Chong the Impact of Reliance on Incentive Based Compensation Schemes, Information Asymmetry and o

Management Accounting Research 18 (2007) 312342

The impact of reliance on incentive-based compensationschemes, information asymmetry and organisational

commitment on managerial performanceVincent K. Chong a,, Ian R.C. Eggleton b

a The University of Western Australia, Australiab The University of Waikato, New Zealand

Abstract

This study examines the effects of information asymmetry and organisational commitment on the relation betweenthe extent of reliance on incentive-based compensation schemes and managerial performance. The responses of 109managers, drawn from a cross-section of Australian manufacturing companies, to a questionnaire survey, wereanalysed by using a multiple regression technique. The results provide evidence of higher managerial performancefor managers with low organisational commitment and a high reliance on incentive-based compensation schemes inhigh information asymmetry situations. On the other hand, the results show that the performance level of managerswith high organisational commitment is unaffected regardless of the degree of information asymmetry and the extentof reliance on incentive-based compensation schemes. 2007 Elsevier Ltd. All rights reserved.

Keywords: Reliance on incentive-based compensation schemes; Information asymmetry; Organisational commitment andmanagerial performance

1. Introduction

Incentive-based compensation schemes are used by organisations to align the interests of employeeswith owners (see Baker et al., 1988). The primary reason why organisations use an incentive-based

Corresponding author at: Accounting and Finance (M250), UWA Business School, The University of Western Australia, 35Stirling Highway, Crawley, WA 6009, Australia. Tel.: +61 8 6488 2914; fax: +6 18 6488 1047.

E-mail address: [email protected] (V.K. Chong).

1044-5005/$ see front matter 2007 Elsevier Ltd. All rights reserved.doi:10.1016/j.mar.2007.04.002

V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18 (2007) 312342 313

compensation scheme is to ensure that their employees efforts can be channeled toward activities thatfacilitate the achievement of organisational objectives (Flamholtz et al., 1985; Banker et al., 1996a, 1996b,2001; Gibbs et al., 2004).1 Most of the research examining the control system effects of compensationschemes is based on an agency theory framework. Agency theory suggests that an agent is capableof engaging in dysfunctional behaviours known as adverse selection and moral hazard (Arrow, 1985;Baiman, 1982, 1990).2 The dysfunctional behaviours arise when the agent and the principal have differentrisk preferences and conflicting goals.3 This is because agents, who possess more private informationabout their task environment than their superior, are assumed to use this private information to makedecisions in their self-interests. The existence of private information is an illustration of informationasymmetry (Baiman and Evans, 1983; Penno, 1984; Coughlan and Schmidt, 1985; Dunk, 1993), whichrefers to subordinates who possess more private information than their superior relating to their area ofresponsibility (Dunk, 1993). Thus, it is argued that when information asymmetry is high, dysfunctionalbehaviours are more likely to occur than when information asymmetry is low (see Eisenhardt, 1985; Prattand Zeckhauser, 1985).

Agency theorists posit that the principal can minimise moral hazard problems by developing anincentive-based compensation scheme (a control subsystem), which aligns the interests of principal andagent (Eisenhardt, 1988, 1989; Kaplan and Atkinson, 1998, p. 681). A fundamental objective of anincentive-based compensation scheme is to motivate individuals to exert effort to improve performance.A recent study by Sprinkle (2000) found that the reliance on an incentive-based compensation schemeimproves individuals performance by motivating them to increase both the duration and intensity oftheir effort. He found that incentives not only motivate individuals to work longer on a task, but alsoserve to enhance the quality of attention individuals devote to the task. Previous incentive-contractingstudies (Chow, 1983; Waller and Chow, 1985; Chow et al., 1988) have proposed the use of incentive-based compensation schemes for motivating truthful reporting by subordinates. Specifically, these studiesfound that the reliance on incentive-based compensation schemes can enhance individual performance.However, Waller (1994) criticises these studies for investigating economic incentive without explicitlyconsidering other behavioural factors. Frederickson (1992) also argues that conclusions drawn fromagency theory-based models that ignore behavioural factors should be interpreted cautiously. In addition,numerous studies (Baker et al., 1988; Kachelmeier, 1994, 1996; Luft, 1997; Evans et al., 2001; Merchantet al., 2003) argued that better insights may be gained if the results of agency and behavioural studiesare integrated. For example, it has been asserted that a managers level of organisational commitment

1 From an agency theory perspective, an incentive-based compensation scheme exerts two important functions: selectionand effort effects. The selection effect role of incentive-based compensation schemes can increase an organisations overallperformance by attracting and retaining more productive employees. On the other hand, the effort effect role of an incentive-based compensation scheme can induce employees to exert more effort to improve their performance. The focus of this paper isto examine the effort effect function.

2 The agency literature refers to the problems of adverse selection as pre-contractual problems, and to the problems of moralhazard as post-contractual problems (see Arrow, 1985; Baiman, 1982, 1990). Adverse selection occurs before employment whenan agent possesses private pre-contractual information or hidden information about his or her own skill levels. He or she has theopportunity to misrepresent his or her skill level to obtain a higher paying position (see Chow, 1983). Moral hazard occurs afteremployment when an agent possesses private post-contractual information or hidden actions about his or her actions. The focusof this paper is on moral hazard problems.

3 Risk preference refers to the degree of an agents or principals preference for adventure rather than security (Pratt, 1964;Arrow, 1974).

