003-Baird 2012 Performance Management System Effectiveness in Australian Local Government_2

Pacific Accounting Review Performance management system effectiveness in Australian local government Kevin Baird Herbert Schoch Qi (James) Chen

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Performance management system effectiveness in Australian local government Kevin Baird, Herbert Schoch and Qi (James) Chen

PMS effectiveness

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Department of Accounting and Corporate Governance, Macquarie University, Sydney, Australia Downloaded by Universitas Gadjah Mada At 09:27 11 September 2015 (PT)

Abstract Purpose – The purpose of this paper is to examine the association between three organizational factors (the use of multi-dimensional performance measures, link to rewards, and training) and three organizational culture dimensions (innovation, outcome orientation, and teamwork) with the effectiveness of performance management systems (PMSs). Design/methodology/approach – Data were collected by survey questionnaire from a random sample of 450 Australian local governments. Findings – The performance management systems of Australian local councils are only moderately effective in relation to performance related outcomes, and less effective in relation to the achievement of staff related outcomes. The results indicate a significant relationship between the use of multidimensional performance measures, link of performance to rewards, training and two organizational culture factors (team work/respect for people and outcome orientation) with the effectiveness of PMSs. Different factors were found to influence the effectiveness of PMSs for large and small sized councils. Practical implications – The findings imply that there is a need for the managers of local government councils to improve the effectiveness of their PMS. Originality/value – The study provides an initial empirical examination of the effectiveness of performance management systems and the influential factors in the Australian local government context. The study assists local government managers in effectively managing their employees and operations. Keywords Performance management system, Multi-dimensional performance measures, Local government, Culture dimensions, Organizational dimensions, Performance management, Australia Paper type Research paper

1. Introduction A performance management system (PMS) enables organizations to plan, measure and control their performance, so that decisions, resources and activities can be better aligned with strategies to achieve desired results (Bento and Bento, 2006). The PMS also provides a means of recognizing and rewarding good performance and managing poor performance (Australian Public Service, 2001). By incorporating explicit standards and measures of performance, a PMS facilitates an enhanced focus on outcomes and avoids goal conflict and ambiguity (Brunetto and Farr-Wharton, 2005; Hood, 1991). An effective PMS is one which successfully achieves these and other objectives identified in the literature. There is evidence that an effective PMS can lead to improved organizational performance (Bevan and Thompson, 1991) and contribute to other important outcomes such as improved employee involvement, commitment and

Pacific Accounting Review Vol. 24 No. 2, 2012 pp. 161-185 q Emerald Group Publishing Limited 0114-0582 DOI 10.1108/01140581211258461

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motivation (Taylor and Pierce, 1999). An effective PMS can also assist with restructuring organizations (Weiss and Hartle, 1997), and enhancing their ability to recruit, deploy, develop and retain employees (Fletcher and Williams, 1992). Given the importance of PMSs (McAdam et al., 2005), this study is motivated to examine the factors related to the effectiveness of a PMS. Specifically, the study attempts to ascertain the organizational and cultural factors that are conducive to enhancing the effectiveness of PMSs, by examining the association between three organizational factors (use of multi-dimensional performance measures, link of performance to rewards, and training) and three aspects of organization culture (innovation, outcome orientation, and teamwork) with the effectiveness of PMSs. These associations are explored in the context of the Australian local government. The local government in Australia has expanded significantly in the last few decades. For instance, the annual expenditure by local government in Australia is about $24 billion, allowing it to provide a wider range of services and to take on a greater role than ever before in economic and social development and environmental management (Australian Local Government Association, 2006). The focus on the Australian local government is also considered appropriate given the significant reforms undertaken as policy makers attempt to enhance the efficiency of municipal service delivery (Dollery and Johnson, 2005). This Australian local government based study is mirrored by a number of performance management related studies in other countries, thus giving credence to the importance of examining PMSs in the public sector on an international scale. For example, Walker and Boyne (2006) and Andrews et al. (2005) undertook studies of English local government that examined the impact of public management reform variables on organizational performance; in a USA context, Melkers and Willoughby (2005) examined models of performance measurement use in a cross section of local governments. Sanderson (2001) suggests that public sector reforms are taking place throughout OECD member states, with a strong emphasis on performance management. Brignall and Modell (2000) use the context of the “new public sector”. which calls for greater efficiency and effectiveness in the UK and Scandinavian public sectors, to examine implementation of multi-dimensional performance measurement and management. Finally, in a Norwegian context, Johnsen (1999) explored the implementation success of performance measurement in local government in that country. The level of international interest in public sector reform, PMSs and their effectiveness, further highlights the importance of ascertaining the factors that contribute to PMS effectiveness. This study has two objectives: (1) To examine the association between specific organizational and cultural factors with the effectiveness of PMSs. (2) To evaluate the effectiveness of PMSs in Australian local governments. The remainder of the paper is structured as follows. Section 2 reviews the existing literature on PMSs, discusses the association between the organizational and cultural factors and the effectiveness of PMS, and develops the relevant hypotheses. Section 3 discusses the research method used and describes the measurement of the variables, and Section 4 provides the results. Finally, Section 5 provides the conclusions, limitations and the suggestions for future research.


