Similarly, in comparing diversified with vertically integrated firms, Lowers & Allen 1 9 7 3 ) reported that while the former made bonus decisions for their division managers almost exclusively on the basis of the divisions’ profit performance, the latter did not link division managers’ incentive compensation solely to divisional profits thereby relying also on top management’s discretion; the researchers explained the differences in the incentive systems of these two types of companies in terms of the degree of interdependence among divisions created by their respective corporate strategies.
Consistent with these empirical findings, Salter ( 1 97 3 ) has also argued that there is no single “best” incentive imposition system for all companies and that such systems should “fit” the requirements of corporate strategy. While the focus of all of these studies has been on strategy at the corporate rather than the SUB level, it might be noted that, at least on a primacies basis, the rationale for linking the SUB general manager’s incentive compensation to SUB-level strategy would be even stronger than that for linking it to corporate-level strategy; as such, the above studies lend support to the research being presented here.
The second set of studies has dealt with the behavioral effects of incentive mechanisms on individual motivation and task performance. The c o m m o n conclusions of these studies has been that when an individual’s rewards are tied to performance along certain criteria, his/her behavior would be guided by the desire to optimize performance with respect to those criteria. For 53 instance, Spirits( 1 9 64) reported a significant positive correlation between employees’ actual contribution to cost reduction and their perceptions regarding the degree to which contribution to cost reduction would be helpful in attaining more pay.
Similarly, Schuster, et al ( 1971 ) found that the more an employee believed that reference influenced pay, the harder he worked to improve his performance. Based on data collected from questionnaires filled in by managers in both private industry and government, Porter & Lawyer ( 1 9 68 ) also found a definite tendency for managers w h o believe that their performance on the job would have a significant impact on their pay to be assessed by their superiors as more effective than managers who believed that performance had relatively insignificant impact on their pay.
Similar linkages between financial incentives and task performance have also been observed in a series of related laboratory tidies by Locke et al. (1968), Pritchard & courts( 1 9 7 3) and Terrors & Miller (1978). The general conclusion of these behavioral studies are also consistent with the normative implications of “agency theory” (e. G. , Hailstorm, 1979). The third set of studies has focused on the dysfunctional – – rather than the functional – – consequences of incentive compensation systems.
In a study of the responses of government administrators to evaluation on the basis of statistical performance indices, Blab ( 1 95 5) found that the administrators behaved so as to increase their performance in terms of these indices even if the overall result was dysfunctional for the organization. Darken ( 1961 ) has also reported many situations where the incentive system led division managers to optimize their divisions’ performance while, at the same time, subpopulation corporate performance.
Similarly, citing several examples of poor performance on the part of subordinates, Kerr ( 1 97 5) has put the blame on incentive systems that tended to reward behaviors the superior was trying to discourage while the desired behaviors were not being rewarded at all. While these studies help emphasize that incentive systems an indeed have dysfunctional consequences, 54 v. Governmental ANIMAL. GUPPY the i m it on is n tot that such systems should bed n e away with.
Rather, in poi n it n go u t that i n cent i eve systems can have pop e r if I behavioral consequence c e s, they imp lay that such must b e linked very carefully to the d e is red rather than the non des red behave r s/ outgo mess . Extrapolating from the studies revive ewe deed above, it seem s valid to hypotheses i zee that business unit objective s are more likely to be achieved if the unconventionality’s system is tied to the strategy b ii n gap u r sued by the focal SUB RA there Han to a uniform set of p reference criteria (such as return on in v e s tem n t) across all Sables.