314 V.K. Chong, I.R.C. Eggleton / Management Accounting Research 18 (2007) 312342

(a behavioural factor at the individual level) is as important as the extent of reliance on an incentive-based compensation scheme for motivating effort (see Simon, 1991). Prior studies (e.g. Mathieu andZajac, 1990; Randall, 1990; Nouri and Parker, 1998) argued that organisational commitment may havethe potential for improving work outcomes such as subordinates performance. Furthermore, it has beenfound that subordinates with high levels of organisational commitment are more likely to use their privateinformation to pursue organisational goals, while subordinates with low levels of organisational commit-ment are more likely to use their private information largely to pursue self-interest (see Nouri and Parker,1996).

Thus, it seems likely that the effects of the extent of reliance on incentive-based compensation schemeson performance may depend not only on the degree of information asymmetry present, but also on themanagers level of organisational commitment. While these linkages have been recognised in the literature,there have been no studies that attempt to evaluate the three-way interactive effects between the degreeof information asymmetry, subordinates levels of organisational commitment and the extent of relianceon incentive-based compensation schemes affecting managerial performance. This gap in the accountingliterature, which remains unexplored, constitutes the motivation for this paper.

This paper is organised as follows. In the next section, the theoretical framework underlying the studyis developed. This leads to the statement of hypotheses. Subsequent sections address the method, results,discussions, and limitations of the study.

2. Hypotheses development

2.1. The relation between incentive-based compensation schemes and performance

An incentive-based compensation scheme refers to the extent to which pay incentives (such as bonusor profit sharing) are used as the compensation strategy in an organisation (see Balkin and Gomez-Mejia,1990). As noted earlier, prior incentive-contracting studies (e.g. Chow, 1983; Waller and Chow, 1985;Chow et al., 1988) have provided empirical evidence to support the view that reliance on incentive-basedcompensation schemes can affect individual performance by inducing a higher level of effort on the partof subordinates.

Several non-accounting studies (Gomez-Mejia et al., 1987; Eisenhardt, 1988; Tosi and Gomez-Mejia,1994) have also found support for reliance on incentive-based compensation schemes in aligning principaland agent interests, and alleviating moral hazard problems. Furthermore, the sales-force compensation andhuman resources management literature also provides evidence to support the argument that reliance on anincentive-based compensation scheme provides an incentive for the agent to trade off the cost of increasedeffort for higher reward. Thus, it is argued that a high reliance on incentive-based compensation schemesis more likely to enhance an agents performance than a low reliance on incentive-based compensationschemes. Such a general conclusion should not be drawn however, because a number of empirical studieshave found that reliance on incentive-based compensation schemes does not always enhance individualperformance (see Jenkins, 1986; Gerhart and Milkovich, 1992; Kohn, 1993; Jenkins et al., 1998). Otherstudies (e.g. Arkes et al., 1986; Ashton, 1990; Bonner et al., 2000) found reliance on incentive-basedcompensation schemes sometimes even caused performance to deteriorate. Such mixed results suggestthe need to examine the link between the extent of reliance on incentive-based compensation schemesand individual performance.


2.2. Standard agency theory view: the moderating role of information asymmetry on the relationbetween incentive-based compensation schemes and performance

Standard agency theory suggests that the relationship between the extent of reliance on incentive-based compensation schemes and performance is moderated by the degree of information asymmetrybetween the superior and subordinate. Information asymmetry refers to a situation whereby the agents(subordinates) are in possession of more local or private information than their principal (superior) relatingto their area of responsibility (Dunk, 1993). The standard agency theory model assumes that the agenthas private information to which the principal cannot costlessly gain access, and the agent is assumedto be work-averse and risk-averse (Baiman, 1990). It is the information asymmetry, and agents work-aversion and risk-aversion, which prohibit the rst-best (cooperative) solution from being achieved byself-interested behaviour. Hence, moral hazard problems occur when the principal is not able to observethe level of effort exerted by the agent. Thus, it is argued that the agent will attempt to avoid work unlessincentives are provided to motivate effort (Baiman, 1982, 1990; Kaplan and Atkinson, 1998).

Relying on standard agency theory, it is argued that a high reliance on incentive-based compensationschemes is more appropriate when information asymmetry is high rather than low. The rationale for thisproposition is that under such situations, subordinates are in possession of private information unknown tothe superior. Such situations are conducive for subordinates to engage in opportunistic behaviours. Thus,it follows that moral hazard problems are more likely to be high. The existence of moral hazard problemscreates the information impactedness situations. Information impactedness arises when subordinates,who possess valuable and unique local information, are reluctant to disclose or convey it truthfully. Ithas been suggested that incentive-based compensation schemes can be used to mitigate the problemsconcerning the withholding of information by subordinates (Kaplan and Atkinson, 1998). In summary,a high reliance on incentive-based compensation schemes would be an appropriate motivational controltool to encourage subordinates to exert greater effort to enhance their performance when informationasymmetry is high rather than when it is low.