2. Literature review 2.1 Performance management systems A PMS is “a system that covers all aspects of performance that are relevant for the existence of an organization as a whole”. The PMS should provide management with an insight into “how well the organization is performing its tasks and to what extent the organizational objectives are achieved” (Flapper et al., 1996, p. 27). This can involve motivating, monitoring, controlling, and rewarding employees for attaining desired outcomes (Lawler, 2003). The PMS is aimed towards enhancing “the performance of individuals and units, with the ultimate purpose of improving organizational effectiveness” (Biron et al., 2011, p. 1294). It contributes to aligning the interests of employees and management by providing a clear indication of the strategic direction of the organization (Becker et al., 2011, p. 255). A PMS is broader than a performance measurement system in that “performance management precedes and follows performance measurement in a virtuous spiral and performance management creates the context for measurement” (Lebas, 1995, p. 34). PMSs are a means of executing organizational strategy by signaling to employees what is really important in the organization, fixing accountability for behavior and results, and helping to improve performance (Biron et al., 2011; Bae, 2006). PMSs have been advocated as an important means of improving public services (through increased efficiency and effectiveness in service delivery) and reinforcing accountability (Audit Commission, 1999). Furthermore, PMSs can be used to improve employee involvement, commitment and motivation (Bevan and Thompson, 1991), and act as a communication tool to provide feedback on employees’ contributions to achieving organizational goals (Cheng et al., 2007). Following the introduction of the new public management reforms in the public sector and the corresponding increased focus on efficiency, effectiveness, and accountability, the PMS has become increasingly important (Melo et al., 2010). In particular, Melo et al. (2010) refer to the increasing focus on PMSs in public sector organizations throughout OECD countries. 2.2 The effectiveness of PMSs This study is aimed at providing an empirical insight into PMS effectiveness, and hence incorporates the approach used by Lawler (2003). Specifically, PMS effectiveness is assessed in respect to the extent to which 17 specific objectives of performance management are achieved (Appendix) with Lawler’s (2003) items adjusted to reflect the local government environment. Hence, an effective PMS is defined in terms of the achievement of the PMS objectives identified in the literature. While many studies have provided definitions of a PMS (Armstrong and Baron, 1998; Storey and Sisson, 1993), few studies have examined the effectiveness of PMSs (Biron et al., 2011; Padovani et al., 2010; Lawler, 2003). While the first two of these studies adopted a case study approach, Lawler used a survey to examine the association between the link between performance appraisal and salary and forced employee performance ranking systems, with PMS effectiveness. Lawler (2003) surveyed Fortune 500 companies and found that the link to rewards (forced distribution) had a positive (negative) impact on PMS effectiveness. The study examines the factors that influence the effectiveness of a PMS including the use of multi-dimensional performance measures, the link of performance to rewards,

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the level of training and organizational cultural factors. The nature of each of these relationships is discussed in the following sections. 2.2.1 Multi-dimensional performance measures. While traditional performance measures are useful under relatively stable conditions (Malina and Selto, 2001) they are considered inappropriate given the changes in local government. For instance, local governments are increasingly adopting a more commercially oriented managerialist approach, termed the new public management (Watty et al., 2008; Houston et al., 2006; Bellamy et al., 2003). With an increasing focus on efficiency and effectiveness, a broader set of performance measures is required to support the requirements of the changing local government environment. Hence, organizations are increasingly looking to adopt an improved performance measurement system, one which focuses on different aspects of the organization and is aligned with the organizational strategy (Tardivo and Viassone, 2010). Financial measures fail to capture most of the intangible value that an organization has or can create (Soderberg, 2006). For example, in local government, the focus is not profit maximization, with customer satisfaction and the efficiency of internal processes considered to be much more important. Traditional financial measures have also been criticized for focusing mainly on what has transpired in the past rather than what needs to be done in the future (Soderberg, 2006). Furthermore, traditional measures do not provide decision makers with sufficient information to manage their organizations (Atkinson et al., 1997; Kaplan and Norton, 1996, 1992). Johnson and Kaplan (1987) recognized that traditional financial performance measures are not only provided too late to aggregate, but also provide poor proxies for aspects that matter to customers, such as quality and speed of delivery. As a result, a number of multi-dimensional performance measurement systems including the “balanced scorecard” (Kaplan and Norton, 1992), the “performance pyramid” (Lynch and Cross, 1991) and the “results and determinants framework” (Fitzgerald et al., 1991) have been developed. It is claimed that these multi-dimensional performance measurement approaches lead to more effective performance management in the nonprofit sector (Becker et al., 2011; Kaplan, 2001). Among these systems, the balanced scorecard (BSC) is argued to be the most popular (Maltz et al., 2003) with organizations in both the private and public sector using it as a tool for performance improvement (Chan and Ho, 2000; Hoque and James, 2000). Accordingly, this study operationalizes the use of multi-dimensional performance measures in respect to the extent to which organizations use measures relating to the five perspectives of the BSC: financial, internal, customer, learning and growth, and environment. The effectiveness of PMSs in local governments is expected to be enhanced by the use of a multi-dimensional performance measurement system for a number of reasons. First, in the local government sector, objectives are often stated in non-financial terms. Financial reporting will therefore not fully capture performance, and hence the use of non-financial performance measures can provide a more accurate assessment of performance (Guthrie and English, 1997). Second, multi-dimensional performance measures can also support a local government’s strategy (Kloot, 1999). Long-term survival of an organization is linked to its chosen strategy and short-term financial results cannot adequately support the strategy. For example, a study of a local government child-care organization indicated that multi-dimensional performance measures are needed to implement strategy (Brignall, 1993). Third, Kaplan and Norton


