Control Systems and Effort Direction: Exploratory Evidence from the Public Sector

Abstract

One of the main themes in the current management control literature is the study of ‘systems’ of control practices. While several studies have examined pairwise complementarities in control practices to investigate whether a control system exists, a system may also be comprised of a combination of more than two control practices. We provide an illustration of how such a multi-element control system can be modeled and empirically examined. Using data from 162 organizational units in the public sector, we examine how organizations design and use their control systems to mitigate the control problem of effort direction in contexts of low and high contractibility. We find that operational, incentive-oriented, and exploratory uses of performance information are interrelated and combine in a single system of controls in a low contractibility setting. This system of control is significantly associated with effort direction effectiveness. In a second analysis, we expand our examination to encompass a broader system of control practices. We find that action, cultural, and personnel controls, jointly with the use of performance measurement information, are interrelated and form a broader system of control practices that is associated with effort direction effectiveness in conditions of low contractibility. In contrast, and consistent with our theory, we find no evidence that organizations choose to rely on a system of controls when contractibility is high. Jointly, our results suggest that organizations select individual control system practices in relative isolation to effectively manage effort direction when contractibility is high, yet choose to use a system of control practices when contractibility is low.