Thus far, the agency theorists have concluded that a match between a reliance on incentive-basedcompensation schemes and the level of information asymmetry can enhance managerial performance.However, such a conclusion is subject to one further qualification. This is because standard agency theoryhas been criticised for its simplicity and narrowness (e.g. McKean, 1975; Collard, 1978; Noreen, 1988;Baiman, 1990). Specifically, standard agency theory assumes that subordinates actions are endoge-nously derived, and based on well-specified preferences and beliefs (Baiman, 1990). In addition, thestandard agency theoretical framework tends to disregard the existence and possible influence of otherbehavioural factors such as the subordinates level of organisational commitment. Standard agency the-ory cannot explain why some agents are willing to sacrifice their self-interest in order to benefit theinterest of the organisation. A possible explanation for such behaviour may be the fact that some ofthese agents are highly committed to their organisation. These individuals with high organisationalcommitment want the organisation to succeed. If these individuals consider that improving their ownperformance helps to enhance overall organisational performance, they may be willing and motivatedto exert effort to serve the organisation by doing just this. Thus, it can be concluded, that standardagency theory assumes that all individuals, regardless of the level of their organisational commitment,are motivated solely by self-interest. The next section discusses the effect of information asymmetry andreliance on incentive-based compensation schemes on performance under different levels of organisationalcommitment.


2.3. The effects of organisational commitment

Organisational commitment is defined as an employees identification with and involvement in theorganisation (Mowday et al., 1979).4 As noted earlier, we argue that standard agency theory assumes thatindividuals possess low levels of organisational commitment and are motivated solely by self-interest. Thisstrict assumption is rather unrealistic as the behavioural literature (e.g. Otley and Pierce, 1996; Nouri andParker, 1996, 1998; Lord and DeZoort, 2001; see also Porter et al., 1974; Angel and Perry, 1981) indicatesthat while the managers with low levels of organisational commitment are motivated to pursue self-interest,managers with high levels of organisational commitment are motivated to pursue organisational interest.Individuals with high organisational commitment are characterised by a strong belief in, and acceptanceof, the organisations goals and values, and a willingness to exert considerable effort on behalf of theorganisation (Porter et al., 1974; Angel and Perry, 1981). This suggests that individuals with strongorganisational affiliations may be motivated to pursue organisational interests without the opportunity forpersonal gain. The idea that individuals can be strongly motivated to pursue organisational interests is alsofound in the literature (see e.g. Ouchi, 1981; Birnberg and Snodgrass, 1988). For example, Birnberg andSnodgrass (1988) argue that employees in Japanese firms have cooperative utility functions that valuethe pursuit of organisational goals. Conventional utility function, which is commonly assumed in agencyliterature, is not applicable to these individuals (i.e. highly committed individuals) as conventional utilityfunction focuses exclusively on the individuals self-interest rather than organisational interests. Thus, itfollows that when this assumption underpinning standard agency theory is abandoned, the predictions ofagency theory are inappropriate. In other words, standard agency theory cannot adequately explain thebehaviour of those individuals with high levels of organisational commitment. Our study proposes thatwhether individuals are predisposed to pursuing self or organisational interests depends on the levels oftheir organisational commitment.

Thus, the existing agency and behavioural literature seem to suggest that the relationship between theextent of reliance on incentive-based compensation schemes and managerial performance is likely to beinfluenced by the degree of information asymmetry and the subordinates level of organisational commit-ment. This suggests that the integration of agency and behavioural theoretical frameworks would providefurther insights into the relationships between the extent of reliance on incentive-based compensationschemes and subordinates performance.

2.4. The three-way interaction hypothesis

Table 1 shows the expected performance for the eight possible combinations of the three-way interactionbetween the extent of reliance on incentive-based compensation schemes, information asymmetry, andorganisational commitment affecting managerial performance.

As discussed earlier, standard agency theory predicted that individuals with low levels of organisationalcommitment are interested in pursuing self-interest rather than organisational interests. Under low infor-

4 Organisational commitment may be conceptualised in the following two ways: affective and continuance commitment (seeMeyer et al., 1990). This paper employs the affective (attitudinal) commitment conceptualization of organisational commitment.Such commitment is characterised by two factors: (1) a strong belief in and acceptance of organisational goals and values; and (2)a willingness to exert considerable effort on behalf of the organisation (Porter et al., 1974; Angel and Perry, 1981). Continuancecommitment refers to the perceived costs associated with leaving the organisation (Becker, 1960; see also Meyer et al., 1990).


Table 1Expected managerial performance for the eight possible combinations between organisational commitment, information asym-metry and reliance on an incentive-based compensation scheme

Cell Information asymmetry Incentive-based compensation scheme Expected managerial performance

Panel A: Low organisational commitment sub-sample1 Low Low Moderate/unclear2 Low High Moderate/unclear3 High Low Low4 High High High

Cell Information asymmetry Incentive-based compensation scheme Expected managerial performance

Panel B: High organisational commitment sub-sample5 Low Low Moderate/high6 Low High Moderate/high7 High Low High8 High High High

mation asymmetry situations, it is expected that managers with low levels of organisational commitment(i.e. less committed managers) may not have the private information by which to materially enhancetheir performance. Additionally, under such conditions the moral hazard problems are also likely to below. Therefore, a low reliance on incentive-based compensation schemes would be a more appropriatecontrol tool under such situations. However, even when the reliance on incentive-based compensationschemes is high, subordinates may not possess the private information which would enable them tomaterially enhance their performance. This suggests that when reliance on incentive-based compensationschemes is high, subordinates, while having the extrinsic incentive to improve their performance, will notbe in a position to obtain it since under low information asymmetry situations the subordinate has littleinformation that is not known to the superior.

The aforementioned discussion suggests that managers with low levels of organisational commitmentare unwillingly to exert additional effort when reliance on incentive-based compensation schemes is low,as there is no extrinsic incentive to do so under low information asymmetry situations. Thus, we expectthat the performance level of managers with low levels of organisational commitment will be low whenthe extent of reliance on incentive-based compensation schemes and the degree of information asymmetryare both low.