(1992, 1996) argue that by using multiple performance measures, the BSC provides a comprehensive view of an organization’s performance. Local government is also accountable to a variety of stakeholders, hence, it is necessary to provide different perspectives of performance to enhance service delivery and better resource allocation. The use of multi-dimensional performance measures, as part of a PMS, can result in more accurate and meaningful measurement of performance, provide a stronger strategic focus for local government, encourage appropriate employee behavior and provide management with better information for decision making purposes, thereby assisting local governments in achieving their goals. Martinez and Kennerley (2010) refer to a number of survey studies highlighting the positive effect of a balanced PMS on organizational performance. Hypothesis 1 is therefore stated as follows: H1. The extent of use of multi-dimensional performance measures is positively related to the effectiveness of PMSs. 2.2.2 Link of performance to rewards. Swiss (2005) argued that information and capacity to improve without performance based rewards will often lead to inertia. For example, if a manager or front-line worker has information that indicates a shortfall in expected results, but they are not motivated to take responsibility to improve results, such information is of little value. This may explain why some employees pay little attention to results. A number of studies have examined the importance of and the benefits of linking performance to rewards in order to motivate employees to improve performance (Rynes et al., 2005; Swiss, 2005; McShane and Travaglione, 2003; Lawler, 2003; Fletcher and Williams, 1992). Rewards not only motivate individuals due to their economic needs, but also serve to meet psychological needs, such as security, status, and feedback about achievement (Gerhart and Rynes, 2003). There are many benefits of linking performance to rewards. First, superior performers will feel valued if they are equitably compensated for their efforts, and they are less likely to leave the organization (Rollins, 1988). This is an important consideration, since research has shown that high performers are likely to seek alternative employment if their performance is not sufficiently rewarded (Trevor et al., 1997). Second, the reward system has an important role to play in aligning interests by motivating employees (Lawler, 2003) to achieve strategic goals (Becker et al., 2011). Through distributing rewards to better performers, local governments can achieve higher staff retention, as well as providing more incentives for employees to provide higher quality services (Wright and Davis, 2003). Third, supervisors are provided with a concrete and effective means of convincing poor performers to improve or leave. Without a link between performance and rewards, poor performers may not be motivated to improve. Finally, the importance placed on the PMS due to the resulting rewards available, will focus managers’ attention on the importance of accurate performance appraisals based on objective standards and measurable objectives. Lawler (2003) empirically examined the association between the link to rewards and PMS effectiveness, concluding that “performance appraisal systems are more effective when there is a connection between the results of the performance management system and the reward system of the organization” (p. 402). Similarly, a number of studies have found a positive association between linking performance to rewards and performance measurement systems (Burney et al., 2009; Johanson et al., 2006; Chan, 2004), a component of PMSs. Hence, it is seen that a PMS with a strong link between

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performance and rewards is more likely to motivate employees, focus managers’ attentions on performance evaluation, better manage poor performers, and result in a more effective allocation of resources. Hypothesis 2 is therefore stated as follows: H2. The link of performance to rewards is positively related to the effectiveness of PMSs.


166

2.2.3 PMS related training. Training is defined by Wexley and Latham (1982) as a planned program of organizational importance designed to bring about relatively permanent changes in employee knowledge, skills, attitudes, and behaviour. The level of training has been found to be associated with the success of new projects (Tait and Vassey, 1988) and adequate training is essential in overcoming resistance to change and convincing employees of the benefits of new approaches (Smith, 1998). An effective PMS is dependent on executives and managers having the knowledge, ability and willingness to use the system correctly (Chamberlain, 2011). A number of studies have found a positive relationship between training and the effectiveness of a PMS. For example, Chan (2004) and Emerson (2009) cite training as an important factor and the key to maintaining the usefulness and effectiveness of PMSs. All performance measures need to be clearly communicated and be perceived as both relevant and reliable for decision making. Without relevant training, managers may perceive the PMSs measures as less than useful. PMS related training assists managers and employees in understanding performance management processes and objectives, and how to operationalize the PMS. This improved understanding of the PMS enhances the likelihood that employees and managers will commit to the system and achieve desired organizational outcomes. Similarly, Cavalluzzo and Ittner (2004) found that performance measurement development and outcomes are positively associated with the extent of related training provided. The provision of related training points to the willingness of organizations to resource support for the development and implementation of PMSs. Hypothesis 3 is therefore stated as follows: H3. PMS related training is positively related to the effectiveness of PMSs. 2.2.4 Organizational culture. Organizational culture is generally described as a set of shared values, belief, assumptions and practices that shape and guide members’ attitudes and behavior in organizations (Kotter and Heskett, 1992; Denison, 1990). Organizational culture has been incorporated in various studies as a contingency factor that can influence business performance generally (Chan et al., 2004; Deshpande and Farley, 2004; Ogbonna and Harris, 2000; Kotter and Heskett, 1992). Similarly, this study includes organizational culture as a variable that may impact the effectiveness of a PMS. Three organizational cultural factors were examined for their impact on PMS effectiveness: innovation, outcome orientation, and teamwork. 2.2.4.1 Innovation. Innovation is defined as the creation of something qualitatively new, through the process of learning and knowledge building. It involves changing competences and capabilities, and producing new outcomes. Innovation has been found to be related to organizational performance (Roper and Love, 2002; Du and Farley, 2001; Li and Atuagene-Gima, 2001; Capon et al., 1992), and can indirectly assist in improving the effectiveness of PMSs by providing a number of benefits. First, emphasis on innovation promotes a culture that encourages responsiveness to new opportunities,


breaking existing paradigms, autonomy, risk taking, and tolerance for mistakes (Naveh and Erez, 2004). This in turn can lead organizations to better support change efforts which can lead to better performance. Second, Garcia-Morales et al. (2006) suggest that innovative organizations are more likely to respond to external changes and develop new capacities to enhance performance. Hence, innovation can support change efforts to satisfy the increasing call for accountability expected from local governments. Third, employees in innovative organizations have more opportunities to participate in decision making, with additional responsibilities in carrying out their work (Mohanty, 1999). Accordingly, a higher level of commitment can be expected from employees (McKinnon et al., 2003). Therefore, it is hypothesized that a more innovative organization is more likely to achieve the desired outcomes indicative of an effective PMS: H4a. Organizations with more innovative cultures are expected to have a more effective PMS. 2.2.4.2 Outcome orientation. Sheridan (1992) refers to outcome orientation as the extent to which organizations emphasize action and results, have high expectations for performance and are competitive. Grutter et al. (2001) proposed that organizations which are more outcome oriented would be more performance oriented. In addition, Hofstede (1998) indicated that employees in outcome oriented organizations would be more motivated with employees perceiving that everyday could bring new challenges. Therefore, employees are more likely to apply maximum effort to their work. Motivated employees are also likely to have a higher level of commitment to their organization, which will be reflected in greater work related effort (McKinnon et al., 2003). Given that PMSs have the objective of enhancing organizations’ performance, motivating employees and improving employees’ organizational commitment, it can be posited that outcome oriented organizations are more likely to achieve such desired results. It is hypothesized therefore that a more outcome oriented organization will have a more effective PMS: H4b. Organizations with more outcome oriented cultures are expected to have a more effective PMS. 2.2.4.3 Team work. Work teams are popular in today’s business and related environments (Reader et al., 2009; Wuchty et al., 2007; Tata and Prasad, 2004; LaFasto and Larson, 2001). Teams are considered the best way to deliver high performance in a competitive marketplace. Increased focus on teamwork is envisaged to have a number of benefits. Team work has been associated with increased performance, improvements in quality of products and increases in the level of innovation (Tata and Prasad, 2004). Teams are also thought to provide a better means of integrating the unique skills of individuals to produce better performance across a variety of tasks than could be achieved by any individual working alone or by individuals working outside a team structure (Katzenbach and Smith, 1993). Teamwork enables team members to plan, organize and coordinate the activities of the team for goal attainment (Pineda and Lerner, 2006). Therefore, employee resources will be used more efficiently. Increased frequency of team meetings can lead to increased social contacts and will give employees the opportunity to learn from each other. Learning how to deal with other team members can also serve as a valuable developmental outcome for a team member, especially if the team has to work together on a recurring basis

