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By: Liedtka , Church, and Ray Presenter: Sara Aliabadi October 23, 2008

Performance Variability, Ambiguity Intolerance, and Balanced Scorecard-Based Performance Assessments. By: Liedtka , Church, and Ray Presenter: Sara Aliabadi October 23, 2008. Question. What is the relation between Balanced Scorecard (BSC) evaluations and quality of the evaluator ?.

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By: Liedtka , Church, and Ray Presenter: Sara Aliabadi October 23, 2008

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  1. Performance Variability, Ambiguity Intolerance, and Balanced Scorecard-Based Performance Assessments By: Liedtka, Church, and Ray Presenter: Sara Aliabadi October 23, 2008

  2. Question • What is the relation between Balanced Scorecard (BSC) evaluations and quality of the evaluator?

  3. Introduction • Financial-oriented performance measurement systems have been criticized by academics and practitioners (Drucker 1954; AICPA 1994). • The Balanced Scorecard addresses this criticism by offering non-financial performance information such as: • Customer related • Organizational learning and growth • Internal business process

  4. Introduction • The BSC has been adopted by different types of organizations: • Government entities • Commercial enterprises • Non-profit organizations • And for variety of purposes: • To evaluate and reward managers • To determine compensation • To evaluate performance

  5. Justification • Ittner et al. (2003) find that firm’s BSC evaluators overemphasized financial category performance. • Prior studies suggest that general human cognitive tendencies and other factors can result in performance evaluations that are not in line with the strategies and goals articulated in a BSC. • Evidence show that BSC-based performance evaluation needs to be modify or clarify.

  6. Justification • Psychology research also finds that individuals differ in their willingness to tolerate ambiguity. • Ambiguity intolerant individuals may ignore ambiguous information. • Prospect Theory suggest that evaluators may react differently to ambiguity depending upon situation.

  7. This Study • Investigate: • The relation between BSC-based performance assessments and the quality of the evaluator. • Whether evaluators’ “ambiguity intolerance” influences their reaction to variation among performance measures within a BSC category, • if that influence depends upon whether the overall performance in that category is relatively strong or relatively weak.

  8. Source of Ambiguity • Norton (1975) characterizes ambiguous information as vague, incomplete, fragmented, ……. • In accounting Zebda (1991) identifies numerous ambiguous concepts such as material errors, strong internal control, and significant variances. • Psychology research defines inconsistency among cues as a source of ambiguity (Norton 1975).

  9. Denial of Ambiguous BSC Categories • We argue that variability among performance measures within a BSC category creates ambiguity. • Van Dijk and Zeelenberg (2003), decision makers are uneasy with: • complexity and • The potential for incorrect interpretation inherent in assessments of ambiguous information.

  10. Ambiguity Intolerance • Ambiguity intolerance influence both perceptions and judgments. • Gupta and Fogarty (1993), suggest that ambiguity-intolerance auditors perceive the audits process differently. • Pincus (1991), finds ambiguity-intolerance auditors less confident in making opinions on financial statements.

  11. Hypotheses • Increasing the variability (ambiguity) among performance measures within a BSC category will not affect the overall performance evaluation judgments of ambiguity-tolerant evaluators. • H2a: Increasing the variability (ambiguity) among performance measures of a BSC category in which mean performance is relatively strong will have a negative impact on overall performance judgments of ambiguity-intolerant evaluators. • H2b: Increasing the variability (ambiguity) among performance measures of a BSC category in which mean performance is relatively weak will not impact overall performance judgments of ambiguity-intolerant evaluators

  12. Research Method • 85 MBA students. • Participants assumed the role of the president of a large corporation. • Using BSC, participants evaluated the managers. • Each BSC was organized into four standard categories. • Financial, • Customer-related, • Internal business processes, • Learning and growth.

  13. Table 2

  14. Table 3

  15. Results • To test H1, they examine the performance evaluations of ambiguity-tolerant participants. • Finding: The average overall evaluation is practically identical. • To test H2 and H3 they examine the performance evaluations of ambiguity-intolerant participants. • Finding in Table 4.

  16. Table 4

  17. Discussion and Limitation • We find evidence that the “ambiguity intolerance” of evaluators can influence their reaction to variation among performance measures within a BSC category. • First limitation in this study is that the experimental exercise abstract from reality. • Another limitation is related to the methodology of study because participants rated the overall performance without rating performance within each BSC category.

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