Standard agency theory predicts that when the extent of reliance on incentive-based compensationschemes is high, individuals are motivated to exert effort to improve their performance. But, it is unclearif the positive effect on performance will be significant enough when the extent of reliance on anincentive-based compensation scheme is high, since they may not be in a position to possess the nec-essary information to enhance their performance materially. Thus, we expect that the performance levelof managers with low organisational commitment will remain unaffected when the extent of reliance onincentive-based compensation schemes is high and the degree of information asymmetry is low.

Standard agency theory predicts that the performance level of managers with low levels of organisa-tional commitment will improve when a high reliance on incentive-based compensation schemes occursunder high information asymmetry situations. The rationale for this view is based on the argument thatless committed managers will continue to exert additional effort, with the help of their privately-held


information, as long as they believe that doing so is worthwhile in order to improve their performance.These managers are interested in using their private information primarily to pursue self-interest. Thisview is consistent with standard agency theory, which predicts that individual performance is an increas-ing function of performance-contingent incentive. Several previous studies reported that incentive-basedcompensation schemes have a positive effect on efforts and individual performance (e.g. Chow, 1983;Waller and Chow, 1985; Bailey et al., 1998; Sprinkle, 2000). The essence of this theoretical argument isthat individuals are motivated to exert more effort when they believe that the additional effort will increasetheir performance, which in turn, will result in them receiving more rewards. In addition, the findings ofnumerous prior empirical accounting studies (see Libby and Lipe, 1992; Kennedy, 1993, 1995; Stone andZiebart, 1995) also strongly support the suggestion that incentives stimulate increased effort for managerswith low levels of organisational commitment. Kennedy (1993) argues that individuals will not exert anyeffort in making judgments unless they perceive it to be worthwhile. Hence, it can be concluded that underconditions where high information asymmetry exists, managers with low levels of organisational com-mitment will exert greater effort to perform when the reliance on incentive-based compensation schemesis high rather than when it is low. In summary, we propose that the performance level of managers withlow levels of organisational commitment will be higher when the extent of reliance on incentive-basedcompensation schemes is high rather than low under high information asymmetry situations (i.e. Cell4 > Cell 3, see Table 1)

It is argued that managers with high levels of organisational commitment (i.e. highly committedmanagers) are motivated to pursue organisational interests rather than self-interest (Nouri and Parker,1996; see also Porter et al., 1974; Angel and Perry, 1981; Eisenhardt, 1989). Lincoln and Kalleberg(1990), for example, conclude that highly committed individuals will expend effort on behalf of theorganisation even when such effort does not result in the individual receiving any additional compensationor opportunities for career advancement.

As noted earlier, the predictions of standard agency theory are inappropriate for highly committedmanagers as this theory cannot adequately explain their attitudes and behaviours. These highly committedmanagers are indifferent to the extent of reliance on incentive-based compensation schemes because thepursuit of organisational goals and values is important to them. They are willing to exert additionaleffort to gather job-relevant information to enhance their decisions regardless of the extent of relianceon incentive-based compensation schemes and the degree of information asymmetry. It is expected, thatunder high information asymmetry situations, these highly committed managers are also willing to sharetheir privately-held information with their peers and superiors, and use the private information primarilyto pursue organisational goals regardless of the extent of reliance on an incentive-based compensationscheme. Thus, we expect that the performance level of managers with high organisational commitmentwill remain unaffected by the extent of reliance on incentive-based compensation schemes and the degreeof information asymmetry (i.e. Cell 5 = Cell 6 = Cell 7 = Cell 8, see Table 1).

Accordingly, the following hypotheses are tested:

H01 (:). There is no statistically significant three-way interaction between information asymmetry,reliance on incentive-based compensation schemes and organisational commitment affecting managerialperformance.

HA1 (:). The performance level of managers with low organisational commitment will be higher whenthe extent of reliance on incentive-based compensation schemes is high rather than low under highinformation asymmetry situations.


HA2 (:). The performance level of managers with high organisational commitment will remain unaf-fected by the extent of reliance on incentive-based compensation schemes and the degree of informationasymmetry.

3. Research method

3.1. Sample selection

Data for this study were collected from a sample of senior managers selected from business sub-unitsof 176 manufacturing firms with more than 100 employees using a mail survey method. These firmswere randomly chosen from the list of manufacturing firms published in Kompass Australia (1996). Thenames of 225 senior managers were gathered. The criteria for inclusion in the sample were as follows:(1) the companies must have at least 100 employees; and (2) the respondents were required to haveresponsibility for operations of their business sub-units. Telephone calls were made to each manager toensure that the above criteria were met and to ascertain whether the manager was willing to participatein the research project. This resulted in a sample of 179. Forty-six managers were not included in thefinal sample for a number of reasons. Some failed to meet the criteria. Others could not be contacted andsome had retired or left the companies. Furthermore, some of the companies had ceased to operate orhad moved.