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(Pineda and Lerner, 2006). Further, team member’s satisfaction with their team could lead to greater commitment, less absenteeism and reduced turnover in the workplace (Ulloa and Adams, 2004). In particular, since teamwork is usually associated with greater employee empowerment and greater delegation of decision making power and responsibilities, it is argued that the additional responsibilities and autonomy in performing tasks leads to greater commitment amongst employees. Carson et al. (1999), for example, found a positive association between employee empowerment and the level of EOC. Similarly, Park et al. (2005) found a strong relationship between teamwork and employee commitment. Hypothesis 4c follows from the above discussion:


H4c. Organizations with more teamwork oriented cultures are expected to have a more effective PMS. 3. Method Data were collected through a postal mail survey of finance managers, or similarly titled executives in 450 Australian local governments. The random sample ensured the inclusion of local governments of different sizes from across the country, inclusive of city and regional councils. The potential respondents were randomly selected from the Australian Local Government Association web site. Finance managers were chosen due to their understanding of the PMSs within their organization. The survey was administered using Dillman’s (2007) Tailored Design Method approach, with the survey adhering to guidelines on format and style of questions, as well as the recommended techniques to personalize and distribute the survey. A total of 184 responses were received, for a response rate of 40.9 percent. This comprised 111 responses (24.7 percent) from the initial distribution (early responses), and a further 73 responses (16.2 percent) from the follow-up (late responses). Non-response bias was assessed by comparison of the independent and dependent variable values between early and late responses. Table I reveals that the early and late responses were

Table I. Results of one-way ANOVA comparing the mean values of all the variables between early and late respondents

Dependent variable Effectiveness of PMS Independent variables The use of multi-dimensional performance measures Link of performance to rewards Level of training Teamwork/respect for peoplea Innovation Attention to detail Stability Outcome orientation

Early respondents Mean (SD)

Late respondents Mean (SD)

F-value

p-value

2.95 (0.72)

3.19 (0.70)

5.158

0.024

6.452 7.401 12.033 4.231 3.907 0.003 0.578 3.560

0.012 0.007 0.001 0.041 0.050 0.960 0.448 0.061

3.12 2.45 3.63 16.94 15.16 9.92 7.51 16.46

(0.59) (0.96) (0.99) (5.98) (3.50) (2.67) (2.53) (4.46)

3.38 2.85 4.10 15.07 14.13 9.95 7.23 15.23

(0.70) (1.00) (0.69) (5.98) (3.26) (2.76) (2.33) (3.97)

Notes: aThe factor analysis of the cultural factors produced a combined team work/respect for people; lower scores on the organizational culture dimensions indicate that the cultural attribute is more prevalent in business units


significantly different regarding the effectiveness of PMSs (at p # 0.05). They also differed significantly for the use of multi-dimensional performance measures, link of performance to rewards, training, teamwork/respect for people and innovation (at p # 0.05). Specifically, the late responses indicated higher PMS effectiveness, greater use of multi-dimensional performance measures, a stronger link of performance to rewards, a higher level of training, and more innovative and teamwork/respect for people oriented cultures. To gain a deeper understanding of the differences between early and late responses, further analysis was undertaken into the nature of the two respondent groups. First, an analysis of the size of local governments across the two groups was undertaken. The overall mean population of the responding 180 local governments was 51,285, with early respondents tending to be smaller in size (mean population of 43,290) and late respondents larger (mean population of 63,278). The mean population of both early and late responding local governments was much larger than the mean (37,808) of the sampling frame (450 local governments), indicating that the mean population of non-respondents must be less than this, approximately 28,749[1]. Hence, non-respondents appear to be smaller local governments, thus making early respondents more representative of non-respondents. Given the identified differences in the values of the independent and dependent variables for the two groups of respondents, coupled with the apparent difference in mean populations for the two groups, the analysis of the hypothesized associations was conducted on an overall basis, and separately for larger and smaller sized councils. The delineation mark for larger and smaller councils was set at 37,808, the average population for the entire sample of 450 councils. The distinction between larger and smaller sized councils was also considered appropriate given evidence of better performance in larger authorities (Andrews et al., 2006). 3.1 Measurement of variables 3.1.1 Use of multi-dimensional performance measures. The use of multi-dimensional performance measures was assessed using two approaches. The first approach relied on respondents understanding the nature of a BSC and simply required respondents to indicate if they were using a BSC (“Yes” or “No”). The second, somewhat more complex approach, required respondents to indicate the extent to which they were using 20 different performance measures relating to the customer, environment, financial, internal process and learning and growth perspectives of the BSC (Appendix). Respondents were required to indicate the extent to which each measure was used to evaluate their council’s performance on a five-point Likert scale with anchors of 1 “not at all” to 5 “to a great extent”. These measures were identified in the Australian Government Productivity Commission’s (1997) report as the key performance indicators for the Australian local government. Factor analysis revealed that the 20 items loaded onto four specific dimensions three of which covered the financial, learning and growth, and environment perspectives. The fourth dimension included items relating to both the customer satisfaction and internal processes perspectives. In accordance with the five perspectives BSC model, these two areas were treated as separate dimensions in the subsequent analysis. Each of the five perspectives were scored as the sum of the items loading onto each perspective (Appendix), with higher (lower) scores indicating the PMS focused on each perspective to a greater (lesser) extent. Given that a different number of items

