Responsibility Accounting and Controllability: Determinants of Performance Evaluation Systems for Plant Managers in Canada
Posted: 18 Nov 1997
Date Written: July 1997
The study investigates how firms design performance evaluation systems for plant managers. These managers can be evaluated primarily on cost control or profit. Which approach to adopt can be framed as a choice to evaluate these managers primarily on one variable (cost) or two (cost and sales). Results from agency theory show that the weight placed on a variable in performance evaluation depends on its precision and the information it contains not conveyed by other variables. This suggests the following hypotheses: tendency to evaluate a plant manager primarily on profit rather than cost (1) decreases with the importance of marketing in stimulating sales, (2) increases with the importance of product quality in stimulating sales, (3) increases with the importance of customer service in stimulating sales; and (4) decreases with the extent to which the manager is evaluated on specific measures of product quality and customer service. Using a probit model, these hypotheses are tested with data collected from large Canadian manufacturing firms. The results are strongly supportive of the hypotheses. Contrary to conventional wisdom, more firms are found to evaluate plant managers primarily on profit than primarily on cost control.
JEL Classification: M40, M46, J33
Suggested Citation: Suggested Citation