Each participant was sent a questionnaire together with a cover letter and a prepaid self-addressedenvelope for the questionnaire to be returned directly to the researcher.5 Questionnaires were pre-codedto enable non-respondents to be traced and follow-up to be executed. A follow-up letter and anothercopy of the questionnaire were sent to those who had not responded after three weeks. Of the 179 ques-tionnaires distributed, 147 were returned, giving a response rate of 82%.6 A total of 16 questionnaireswere excluded from the study for incomplete responses and 10 for unreliable responses.7 In addition,12 respondents who had a mean score of less than 24 on the scale for the information asymmetryconstruct were also excluded from the data analysis.8 This left the study with 109 useable responses.The mean age of the respondents was 47 years. On average, the respondents had worked for theirpresent company for 10 years and had been in their current position for 7 years. The average number ofemployees in the respondents areas of responsibility was 143 and the companies had an average of 694employees.

5 The present study utilised the survey method because it provides accessibility to a large sample and enables the collection ofdata for many variables. To ensure external validity, this study used a random sample and established instruments developed inprior studies.

6 The high response rate was the result of the telephone calls made by one of the researchers to each participant. Such anapproach whereby each of the potential participants was spoken to personally was undertaken to ensure that they would becommitted to the research project, and would complete and return the questionnaires.

7 We conducted diagnostic measures for identifying influential observations. Our results reveal that 10 cases have exceeded therecommended threshold based on the Studentised residuals, Mahalanobis distance and Cooks distance (see Hair et al., 1998).Consequently, we excluded these 10 outliers from our study. A test of the regression results based on 119 (before the exclusionof the 10 outliers) and regression results based on 109 (after exclusion of the 10 outliers) show no statistical differences.

8 A total score of less than 24 indicates that information asymmetry did not exist (see Dunk, 1993 for a detaileddiscussion).


3.2. Measurement of variables

3.2.1. Information asymmetryInformation asymmetry was measured based on a six-item, seven-point Likert-type scale developed

by Dunk (1993). A factor analysis confirmed the unidimensional nature of the information asymmetryconstruct. The results indicate satisfactory construct validity (Kerlinger, 1964) in which all six items wereloaded above the 0.5 level of the first factor (Eigenvalue = 3.787; total variance explained = 63.12%). Theuse of the information asymmetry scale yielded a Cronbach Alpha coefficient (Cronbach, 1951) of 0.88,which indicates satisfactory internal reliability for the scale (Nunnally, 1967).

3.2.2. Organisational commitmentOrganisational commitment was measured by a nine-item short-form version of the organisational

commitment questionnaire (OCQ) developed by Mowday et al. (1979). The short-form seven-pointLikert-type scale instrument was used because acceptable levels of reliability and validity have beenreported in the prior literature (see Angel and Perry, 1981; Price and Mueller, 1981; Blau, 1987; Nouri,1994; Collins et al., 1995; Nouri and Parker, 1996, 1998; Chong et al., 2006). A factor analysis of thenine-item OCQ was conducted to examine its dimensionality. A factor analysis with varimax rotationindicated that except for items 1 and 9, which loaded on the second factor, all other seven items loadedon the first factor. The first factor (Factor I called value commitment), which accounted for 36.60% of thetotal variance explained, contains seven items interpreted here as indicating identication with organi-sational values. The second factor (Factor II called effort commitment), which accounted for 22.84% ofthe total variance explained, contains two items interpreted here as indicating a willingness to exert effortin order to keep the organisation successful. Consistent with prior accounting studies (e.g. Nouri, 1994;Nouri and Parker, 1996, 1998; Chong et al., 2006) which have used this instrument the scores of the nine-items were summed to form a composite measure of organisational commitment. The significant positivecorrelation between the average scores of the two factors (r = 0.295, p < 0.01) allowed their scores to beaggregated to provide the overall score for the instrument (Brownell, 1985). The Cronbach alpha coeffi-cient (Cronbach, 1951) was 0.80, which indicates satisfactory internal reliability for the scale (Nunnally,1967).

3.2.3. Incentive-based compensation schemeThe incentive-based compensation scheme variable was measured by a two-item, five-point Likert-

type scale developed by Balkin and Gomez-Mejia (1990). The positive correlation between the twoitems (r = 0.863, p < 0.01) allowed their scores to be aggregated to provide the overall score for theinstrument (Brownell, 1985). A factor analysis confirmed the unidimensional nature of the incentive-based compensation scheme construct. The results indicate satisfactory construct validity (Kerlinger,1964) in which the two items are loaded above the 0.5 level on the first factor and have an Eigenvalueof 1.863, which explains 93.16% of the total variance. The use of the measure yielded a Cronbach alphacoefficient (Cronbach, 1951) of 0.93, which indicated high internal reliability for the scale (Nunnally,1967).

3.2.4. Managerial performanceManagerial performance was measured by an instrument using a self-rating scale developed by

Mahoney et al. (1963, 1965). This scale has been used extensively and found to be reliable in other man-


Table 2Inter-correlation matrix for each dimension of managerial performance (n = 109)

1 2 3 4 5 6 7 8 9

1 Planning 1.0002 Investigation 0.338 1.0003 Coordinating 0.513 0.392 1.0004 Evaluating 0.351 0.610* 0.413 1.0005 Supervising 0.536 0.304 0.450 0.343 1.0006 Staffing 0.459 0.390 0.397 0.536 0.540 1.0007 Negotiating 0.308 0.373 0.407 0.452 0.269 0.514 1.0008 Representing 0.346 0.526* 0.517 0.540 0.244 0.431 0.347 1.0009 Overall performance 0.528 0.421 0.605 0.543 0.590 0.583 0.510 0.528 1.000

All correlation coefficients are significant at p < 0.001 level (two-tailed test).* Correlation coefficients that violate the criterion.

agement accounting studies (Lau et al., 1995; Chong, 1996; Chong and Chong, 2002; Chong and Eggleton,2003).9 This nine-dimensional, seven-point Likert-scale instrument comprises eight items relating to var-ious managerial activities, plus one overall performance dimension. The eight managerial activities are:planning, investigating, coordinating, evaluating, supervising, staffing, negotiating and representing (seeMahoney et al., 1963, 1965). To test for the validity and reliability of the managerial performance scale,analyses were undertaken to ensure that the measure met two criteria: (1) the eight sub-dimensions mustaccount jointly for at least 55% of the variation in the overall performance rating (see Mahoney et al.,1963, 1965), and (2) the eight sub-dimensions must be reasonably independent of each other.