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loaded onto each perspective, the use of multi-dimensional performance measures was scored as the sum of the averages across the five perspectives, with higher (lower) scores indicating that multi-dimensional performance measures were used to a greater (lesser) extent. 3.1.2 Link of performance to rewards. The link of performance to rewards was measured using two self-developed questions with respondents asked “to what extent is performance measurement linked to financial rewards in your council?” and “to what extent is performance measurement linked to non-financial rewards in your council?” (Appendix). They were required to identify the extent to which performance is linked to such rewards in their local governments using a five-point Likert scale with anchors of “not at all” and “to a great extent”. Higher (lower) scores indicated a stronger (weaker) link of performance to rewards. 3.1.3 PMS related training. Training was measured using a single-item self-developed question (Appendix) with respondents asked “to what extent is training provided to staff in your council?” Respondents were required to indicate the extent of training using a five-point Likert scale with anchors of “not at all” and “to a great extent”. Higher (lower) scores indicated a higher (lower) level of PMS related training. 3.1.4 Organizational culture. Organizational culture was measured using the 26 item version of O’Reilly et al.’s (1991) organizational culture profile (OCP) instrument. Respondents were required to indicate the extent to which each item was valued within their organization on a five-point Likert scale with anchors of “not at all” and “to a great extent”. Factor analysis produced five cultural factors, including outcome orientation, attention to detail, innovation and stability (Appendix). These dimensions consist of items similar to previous studies (Baird et al., 2007; McKinnon et al., 2003; Windsor and Ashkanasy, 1996). The fifth dimension consisted of items relating to teamwork and respect for people. While in some studies these items loaded onto separate dimensions, their combination is consistent with Tung et al. (2011). Each of the three hypothesized dimensions were scored as the sum of the items loading on to each dimension. 3.1.5 The effectiveness of PMSs in Australian local government. The assessment of PMS effectiveness is complex (Harper and Vilkinas, 2005; Boland and Fowler, 2000) with different aspects referred to in the literature. The effectiveness of PMSs was measured by assessing the extent to which 17 desired outcomes of PMSs had been achieved. The 17 measures (Appendix) were developed based on a review of the literature relating to the effectiveness of PMSs and desirable local government outcomes. Each measure was customised to reflect the nature of the local government environment. Respondents were required to indicate the extent to which their PMS had achieved each of the 17 perceived outcomes using a five-point Likert scale with anchors of 1 “not at all” and 5 “to a great extent”. Factor analysis revealed that the 17 outcomes loaded onto two factors. These factors corresponded to Tung et al. (2011), with the items on the first dimension focusing on the achievement of organizational goals and objectives, and the items on the second dimension more concerned with employees. This distinction is also consistent with the literature which emphasizes organizational performance (Biron et al., 2011; Padovani et al., 2010) and the human relation perspectives (Becker et al., 2011; Gruman and Saks, 2011; Stanton and Nankervis, 2011) in relation to PMSs.


The two dimensions were labeled “performance related outcomes” and “staff related outcomes”. The dimensions were scored as the sum of the items loading cleanly on to each dimension with higher (lower) scores representing a more (less) effective PMS. 4. Results The summary statistics for the dependent and independent variables are provided in Table II. For the multi-item scales, the actual range was comparable with the theoretical range, and with the exception of the link of performance to rewards, the Cronbach a coefficients met or exceeded the 0.70 threshold generally considered acceptable in regard to scale reliability (Nunnally, 1978, p. 245). While the Cronbach a for the link of performance to rewards fell below this threshold (0.609), this is still considered acceptable (Fleming, 2010; Moss et al., 1998). Regarding the two dependent variables, the mean score for performance related outcomes (3.13) was slightly higher than the mid-point of the range, indicating that on average the respondents assessed their PMS to be moderately effective in achieving such outcomes, while in relation to the staff related outcomes, the mean score (2.94) was at the mid-point of the range, indicating less emphasis was being placed on the achievement of staff related outcomes. Additional analysis revealed that the majority of the performance related outcomes (eight out of ten) were achieved to a greater extent than six of the seven staff related outcomes. The performance related outcomes that were achieved to the greatest extent included assisting in achieving council goals (mean score of 3.44) and providing useful performance feedback to employees (mean score of 3.39). The staff related outcomes that were achieved to the greatest extent included developing individual’s skill and knowledge (mean score of 3.33) and identifying poor performing employees (mean score of 2.99). The mean score (3.23) for the use of multi-dimensional performance measures was slightly above the mid-point of the range, indicating a moderate level of use of multi-dimensional performance measures. This relatively low use of multi-dimensional performance measures was further highlighted by the fact that only 25 councils

Variables Independent variables Use of multidimensional performance measures Link of performance to rewards Training Teamwork/respect for people Innovation Outcome orientation Dependent variables Effectiveness of PMS (performance related outcomes) Effectiveness of PMS (staff related outcomes) a

n a Mean SD

168 184 184 179 179 177

3.23 2.61 3.82 2.31 2.95 2.66

0.65 0.99 0.92 0.86 0.69 0.72

178

3.13

0.75

179

2.94

0.79

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171

Minimum Maximum Cronbach’s (theoretical) (theoretical) a

1.32 1.00 1 1.00 1.40 1.00

(1) (1) (1) (1) (1) (1)

4.75 5.00 5.00 4.43 4.80 4.67

(5) (5) (5) (5) (5) (5)

0.841 0.609 – 0.943 0.806 0.892

1 (1)

4.50 (5)

0.932

1.00 (1)

4.86 (5)

0.903

Note: The number of responses (n) varies due to the fact that not all survey items were completed by respondents

Table II. Descriptive statistics

(13.8 percent) indicated that they were using a BSC. Table III shows that councils placed greatest emphasis on the financial perspective (3.45) followed by the internal (3.39), and environmental (3.37) perspectives whereas the focus on the customer (3.09) and learning and growth perspectives (2.70) was substantially less than the other three perspectives.

