Consistency of firm's performance evaluation and compensation plans with competitive strategy

Abstract

According to “Contingency Theory” and several researches, there is no absolutely conclusive result to show that there is a best control system for all firms that fits all types of competitive strategy. Also, based on “Expentancy Theory” , in order to motivate employee, the compensation plans have to cover all performance measures that fully reflect employee’s effort. Hence, this case-based research is set up for the purpose of studying the consistency of firm’ s performance evaluation and compensation plans with competitive strategy. All 285 of MBA students at the Faculty of Commerce and Accountancy, Chulalongkorn University, Thailand, are the experimental units. The controlled group with 141 regular MBA students are subdivided into two groups as low-cost group and product-differentiation group. Then each group is subdivided into two more sub groups as CEO and MD groups. For the treated groups with 144 executive MBA students, subdivision is done in the same manner as the controlled group. The experiment is set up to evaluate whether competitive strategy affects weights placed on performance measures used for firm’ s performance evaluation and compensation plans. Also, it is set up to evaluate the consistency of weights placed on performance measure for these two purposes under a given competitive strategy. The research results are as expected. That is, under low-cost strategy, a firm places more weights on financial performance measures for firm’s performance evaluation resulting in short-term oriented compensation plans and vice versa. Under product-differentiation strategy, a firm places more weights on non-financial performance measures for firm’s performance evaluation resulting in long-term oriented compensation plans and vice versa. Therefore, the consistency of two control systems are evidenced from this research. That is, for a given competitive strategy, a control system designed by first considering the appropriate firm’s performance evaluation system to match with that strategy in terms of weights placed on performance measures followed by the compensation plans will be consistent with the control system designed by first considering the appropriate compensation plans to match with that same strategy and followed by firm’ performance evaluation system. However, executives of a low-cost strategy firm significantly place more weight on “productivity” which is one of non-financial performance measures for both firm’s performance evaluation and compensation plans than those of a product-differentiation strategy firm. This means that although productivity is non-financial performance measure, it still plays crucial role for a low-cost strategy firm than a product-differentiation one. This may be due to the fact that usually low-cost strategy firms emphasis on efficiency as an important mean to reduce cost. And “productivity” is one performance measure that evaluates the efficiency of firms.