To test the first criterion, i.e. to find out how much of the global rating variance was explained bythe eight managerial activities, the overall rating was regressed on the ratings of the eight separatemanagerial activities in a single multiple regression. The resulting R2 indicates that the eight separatedimensions explained 62% (n = 109) of the variance in the overall performance rating. These values com-pare favourably with the claim of Mahoney et al. (1963, pp. 105107) that the eight separate dimensionsshould account for approximately 55% of the variance of the overall rating, with the remaining 45% beingjob-specific.

To test the second criterion, i.e. to assess whether the eight separate dimensions were reasonablyindependent of each other, Pindyck and Rubinfelds (1976) method was used. According to this method,the correlation between any two independent variables in a sample should be less than the correlation ofeach variable with the dependent variable. Prior studies (see e.g. Brownell and McInnes, 1986) have usedthis method to assess the independent dimensions of the managerial performance scale. Table 2 presentsthe matrix of the intercorrelations among the eight separate dimensions of managerial performance,

9 This scale has been criticised for higher leniency error and lower variability error in the observed score than superior ratings(see e.g. Prien and Liske, 1962; Thornton, 1968; Lau et al., 1995). However, Heneman (1974) found that superiors ratingsof performance were more lenient than self-ratings. Some studies (e.g., Prien and Liske, 1962; Thornton, 1968; Heneman,1974) have found that halo errors (intercorrelations among performance sub-dimensions) are also more common with superiorsratings. Halo error refers to the tendency of raters to make global assessments of the variable and to be unable to differentiatetheir assessments on the various dimensions (Brownell, 1995, p. 45). Brownell (1995) argued that self-rated performance is lesssusceptible to halo error, especially if the ratings are sought on a number of dimensions (as with Mahoney et al.s performancescale). Self-raters are able to discriminate among performance dimensions. Further, self-assessment instruments can producemore reliable and uninhibited responses from respondents when they are assured of anonymity and/or confidentiality.


Table 3Descriptive statistics and Pearson correlation matrix for the independent and dependent variables (n = 109)Variable Mean Median S.D. Actual range Theoretical range Pearson correlaton matrix

Min Max Min Max IA OC ICS PERF

Information asymmetry(IA)

5.44 5.50 0.83 4.00 7.00 4.00 7.00 1.00

Organisationalcommitment (OC)

5.40 5.44 0.72 3.00 7.00 1.00 7.00 0.05 1.00

Incentive-basedcompensation scheme(ICS)

3.20 3.00 1.51 1.00 5.00 1.00 5.00 0.07 0.20* 1.00

Managerial performance(PERF)

5.86 6.00 0.90 2.00 7.00 1.00 7.00 0.23* 0.10 0.08 1.00

* Significant at p < 0.05 level (two-tailed test).

and with the dependent variable (overall performance). The results in Table 2 reveal that only two ofthe possible 28 comparisons violate this criterion. Thus, the eight dimensions appear to be reasonablyindependent.10

A further test revealed that when the eight sub-dimensions were summed to construct a compositemanagerial performance score, they were significantly correlated (r = 0.763, p < 0.001) with the overallperformance rating. The above tests strengthen the confidence of the validity and reliability of the useof Mahoney et al.s scale to measure managerial performance. Consistent with prior accounting studies(e.g. Lau et al., 1995; Chong, 1996; Chong and Chong, 2002; Chong and Eggleton, 2003), the hypothesestesting was based on the overall performance rating of the Mahoney et al.s scale as the dependent variable.

4. Results

Table 3 presents the descriptive statistics and Pearson correlation matrix for the independent anddependent variables of this study.

The hypothesis H01 advanced in this paper was tested using the following models11:

PERF = b0 + b1IA + b2ICS + b3OC + b4IA ICS + b5IA OC + b6ICS OC + e (1)

10 To further assess whether the eight separate dimensions are reasonably independent of each other, a rotated factor analysiswas conducted by forcing the eight factors since Mahoney et al.s scale is expected to consist of eight independent dimensions.It is argued that if the eight dimensions are independent of each other, they should load on eight different factors. In other words,the results of the factor analysis will show only one item to be loaded significantly on each factor, and no two factors share thesame item. The results of the rotated factor analysis are shown in Appendix A and reveal that there are eight factors present.Each factor consists of only one item, with the highest factor score, as indicated by the shaded box.11 We used deviation scores, which were based on the overall mean score minus the raw scores, for all independent variables

in our regression models. Thus, a low raw score has a positive deviation score and a high raw score has a negative deviationscore. We conducted tests on the adequacy of the multiple linear regression models and the results of the residual and normalityof probability plots indicate that the normality assumptions underlying the regression models were not violated. These resultsprovide support for the use of multiple regression analysis and add confidence to the validity of the statistical results obtained.