172

4.1 Analysis of the association between the organizational and cultural factors with the effectiveness of the PMS Table IV presents the results of the one-way analysis of variance (ANOVA) examining the difference in the level of PMS effectiveness for respondents using or not using a BSC. The level of PMS effectiveness for performance related outcomes was significantly higher for the 25 councils employing a BSC. While the achievement of staff related outcomes was also higher for BSC users, the difference was not statistically significant. These results provide preliminary evidence that the use of multi-dimensional performance measures is associated with the effectiveness of PMSs, thereby providing partial support for H1. Stepwise regression was used to examine the association between the organizational and cultural factors with PMS effectiveness, with the results presented in Table V. In respect to the effect on performance related outcomes, the model was statistically significant (F ¼ 25.783, p ¼ 0.000) with an R 2 of 0.331. Two organizational factors (the use of multi-dimensional performance measures and the link of performance to rewards) and one cultural factor (outcome orientation) were significantly associated with the performance related outcomes. The staff related outcomes model was also statistically significant (F ¼ 17.014, p ¼ 0.000) with an R 2 of 0.301. Three organizational factors (use of multi-dimensional performance measures, training, and link of performance to rewards) and one cultural factor (teamwork/respect for people) were significantly associated with the staff related outcomes. The findings provide support for H1 and H2 and partial support for H3 and H4b and H4c. Further analysis was performed to assess the hypothesized relationships for both smaller and larger sized councils due to the significant divergence in the mean scores for the independent and dependent variables between early and late respondents, and the observed differences in the populations of councils between the two groups


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BSC perspectives

Table III. Use of multidimensional performance measures

Table IV. Results of the one-way ANOVA comparing the level of PMS effectiveness based on BSC usage

n

Financial Customer Internal business process Learning and growth Environmental/community

BSC usage BSC user Non-BSC user

n 25 150

Minimum

173 181 173 172 169

1.20 1.00 1.00 1.17 1.00

(1) (1) (1) (1) (1)

Maximum 5.00 5.00 5.00 5.00 5.00

Mean

34.16 30.81

21.52 20.36

0.039

Rank

3.45 3.09 3.39 2.70 3.37

1 4 2 5 3

(5) (5) (5) (5) (5)

Performance related outcomes Mean F-statistic Significance 4.314

Mean

Staff related outcomes F-statistic Significance 0.945

0.332


Variables Use of multidimensional performance measures Training Link of performance to rewards Outcome orientation Teamwork/respect for people F-value p-value R2 Adjusted R 2 n

Performance related outcomes Staff related outcomes Coefficient t-statistics Significance Coefficient t-statistics Significance 0.808

4.344

0.000

0.300 0.967

2.205 2.037

0.029 0.043

0.905 21.651

3.038 22.171

0.003 0.031

0.855

3.929

0.000

2 1.040 17.014 0.000 0.301 0.283 162

2 2.324

0.021

25.783 0.000 0.331 0.319 159

PMS effectiveness

173 Table V. Results of stepwise regression analysis of the association between the organizational and cultural factors with the effectiveness of PMSs

of respondents. The two groups were split into large and small based on the mean population (37,808) of the entire sample population (i.e. all 450 councils), with the findings presented in Tables VI and VII. Table VI reveals that the models for the large sized councils were statistically significant for both the performance related (F ¼ 9.977, p ¼ 0.000) and staff related (F ¼ 6.568, p ¼ 0.003) outcomes with R 2 values of 0.253 and 0.182, respectively. Similarly, Table VII reveals that the models for the smaller sized councils were also statistically significant for both the performance related (F ¼ 22.718, p ¼ 0.000) and staff related (F ¼ 19.951, p ¼ 0.000) outcomes with much higher R 2 values of 0.428 and 0.465 reported. The use of multi-dimensional performance measures was significantly associated with both the performance and staff related outcomes for both large and small councils. In addition, training was significantly associated with the performance (staff) related outcomes for large (small) councils. The only other factor associated with PMS effectiveness for large councils was teamwork/respect for people, which was significantly associated with the staff related outcomes. Finally, in respect to small

Variables Use of multidimensional performance measures Training Teamwork/respect for people F-value p-value R2 Adjusted R 2 n

Performance related outcomes Staff related outcomes Coefficient t-statistics Significance Coefficient t-statistics Significance 1.043 2.081

3.595 2.119

9.977 0.000 0.253 0.227 61

Note: For large councils, population . 37,808

0.001 0.038

0.588

2.485

0.016

2 1.603 6.568 0.003 0.182 0.154 61

2 1.967

0.054

Table VI. Results of stepwise regression analysis of the association between the organizational and cultural factors with the effectiveness of PMSs

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174 Table VII. Results of stepwise regression analysis of the association between the organizational and cultural factors with the effectiveness of PMSs (for smalla councils)

Variables Use of multidimensional performance measures Training Link to rewards Outcome orientation Teamwork/respect for people F-value p-value R2 Adjusted R 2 n

Performance related outcomes Staff related outcomes Coefficient t-statistics Significance Coefficient t-statistics Significance 0.806