Taking n Tot of the fact that, b y definition, a b u IL d strategy d me an ads a t et n t ii n to tasks hi chi have I on g- et r m IM p I IAC t ii n s w her e as harvest strategy d Emma n ads a t ten t ii n to tasks with SSH rot-et arm payoffs, it follows that: Pl: Greater reliance on long-run criteria (specifically: sales growth, market share, new product development, market development, R&D, personal development, and political/public affairs) in the determination of the incentive bonus for SUB mineral managers will have a stronger positive impact on effectiveness in the case of Scubas the “build” end of the strategy spectrum than in the case of Scubas the “harvest” end. UP: Greater reliance on short-run criteria (specifically: cost control, operating profits, profit margins, cash flow, and return on investment) in the determination of the incentive bonus for SUB general managers will have a stronger positive impact on effectiveness in the case of Subs at the “harvest” end of the strategy spectrum than in the case of Scubas the “build” end.
Reliance on f o r m u I a vs. subjective (non-form u I a ) approaches towards the d termination of incentive bonus For any SUB, in a d d tit on top a r hi n g the import n CE of different boo n us criteria, given a specific level of pee r of r ma once, superior r SMS us t also decide as to what approach h to take in determining a specific bon us amount: atone extreme, the bonus amount maneuvered strictly from a formula where nu impermeableness reformations or more criteria constitute the i ND e pendent variable(s); at the HTH erecter me, the superior may rely totally o n his/her subjective judgment in d e termini Eng the SUB genera Inman age r’ s bonus; alternatively, part of the bonus maybe ormolu-based a n d part m a y b e subjective. This study hypotheses i zees that, in terms of impact on effectiveness, the utility of determine n ins the boon s in as u b eject iv e rather than for, m u la -baa s deed m an n e r will be greater for b u i I d than for harvest managers.
T w o reasons are offered in sup rot of this expo c TA t ii n: ( 1 ) Unlike the case for a harvest manager, more aspects of build manager’ s job such as market d eve lop men t, new product development, quantifiable and, therefore, o b j e CT i v e p e r of r m a n c e m EAI us r e s for such tasks are n tot available; a n d (2 ) Managers in hare of build units face greater environmental uncertainty than do m Ana germ s in charge of harvest u n i TTS n d that strategy i m p elm antidisestablishmentarianism greater uncertainty requires a mores u b j e c it eve p pro ACH towards the deter i an it on of the i n CE native bonus. At the SUB level, pee r of r man CE along most long-term criteria (prod codependent, marketed eve lop me n t, person n n led eve lop m e n t, political/public affairs, etc. ) is clearly less amendable to o b j r e men t than is pee r of r ma n CE along most s h o art-term m criteria (sacs h flow, return r non invests e n t, profits, profit margins, etc. . Since build man eager– in contrast to harvestman eager–need to focus m or e n the long RA t h e r that n short-run, it follows that buy i old managers s ho u I d be evaluated MO rest b j CE h an harvest managers.
Salter( 1 97 3) used very similar logic to argue that the greater the n e e d to o p it m i z e an Scab’s p e r form an c e eve r the on g rather than short-run, the great term should be the extent of reliance on expeditiousness’s to formula-based approach sees to d terminated SUB manager’ since native bonus. As might be expo CE Ted , his argument t has b e e n that perform a n CE along ma nylon g -our n criteria cannot usually be measured in objective, quantitative v e terms. If r t hers up port to the prediction n that subjective bombardments nation approaches will BEMA re beneficial for build that n for harvest units is p r o vided by the expo CE tat ion that build nits face greater environmental uncle r taint y than do harvest units. Such an expect a it o n is based u p o n the following reasons: ( 1 ) As Hoofer ( 1975 ), Hoofer & Ascended( 1978, up. 02-1 04) and Ham brick et LINKING CONTROL SYSTEMS TO BUSINESS UNIT STRATEGY METHOD al (1982) have argued, build strategies are typically undertaken in the growth tag of the product life cycle (PL) whereas harvest strategies are typically undertaken in the mature/decline stage of the PL; and that factors such as technology, product design, process design, market demand, number of competitors and competitive structure change more rapidly and are more predictable in the growth rather than the mature/decline stage of the PL; (2) Since the total market share of all firms in an industry would always be 100%, a build mission, signifying a desire to increase market share pits an SUB into greater “conflict” with its competitors than does a harvest mission. Further, to increase market share, it is not sufficient