Table 4Results of multiple regression analysis of managerial performance on information asymmetry, reliance on an incentive-basedcompensation scheme and organisational commitment

Variables Coeff. Eq. (1) (Two-way) Eq. (2) (Three-way)Est. p Est. p

1-tailed 1-tailed

Constant b0 5.900 0.001 5.896 0.001Information asymmetry (IA) b1 0.250 0.009 0.263 0.007Incentive-based compensation scheme (ICS) b2 0.057 0.164 0.052 0.186Organisational commitment (OC) b3 0.139 0.129 0.096 0.220IA ICS b4 0.037 0.289 0.085 0.118IA OC b5 0.017 0.460 0.065 0.355ICS OC b6 0.112 0.092 0.095 0.129IA ICS OC b7 0.214 0.049R2 0.092 0.116F-value 1.716 1.898p< 0.063 0.039

R2 explained by three-way interaction term = 2.4%.

PERF = b0 + b1IA + b2ICS + b3OC + b4IA ICS + b5IA OC + b6ICS OC + b7IA ICS OC + e (2)

Where PERF: managerial performance; IA: information asymmetry; ICS: incentive-based compensationscheme; OC: organisational commitment; and e: error term.

Hypothesis H01. Hypothesis H01 states that there is no statistically significant three-way interactionbetween information asymmetry, reliance on incentive-based compensation schemes, and organisa-tional commitment affecting managerial performance. To test this hypothesis, managerial performancewas regressed on information asymmetry, incentive-based compensation scheme and organisationalcommitment. The results reported in Table 4 (see Eq. (2)) indicate there is a statistically significant(p < 0.049) three-way interaction between information asymmetry, reliance on incentive-based compensa-tion schemes and organisational commitment affecting managerial performance. Accordingly, hypothesisH01 can be rejected.

The introduction of the three-way interaction term in Eq. (2) results in an increase in R2 (from 9.2% to11.6%), indicating that the three-way interaction between information asymmetry, reliance on incentive-based compensation schemes and organisational commitment improved the predictive ability of the model.

Hypotheses HA1 and HA2. To test the alternative Hypotheses HA1 and HA2, and to assist in the interpre-tation of the interactive effect results presented in Table 4, both information and asymmetry and relianceon incentive-based compensation scheme were dichotomised at their respective raw score medians.12

The following regression models were used to test the main effect and the two-way interaction effectbetween reliance on incentive-based compensation schemes, and information asymmetry under the low

12 The results were similar when the independent variables were dichotomised at the mean.


Table 5Results of multiple regression analysis of managerial performance on information asymmetry and reliance on an incentive-basedcompensation scheme

Variables Eq. (3) (main effect) Eq. (4) (two-way)Coeff. Est. p Est. p

1-tailed 1-tailed

Panel A: Low organisational commitment sub-sample (n = 52)Constant b0 5.805 0.001 5.827 0.001Information asymmetry (IA) b1 0.200 0.131 0.203 0.121Incentive-based compensation scheme (ICS) b2 0.213 0.023 0.221 0.017IA ICS b3 0.250 0.032R2 0.095 0.158F-value 2.570 3.012p< 0.044 0.020R2 explained by two-way interaction term = 6.3%

Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p 1-tailed Est. p 1-tailed

Panel B: High organisational commitment sub-sample (n = 57)Constant b0 5.984 0.001 5.980 0.007Information asymmetry (IA) b1 0.296 0.007 0.313 0.006Incentive-based compensation scheme (ICS) b2 0.049 0.217 4.901 0.221IA ICS b3 0.042 0.274R2 0.122 0.128F-value 3.761 2.600p< 0.015 0.031R2 explained by two-way interaction term = 0.6%

and high organisational commitment sub-samples.

PERF = b0 + b1IA + b2ICS + e (3)PERF = b0 + b1IA + b2ICS + b3IA ICS + e (4)

where PERF: managerial performance; IA: information asymmetry; ICS: incentive-based compensationscheme; and e: error term.

Eqs. (3) and (4) were used to test the main effect and the two-way interaction effect, respectively. Asshown in Table 5, Panel A, the interaction between information asymmetry and reliance on incentive-based compensation schemes on managerial performance was found to be statistically significant for thelow organisational commitment sub-sample, but not statistically significant for the high organisationalcommitment sub-sample (see Table 5, Eq. (4): p < 0.032, Panel A, and p < 0.274, Panel B, respectively).These results provide initial support to hypothesis HA1. It is noteworthy that with the low organisationalcommitment sub-sample, the introduction of the two-way interaction term in Eq. (4) results in a substantialincrease in R2 (from 9.5% to 15.8%), indicating that the two-way interaction between the degree ofinformation asymmetry and the extent of reliance on incentive compensation schemes improved thepredictive ability of the model.


Table 6Mean performance of low organisational commitment sub-sample

In addition, the results shown in Table 6, Panel A, indicate that the mean managerial performancescore is highest in the high information asymmetry and high reliance on incentive-based compensa-tion scheme cells (Cell 4 = 6.75 > Cell 1 = 5.50; Cell 2 = 5.56, and Cell 3 = 5.50). Statistical support forour results is further provided by a post hoc test of multiple comparisons (Bonferroni t-test); and areshown in Table 6, Panel B. Furthermore, the steep slope of the high reliance on incentive-based com-pensation scheme line in Fig. 1 provides additional evidence of the sensitivity of the managers withlow organisational commitment under high information asymmetry situations. Taken together, theseresults are consistent with our theoretical expectation, that the performance level of managers with loworganisational commitment will be high when the extent of reliance on incentive-based compensationschemes is high and the degree of information asymmetry is high, and therefore provide strong support forhypothesis HA1.

