A path model examining the relations among strategic performance measurement system characteristics, organizational justice, and extra- and in-role performance

Abstract

Economic theory suggests that multiple financial and non-financial measures (i.e., a strategic performance measurement system “SPMS”) be used in compensation contracting to properly direct employees’ attention and motivate behavior aligned with organizational goals. Conversely, linking incentives to the SPMS can result in various dysfunctional behaviors, including game playing by employees, the achievement of unbalanced performance, and the potential of basing compensation on an incomplete performance measurement system. Prior literature has investigated the use of subjectivity in compensation contracting as a means of potentially mitigating these problems; however, subjectivity can introduce other problems including claims of favoritism and bias. Economic theorists have recently begun expanding the traditional agency model to include the notion of fairness or justice. In this study, we obtain data from an organization that uses an SPMS as the basis for the allocation of bonuses and investigate whether characteristics of the SPMS are associated with perceived organizational fairness. Specifically, we hypothesize and show that the extent to which employees perceive that the SPMS reflects a strategic causal model and the degree to which it is technically valid are positively associated with their perceptions of organizational justice. We also provide evidence that heightened levels of organizational justice are the mechanism though which the perceived characteristics of the SPMS are associated with employee performance. The implication is that firms do not necessarily need to introduce subjectivity into the incentive contracting system, but can enhance performance by linking incentive contracts to their SPMS if the system contains characteristics that enhance employees’ perceptions of justice.