to merely increase the demand for one’s products; one must also increase the volume of production and, thus, the input resources (raw materials, labor, capital, etc. ) by corresponding amounts. Thus, on both the output and the input sides, a build manager faces greater “dependencies” than does a harvest manager. As Prefer & Clinicians ( 1978, p. 8) and Thompson ( 1 96 7) have argued, the greater the external conflict and dependencies facing an organization, the greater would be the uncertainty confronted by it; and ( 3 ) Since build Sables are typically in new and evolving industries as impaired to harvest Subs, build managers’ experience in their industries is likely to be less; this would again contribute to the greater uncertainty faced by build managers in dealing with external constituencies. As Kelly ( 1 9 7 7 ) has argued, the more uncertain the environment, the less reliable predictions about future performance are likely to be thus requiring a greater reliance on subjective bonus determination approaches. The two sets of arguments advanced above yield the following proposition regarding linkages between SUB strategy, formula vs. subjective approaches towards bonus determination, and SUBS effectiveness:
UP: Greater reliance on subjective (non-formula) approaches towards the determination of the SUB general manager’s incentive bonus will have a stronger positive impact on effectiveness in the case of Subs at the “build” end of the strategy spectrum than in the case of Subs at the “harvest” end. 55 Sample Data were collected from general managers of Subs in diversified firms. Previous studies (e. G. , Rumble, 1974) have indicated that more than 80% of the largest 500 industrial firms in the United States (i. e. , the Fortune 500) are diversified into more than one business and have adopted a profit center structure for the management of heir numerous businesses.
Thus, eight Fortune 500 diversified firms with headquarters in Massachusetts, Connecticut and New York were selected. The need to obtain access and constraints of time and funding prevented the use of a random sample either from the entire Fortune 500 or from the entire subset of firms headquartered in the Northeast. Given, however, their size range (in 1980 sales, from about $500 million to about $10 billion) and the diversity in industries in which they operate (consumer products, industrial machinery, chemicals, electronic components, electronic equipment, etc. ), there is no prima facie season to expect any systematic bias in the findings from Subs within these firms.
Within each firm, the senior-most corporate executive in charge of strategic planning (usually the Vice President for Planning) and one or more senior line executives (usually a Group Vice President) were interviewed. During the interviews, agreement was obtained from the planning executive that he would send a questionnaire instrument to four or more SIBS general managers within his firm making sure that a mix of businesses along the spectrum from “pure build” to “pure harvest” would be covered so as to provide the needed strategic perversity. The cover letter to the questionnaire guaranteed that individual responses would not be communicated to anybody within or outside the firm, and that only summary data from the total responses from several business unit heads would be published.
A prepossessed stamped envelope was also enclosed with each questionnaire to enable the respondents to mail these directly back to the researchers without any risk of perusal by others in their firms. Our primary 56 v. GOVERNANCE and NAIL K. GUPPY contacts the corporate-level executives -distributed these questionnaires to the general m an age r so f 70 Subs. Tat TA loaf b I e responses were received. Because of the high response (82%), no tests for non-response bias were considered necessary. The 58 respondents were also asked to indicate the extent of maximum bonus (as a percentage of basic salary) that they were eligible to receive. Since linkages between strategy, incentive bonus system, and effectiveness would not be very meaningful in those situations where the maximum renewable bonus was relatively small (see, e. G. Pritchard & Curt s, 1973), praiseworthiness’s duty, it was decidedtofocusonlyonthose46SBUswhereth e maximum renewable bonus was greater than%basic alarm. Forth sexes Subs, the maximum renewable bonus (as percentage of basic salary) averaged 39. 3%. Variables measured Business unit strategy (X 1), Preliminary interviews with four SIBS managers in on e firm had revealed as expected – -that a lath cough the e terms build, hold, harvest and divest can be applied to the business unit as a whole, each SUB usually consists of several products which together form one or more closely related prod u c TTL in e s, the u soon sit UT in gas ingle business.
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