considered to be a mentor, a sage, or a father or
mother figure.
- The head of Department B is generally considered to be an entrepreneur, an innovator,
or a risk taker.
- The head of Department C is generally considered to be a coordinator, an organizer, or
an administrator.
- The head of Department D is generally considered to be a producer, a technician, or a
hard-driver.
3 – Department cohesion (please distribute 100 points)
45
- The glue that holds Department A together is loyalty and tradition. Commitment to this
department runs high.
- The glue that holds Department B together is commitment to innovation and
development. There is an emphasis on being first.
- The glue that holds Department C together is formal rules and policies. Maintaining a
smooth-running organization is important here.
- The glue that holds organization D together is the emphasis on tasks and goal
accomplishment. A production orientation is commonly shared.
4 – Department emphasis (please distribute 100 points)
- Department A emphasizes human resources. High cohesion and morale in the
department are important.
- Department B emphasizes growth and acquiring new resources. Readiness to meet new
challenges is important.
- Department C emphasizes permanence and stability. Efficient, smooth operations are
important.
- Department D emphasizes competitive actions and achievement. Measurable goals are
important.
Performance Measures
The next question relates to the type o f performance- and competence measures used in your
latest PCB Cycle. The possible measures are divided in three categories:
1. Measurable financial measures; for example revenue, budget outcome, costs or margin.
2. Measurable nonfinancial measures; for example customer satisfaction, number of errors
in reports or percentage timely handled requests.
3. Non-measurable subjective measures; for example the development of certain behavior.
For example: if an employee needs to develop his or her ‘visibility in the organization’, he or she
can include a measurable nonfinancial measure such as ‘number of internships at other
departments’. Another possibility is to include a non-measurable subjective measure such as ‘the
development of a less introverted attitude’. The manager evaluates the latter and therefore an
objective measurement is missing.
46
Please indicate the percentage of your total latest completed PCB Cycle that is described in a
non-measurable subjective manner or by using measurable objective financial or nonfinancial
performance measures as described below.
For example: if you have a total of five performance- and competence measures in your latest
completed PCB Cycle:
- 2 measurable financial measures 40%
- 1 measurable non-financial measure 20%
- 2 non-measurable subjective measures 40%
The performance- and competence measures in your latest completed PCB Cycle know the
following breakdown:
____% Financial measures.
____% Nonfinancial measures.
____% Subjectively.
100%
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Appendix B – Non-Response bias
48
Appendix C – Detai l s o f Demographics
49
Appendix D – Resul ts o f t es ts with the ful l sample
50
51
Appendix E – Logis t i c regress ion
To further analyze the hypotheses, and show that the results are relative robust, a logistic
regression on the main effects is performed. For this regression new categorical variables are
created. For the dependent variable all employees with a score on subjective performance
measures over 50 are marked with 1 (21 employees). The employees with a score on objective
performance measures (financial and nonfinancial) over 50 are marked with 0 (95 employees).
For the independent variable organizational culture all employees with a positive score on the
dominant-type score of the flexibility and control continuum are marked with 1 (67 employees).
Employees with a negative score are marked with 0 (70 employees). The same procedure holds
for the dominant-type score on the internal and external continuum, what results in 77
employees who are marked with 1 and 51 employees who are marked with 0. Table 1 shows the
results of this logistic regression.
The results of this logistic regression show that the aforementioned results of the
hypothesis tests also hold with alternative specifications of the variables. The logistic regression
doesn’t show any significant relations.