3.694

0.000

1.186 22.184

3.290 22.244

0.001 0.027

22.718 0.000 0.428 0.409 94

0.312 1.550 1.067

2.004 2.733 4.566

0.048 0.008 0.000

2 1.083 19.951 0.000 0.465 0.441 96

2 2.055

0.043

Note: a Population , 37,808

sized councils, the link of performance to rewards was significantly associated with both performance and staff related outcomes, and outcome orientation was significantly associated with the achievement of performance related outcomes. 5. Discussion and conclusion The first objective of the study was to examine the association between organizational and cultural factors, and the effectiveness of the PMS, with PMS effectiveness assessed in respect to the extent to which 17 desired outcomes of PMSs had been achieved. The analysis revealed that overall the use of multi-dimensional performance measures, and the link of performance to rewards exhibited a significant association with both dimensions (performance and staff related outcomes). In addition, the level of training and teamwork/respect for people were significantly associated with the achievement of staff related outcomes, while outcome orientation was significantly associated with the achievement of performance related outcomes. The findings in respect to the use of multi-dimensional performance measures support the many studies (Rigby and Bilodeau, 2009; Jusoh et al., 2008; Kaplan, 2001; Kloot and Martin, 2000; Kloot, 1999; Brignall, 1993; Kaplan and Norton, 1992) advocating the use of a BSC. However, while public sector organizations have increasingly pursued a more commercial orientation, the evidence suggests that the adoption of the BSC has been less prevalent than in the private sector. For instance, the BSC adoption rate found in this study (13.8 percent) compares unfavourably with that found in studies in the private sector. For example, Rigby and Bilodeau (2009) report a 53 percent adoption rate, Chung et al. (2006) 31 percent and Speckbacher et al. (2003) 26 percent. These findings suggest that local government managers have scope to consider more extensive use of multi-dimensional performance measures in order to achieve organizational objectives. In addition, the findings suggest that staff will be more likely to work towards the achievement of organizational objectives if they see a linkage of performance to rewards. This is consistent with the literature advocating the positive impact of rewards on employee performance (Rynes et al., 2005; McShane and Travaglione, 2003). It is also apparent that if organizations are to address staff needs they could provide


adequate training, both in the design and implementation of PMSs, as suggested by Cavalluzzo and Ittner (2004). It is equally important that an effective management performance system requires that managers are familiar with the system and are able to apply it (Chamberlain, 2011). Finally, there is scope for local government managers to work towards developing a more outcome oriented culture, by focusing more on results and having higher expectations for performance. Given the substantial international interest in the impact of public sector reforms, and the effectiveness of performance management practices, the research makes a significant contribution to the literature by providing local government authorities worldwide with an insight into the factors that can enhance the effectiveness of PMSs. The second objective of the study was to evaluate the effectiveness of PMSs in the Australian local government. Indications are that the PMSs of Australian local councils are only moderately effective in relation to performance related outcomes, and less effective in relation to the achievement of staff related outcomes. The effectiveness of PMSs was higher for larger sized councils. The findings suggest that PMSs are not as effective as they could be in achieving desired organizational outcomes, and support Dollery and Johnson’s (2005) claims for more efficient municipal service delivery. Hence, there is scope for local government management to improve their PMSs. For instance, if employees are treated as strategic assets (Harel and Tzafrir, 1999) they are likely to be more committed, thereby enhancing the achievement of organizational goals (Meyer and Allen, 1991). Hence, a greater emphasis on addressing staff concerns, developing their skills, and identifying and rewarding (managing) talented (poor) staff, could lead to positive outcomes for councils. This research is of significance as it provides a national assessment of the effectiveness of PMSs in local governments in Australia, thereby enabling a comparison with studies in other countries that have embarked on public sector reforms. Furthermore, the poor results reinforce the importance of focusing on the identified contingency factors as a means of enhancing PMS effectiveness. Finally, the study also provided a preliminary insight into the specific factors associated with the effectiveness of the PMSs for smaller and larger sized councils. For instance, the link of performance to rewards was associated with both performance and staff related outcomes but only for the smaller councils. Hence, the motivation of staff appears to be particularly relevant for smaller sized councils, and less relevant for larger sized councils. Furthermore, while training was found to be associated with PMS effectiveness, in larger sized councils training appears to serve more as a means of informing staff and driving them to achieve organizational objectives, while in smaller sized councils training appears to be important in terms of addressing and driving individual goals. Similarly, while outcome orientation was significantly associated with performance related outcomes this association was only found for smaller sized councils, indicating that these councils may need to place greater emphasis on efficiency and effectiveness in order to achieve organizational outcomes. 5.1 Limitations and future research The study is subject to the usual limitations of the survey method including the simplification of questions, the absence of the opportunity to ask follow-up questions, and social desirability bias. In addition, this approach can only ascertain associations

PMS effectiveness

175

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176

rather than causal relationships between variables (Singleton and Straits, 2005). Accordingly, future studies may incorporate alternative methodologies such as interviews to further investigate the hypothesised associations. Case studies of small and larger councils may unearth more in-depth findings of differences and similarities in PMSs and their associated implications. Furthermore, to overcome common method bias, future studies could collect data from multiple respondents within councils. While the current study provides a preliminary insight into the association between specific organizational and cultural factors with the effectiveness of PMS, future studies may focus on examining the association between additional organizational and cultural factors, such as geographic location (city vs regional), and the role of leadership in developing and operating PMSs. Future studies may also provide cross country comparisons. Finally, given the number of councils placed into administration in recent times, a comparison of PMSs in “failed” vs operating councils may shed some light on the role of PMSs in the viability of local government councils. Note 1. [(37,808 £ 450) 2 (107 £ 43,290) 2 (73 £ 63,278)]/270 (NB: four responding local governments who failed to indicate their population were included in the denominator in this calculation).

