Perceived Fairness of Performance Evaluation

by <link people frank-hartmann>Frank Hartmann

When it comes to procedural justice, Management Accounting and Human Resources functions have to get closer to create systems of performance evaluation that are perceived as fair – and that also take uncertainty into consideration.

<link people frank-hartmann>The conclusion of the research paper The Perceived Fairness of Performance Evaluation: The Role of Uncertainty that my colleague Sergeja Slapnicar and I published in the journal Management Accounting Research begins as follows: An important, desired outcome of any performance evaluation system is to invoke positive work attitudes and behaviours of managers, and to increase their motivation and performance. Positive perceptions of procedural justice of the performance evaluation procedures [within an organisation] contribute to this type of outcome.

So, that’s simple – no one will question why procedural justice is important, or how it creates a better culture within a firm. What makes the results of our paper a unique contribution to the whole question of procedural justice is that it is the first time that management accounting studies on fairness have applied a formal theoretical basis to their analysis. Further, we measure “process” or behavioural characteristics in addition to the “metric” characteristics typically measured by management accounting systems.

Venus and Mars

It seems simple: the Human Resources (HR) function needs performance evaluation systems that are perceived as fair to keep managers motivated and happy, and the Management Accounting function should be able to create “fair” accounting systems that measure the economic performance of managers, ensuring that they are contributing to the financial “bottom line” of the firm. Together, the HR and Accounting functions should be able to demonstrate that pay increases or bonuses, for example, are fair and based on managers clearly meeting their Key Performance Indicators. But we discovered – proved – that the issue is much more complex than that.

Part of the complexity lies in the awkward relationship between HR and Management Accounting. This is like Venus and Mars is terms of performance evaluation. In HR, people look at process characteristics. Psychology is important here. In HR, it is perceived as important that people have a say in their evaluation process, for example.

In Management Accounting, we look at metric characteristics. We all know what accounting is – it is a financial language, so it is able to express some important parts of firm performance, like revenue and profitability. Management Accounting is a system that tries to assess the economic performance of the firm for internal stakeholders and managers who need to take decisions, in consideration of the bottom line.

No ‘one size fits all’

However, using that information to also assess the performance of individuals is quite a different affair. That’s how we propose to add insights with this research. The way we see accounting systems is not as straightforward as some of the more technically oriented accountants think. We want to build a bridge between HR and Management Accounting.

So, we designed our accounting study around four characteristics: two metric characteristics and two process characteristics. The metric characteristics were outcome vs. effort metrics and diversity of metrics used by superiors. The process characteristics were formalisation of process and voice of subordinate in the performance evaluation process. With our research, we are making the claim that both characteristic types are important, saying that ‘good accounting systems bring them together’. In addition, we want to add a bit more realism to the accounting system’s actual use. This is where task uncertainty and tolerance for ambiguity come in play.

Uncertainty and tolerance

In the perception of procedural justice, task uncertainty has an increasingly important part to play. In general, business is going through an uncertain time; tasks of managers may change from day to day or hour to hour. This reflects in task uncertainty.

If you are in a stable position so that you know what input leads to what output, that mechanistic aspect means that your performance is easy to measure. However, if you are in sales or marketing, for example, you have a very uncertain task. You never know what you’ll be doing the next day, so getting a very clear picture of your performance is hard. We argue that in this case, for example, diversity of metrics may be particularly important as well as voice of the subordinate.

On an individual level, tolerance for ambiguity really colours the perception of justice in performance assessment. It’s a classic psychological variable: how you are able to handle a variety of different informational cues while holding straight to your course. So our research, and the literature, shows that people good in accounting are typically bad with ambiguity – they like to see figures, they like the bottom line, the predictable; while artists, for example, will score high in tolerance for ambiguity. Thus, the “good accountant” may be more comfortable with a more formalised assessment process, based on outcome/effort metrics.

Therefore, we have to take these factors – psychological factors – into account. Circumstantial differences in managerial settings may cause a different weighting to the four metric and process characteristics factors, so that characteristics may be more important in some situations than others depending on the task uncertainty or tolerance for ambiguity of an individual in their particular function.

<link people frank-hartmann>Frank Hartmann is Professor of Management Accounting and Management Control, Department of Accounting and Control, Rotterdam School of Management, Erasmus University. His research activities focus on investigating management control system design. He has published widely on this topic both nationally and internationally, and teaches the subject in post-graduate and PhD programmes in various countries. He is also Chair of the Department of Accounting and Control.

This article is based on the paper 'The Perceived Fairness of Performance Evaluation: The Role of Uncertainty, which was written by <link people frank-hartmann>Frank Hartmann and Sergeja Slapnicar (University of Ljublana, Faculty of Economics) and published in Management Accounting Research, 23 (2012) 17-33.

This article is adapted from RSM Insight 12.