Determinants and consequences of budget reallocations

We investigate the determinants and consequences of budget reallocations, i.e., corrective actions to the budget made during the year. Using proprietary data of a large consumer goods manufacturer, we analyze the extent to which allocation decisions regarding the initial budget drive subsequent reallocations. Whenever scarce resources need to be allocated among a number of individuals, power struggles and politicking behavior are likely to arise, which potentially affects the outcome of the allocation process. We hypothesize and find that one important driver of reallocation decisions is the firm's aim to correct for systematic deviations from the optimal initial budget allocation that are driven by successful lobbying activities during the initial budgeting process. In a more exploratory analysis, we show that such reallocations do not have the desired effects on market-place performance. In particular, budget cuts are negatively associated with a product's change in market share. More surprisingly, while budget boosts do help product lines internally to achieve their sales targets in the last quarter, they do not have a (positive) effect on the change in market share. Most importantly, our results demonstrate that efficient investment planning ex ante is essential to achieve an improvement in market-place performance, highlighting the value of budgeting.Series: Department of Strategy and Innovation Working Paper Serie

The effect of horizontal pay dispersion on the effectiveness of performance-based incentives

In response to general calls for increased transparency in society, pay transparency policies are growing in importance. Given that pay transparency unavoidably gives employees the opportunity to make comparisons between themselves and others, in this study we address the question of how these comparisons impact the incentive effects of performance contingent pay, and consequently their performance outcomes. Specifically, we empirically examine whether horizontal pay dispersion alters the effectiveness of performance-based pay contracts, which firms typically use to incentivize effort. Exploiting our unique access to a large healthcare provider, we document the moderating role of horizontal pay dispersion on the effectiveness of individual monetary incentives at generating increased individual performance. To provide a more nuanced understanding of the moderating effect of pay dispersion, we further examine the boundary conditions of the proposed interaction. In particular, we examine the differential effect of overall pay dispersion on employees that rank high versus low in the pay distribution and disaggregate overall pay dispersion into performance-related versus performance-unrelated pay dispersion. Our findings consistently show a positive moderating effect of pay dispersion when employees are more likely to consider the observed pay dispersion as legitimate, and a negative moderation effect when this is less likely the case. Our study strengthens the understanding of how individual level incentives function in the context of a multi-person firm setting. Our results document that individual incentives are effective, but also suggest that pay dispersion can have a significant influence on the incentive-performance relation. These findings provide some evidence that individuals are concerned not only with their own payout, but also with that of others, and that this concern has a significant impact on individual’s effort provision, and consequently performance.Series: Department of Strategy and Innovation Working Paper Serie

How calibration committees can mitigate performance evaluation bias: An analysis of implicit incentives

While prior research on performance evaluation bias has mainly focused on the determinants and consequences of rating errors, we investigate how a firm can provide implicit incentives to supervisors to mitigate these errors via its calibration committee. We empirically examine the extent to which a calibration committee incorporates supervisors' evaluation behavior with respect to their subordinates in the performance evaluation outcomes, i.e., performance ratings and promotion decisions, for these supervisors. In our study, we distinguish between lack of skills and opportunism as two important facets of evaluation behavior, which we expect the calibration committee to address differently. Using panel data of a professional service firm, we show that supervisors' opportunistic behavior to strategically inflate subordinates' performance ratings is disciplined through a decrease in the supervisors' own performance rating, while the supervisors' skills to provide less compressed and thus more informative performance ratings is rewarded through a higher likelihood of promotion.Series: Department of Strategy and Innovation Working Paper Serie

Tone from the Top in Risk Management: A Complementarity Perspective on How Control Systems Influence Risk Awareness

Prompted by the weaknesses of standardized risk management approaches in the aftermath of the 2008 financial crisis, scholars, regulators, and practitioners alike emphasize the importance of creating a risk-aware culture in organizations. Recent insights highlight the special role of tone from the top as crucial driver of risk awareness. In this study, we take a systems-perspective on control system design to investigate the role of tone from the top in creating risk awareness. In particular, we argue that both interactive and diagnostic use of budgets and performance measures interact with tone from the top in managing risk awareness. Our results show that interactive control strengthens the effect of tone from the top on risk awareness, while tone from the top and diagnostic control are, on average, not interrelated with regard to creating risk awareness. To shed light on the boundary conditions of the proposed interdependencies, we further investigate whether the predicted interdependencies are sensitive to the level of perceived environmental uncertainty. We find that the effect of tone from the top and interactive control becomes significantly stronger in a situation of high perceived environmental uncertainty. Most interestingly, tone from the top and diagnostic control are complements with regard to risk awareness in settings of low perceived environmental uncertainty and substitutes at high levels of perceived environmental uncertainty.Series: Department of Strategy and Innovation Working Paper Serie

Empirische Forschung zu Management Control – Ein Überblick und neue Trends

Unternehmen verwenden Management Control Systeme, um die Strategie zu implementieren und sicherzustellen, dass MitarbeiterInnen im Sinne des Unternehmens handeln. Diese umfassen sowohl formale Steuerungsmechanismen (z.B. Anreiz- und Monitoring-Systeme), als auch informelle Steuerungsmechanismen (z. B. MitarbeiterInnenselektion und Unternehmenskultur). In diesem Beitrag geben wir einen Überblick zum aktuellen Stand der empirischen Management Control Forschung und besprechen diese anhand dreier Literaturströmungen. Im ersten Teil beschreiben wir welche Steuerungsmechanismen zur Verfügung stehen und was die Management Control Forschung bisher dazu erarbeitet hat. Darauf aufbauend beschreiben wir im zweiten Teil den sogenannten Kontingenzansatz, in dem untersucht wird, wie der Unternehmenskontext die Anwendung und Wirkung der Steuerungsmechanismen beeinflusst. Im dritten Teil gehen wir schließlich auf Interdependenzen zwischen den Steuerungsmechanismen ein. In jedem dieser Teile wird auf bestehende Forschungslücken hingewiesen. Im letzten Teil des Beitrags wird schließlich ein Ausblick darüber gegeben, wie der Trend hin zur Wissensgesellschaft sowie zur künstlichen Intelligenz und Big Data die Management Control Forschung zukünftig prägen wird

Determinants and Consequences of Budget Reallocations*

We investigate the determinants and consequences of budget reallocations—that is, corrective changes to the budget made during the year. Using proprietary data from a large consumer goods manufacturer, we analyze the extent to which initial budgeting decisions drive reallocations. Examining this relationship is important because initial budget negotiations are often troubled by power struggles and politicking, which may give rise to the need for reallocations. We hypothesize that one important driver of reallocation decisions is the firm's aim to correct systematic deviations from the optimal initial budget that were driven by lobbying during the initial budgeting process. We find evidence that is consistent with this prediction. In a more exploratory analysis, we show that reallocations do not have the desired effects on market performance. In particular, budget cuts are negatively associated with a product's change in market share. More surprisingly, while budget increases do help product lines achieve their sales targets in the last quarter, they do not boost market share. Our results demonstrate that efficient investment planning is essential to achieve an improvement in market performance