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Tardivo, G. and Viassone, M. (2010), “Creating an innovative social assistential performance management system: beyond the economic-financial perspective: empirical research findings”, Journal of Financial Management and Analysis, Vol. 23 No. 2, pp. 99-110. Tata, J. and Prasad, S. (2004), “Team self-management, organization structure and judgment of team effectiveness”, Journal of Managerial Issues, Vol. 16 No. 2, pp. 248-65. Taylor, P.J. and Pierce, J.L. (1999), “Effects of introducing a performance management system on employees’ subsequent attitudes and effort”, Public Personnel Management, Vol. 28 No. 3, pp. 423-52. Trevor, C.O., Gerhart, B. and Boudreau, J.W. (1997), “Voluntary turnover and job performance: curvilinearity and the moderating influences of salary growth and promotions”, Journal of Applied Psychology, Vol. 82 No. 1, pp. 44-61. Tung, A., Baird, K. and Schoch, H. (2011), “Factors influencing the effectiveness of performance measurement systems”, International Journal of Operations & Production Management, Vol. 31 No. 12, pp. 1287-310. Ulloa, B.C. and Adams, S.G. (2004), “Team effectiveness and individual Myers-Griggs personality dimensions”, Journal of Management and Engineering, Vol. 20, pp. 141-6. Walker, R. and Boyne, G. (2006), “Public management reform and organizational performance: an empirical assessment of the UK labour government’s public service improvement strategy”, Journal of Policy Analysis and Management, Vol. 25 No. 3, pp. 371-93. Watty, K., Bellamy, S. and Morley, C. (2008), “Changes in higher education and valuing the job: the views of accounting academics in Australia”, Journal of Higher Education Policy and Management, Vol. 30 No. 2, pp. 139-51. Weiss, T.B. and Hartle, F. (1997), Reengineering Performance Management: Breakthroughs in Achieving Strategy Through People, St Lucie Press, Boca Raton, FL. Wexley, K.N. and Latham, G.P. (1982), Increasing Productivity Through Performance Appraisal, Addison-Wesley, Reading, MA. Windsor, C.A. and Ashkanasy, N.M. (1996), “Auditor independence decision making: the role of organisational culture perceptions”, Behavioral Research in Accounting, Vol. 8, pp. 80-97. Wright, B.E. and Davis, B.S. (2003), “Job satisfaction in the public sector: the role of the work environment”, The American Review of Public Administration, Vol. 33 No. 1, pp. 70-90. Wuchty, S., Jones, B. and Uzzi, B. (2007), “The increasing dominance of teams in the production of knowledge”, Science, Vol. 316 No. 5827, pp. 1036-9. Appendix Use of multi-dimensional performance measures To what extent are each of the following measures used to assess your council’s performance? Customer perspective . Surveys of customer satisfaction. . Number of customer complaints. . On-time service delivery. . Reduced waiting time for services.

Environment perspective . Average time for approval of building/development applications. . Environmental compliance.

. .

Investment in community services. Investment in environmental management.


Financial perspective . Operating income. . Debt ratio. . Return on investment. . Improvement in net assets/liquidity. . Collection of rates and charges. Internal process perspective . Cost effectiveness of providing services. . Quality of services. . Efficiency of providing services. . Usage/wastage of resources. Learning and growth perspective . Number of new services provided. . Time to market for new services. . Career development of staff. Link to rewards To what extent is performance measurement linked to financial rewards (pay, bonuses, etc) in your council? To what extent is performance measurement linked to non-financial rewards (recognition, service awards, etc) in your council? Training To what extent is training provided to staff in your council? Organizational culture Please indicate the extent to which each of the following values is valued in your council. Teamwork/Respect for people . Fairness. . Respect for the rights of the individual. . Tolerance. . Being socially responsible. . Being people oriented. . Being team oriented. . Working in collaboration with others. Outcome orientation . Being competitive. . Being analytical.

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Having high expectations for performance. Being achievement oriented. Being results oriented. Being action oriented.

Innovation . A willingness to experiment. . Not being constrained by many rules. . Being quick to take advantage of opportunities. . Being innovative. . Risk taking. Stability . Security of employment. . Stability. . Predictability. Attention to detail . Being careful. . Paying attention to detail. . Being precise. . Being rule oriented. Effectiveness of the PMS PMS effectiveness was assessed in respect to the extent to which the PMS of council’s achieved the following outcomes. Performance related outcomes . Motivating performance (Selden and Sowa, 2011; Rynes et al., 2005; Swiss, 2005; Lawler, 2003). . Assisting the council to achieve goals (Harper and Vilkinas, 2005; Lawler, 2003). . Developing a performance oriented culture (Gruman and Saks, 2011; Lawler, 2003). . Supporting change efforts (Harper and Vilkinas, 2005; Nankervis and Compton, 2006; Lawler, 2003). . Supporting council’s values (Lawler, 2003). . Providing an accurate assessment of performance (Lawler, 2003). . Ensuring staff commitment to council objectives (Selden and Sowa, 2011; Lawler, 2003). . Linking individual performance to unit performance (Helm et al., 2007; Lawler, 2003). . Providing useful performance feedback to individuals (Lawler, 2003). . Supporting council’s strategy (Becker et al., 2011; Lawler, 2003). Staff related outcomes . Developing individuals’ skill and knowledge (Nankervis and Compton, 2006; Lawler, 2003). . Addressing the concerns of staff (Lawler, 2003).

. . . .


.

Ensuring staff time is used efficiently (Lawler, 2003). Identifying talented employees (Nankervis and Compton, 2006; Lawler, 2003). Rewarding talented employees (Nankervis and Compton, 2006; Lawler, 2003). Identifying poor performing staff (Lawler, 2003). Managing poor performing staff * (Harper and Vilkinas, 2005; Nankervis and Compton, 2006; Lawler, 2003).

About the authors Kevin Baird has taught both undergraduate and postgraduate subjects in the Management Accounting area for 17 years. He has also supervised Honours and PhD students across many different topic areas within the management accounting discipline including: activity based management practices, total quality management, performance measurement systems, management control systems, outsourcing, employee organizational commitment and employee empowerment. Kevin Baird is the corresponding author and can be contacted at: [email protected] Herbert Schoch has taught both undergraduate and postgraduate courses, primarily in Management Accounting and he has supervised PhD and Honours students. He has also taught Financial Accounting, Business Strategy and Entrepreneurship and Entrepreneurial Management. He has taught in Australia, Singapore, Hong Kong, Canada and the USA. His research interests include: management control systems, management accounting, outsourcing, accounting education and entrepreneurship. He has published numerous journal articles, book chapters and monographs. He also has experience in working in manufacturing, public accounting and has managed and operated his own business. Qi ( James) Chen is a Research Associate at Macquarie University. He completed his Honours degree at Macquarie University and is currently employed as a Financial Analyst at ING.

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