Hypothesis HA2 states that the performance level of managers with high organisational commitmentis unlikely to be affected by the extent of reliance on incentive-based compensation schemes and the


Fig. 1. The impact of the interaction between reliance on an incentive-based compensation scheme and information asymmetryon managerial performancelow organisational commitment sub-sample.

degree of information asymmetry. This suggests there will be no significant two-way interaction betweeninformation asymmetry and reliance on incentive-based compensation schemes in the high organisa-tional commitment sub-sample. As expected, the results reported in Table 5, Panel B indicate thatthe coefficient of the two-way interaction term (b3) is not significant (p < 0.274, Eq. (4)). Note thatthe introduction of the two-way interaction term in Eq. (4) results in a very marginal increase in R2(from 12.2% to 12.8%).

In addition, the results shown in Table 7, Panel A, indicate that the mean managerial performancescores remain relatively unaffected by the degree of information asymmetry and the extent of reliance onincentive-based compensation schemes. Fig. 2 provides a graphical presentation of the results. Further-more, the results of a post hoc test of multiple comparisons (Bonferroni t-test) are shown in Table 7, PanelB. Taken together, these results are consistent with our theoretical expectation that the performance levelof managers with high organisational commitment is unlikely to be affected by the extent of reliance onincentive-based compensation schemes and the degree of information asymmetry, and therefore providesupport for hypothesis HA2.

5. Conclusion, limitations and suggestions for future research

The purpose of this study was to investigate the interactive effects of the degree of information asym-metry, managers levels of organisational commitment and the extent of reliance on incentive-basedcompensation schemes on managerial performance. The results of this study demonstrated that twocontingent variables, namely information asymmetry and organisational commitment, can be usefullyexamined jointly. The results indicate that whether reliance on incentive-based compensation schemes


Table 7Mean performance of high organisational commitment sub-sample

enhances managerial performance depends on whether subordinates behaviour can be easily and read-ily motivated. This in turn depends upon their level of organisational commitment, as organisationalcommitment affects the level of effort subordinates will exert on the job.13

Specifically, the results of our study reveal that the performance level of managers with low levelsof organisational commitment was high when the extent of reliance on incentive-based compensationschemes and the degree of information asymmetry were both high (see hypothesis HA1). This result lendssupport to standard agency theory predictions which assumed that individuals are: (1) effort-averse and

13 Recall that the organisational commitment scale consists of two sub-dimensions (see Section 3.2.2). Further analysis usingeach of the two sub-dimensions, in turn, as the independent variables in the model was undertaken. The results of these dimensionsanalysis were similar to those of the global analysis, which relied on the composite measure of the organisational commitmentmeasure. Appendices B and C provide the results of the dimensions analysis. Overall, the results provide evidence of therobustness of our empirical findings.


Fig. 2. The impact of the interaction between reliance on an incentive-based compensation scheme and information asymmetryon managerial performancehigh organisational commitment sub-sample.

risk-averse; (2) possess low levels of organisational commitment; and (3) are motivated solely by self-interest. It is noteworthy that when the assumptions of standard agency theory are relaxed, the role of anincentive-based compensation scheme is not important. For example, the results of hypothesis HA2 revealthat the performance level of managers with high levels of organisational commitment remained relativelyunaffected by the degree of information asymmetry and the extent of reliance on incentive-based compen-sation schemes. Taken together, the results of this study contribute to the management accounting literatureby responding to calls (e.g. Eisenhardt, 1988; Waller, 1994, 1995; Merchant et al., 2003) to integrate theo-ries, such as agency theory and behavioural theory, to better understand the joint effects of an agency factor(e.g. information asymmetry) and a behavioural factor (e.g. organisational commitment) on the relationbetween the extent of reliance on incentive-based compensation schemes and managerial performance.14

The results of this paper have practical implications for the selection and placement of managers aswell as for the effective design of incentive-based compensation schemes. An organisation is only asstrong as the people it comprises. Thus, decisions made about whom to select and who to reject fororganisational membership are critical to the companys ability to derive competitive advantage throughits human resources. Bowen et al. (1991), for example, argue that firms should look at individuals interms of their long-term potential to contribute to the organisation, as opposed to a short-term focus onmeeting the requirements of one specific job. As such, the emphasis should be on matching the poten-tial employees personal attributes and characteristics to those of the organisational culture. In addition,the results of this paper indicate that not all individuals are positively affected by a high reliance onincentive-based compensation schemes. The results suggest that a high reliance on an incentive-based

14 Eisenhardt (1988), for example, compared the agency and institutional perspectives on organisational control, and concludedthat relying on multiple theories in research can enhance our understanding of phenomena.


compensation scheme is an appropriate motivational tool for managers with low levels of organisa-tional commitment under high information asymmetry situations, but is dysfunctional for such managersunder low information asymmetry conditions. Further, a company should consider the use of policiesthat increase the commitment of its managers to the companys goals and values; as such policiesare also important to the effective implementation of appropriate control tools such as incentive-basedcompensation schemes.

A number of limitations of this study should be noted. First, this study did not consider othervariables which might be significant to the design of effective incentive-based compensation sys-tems and their impact on managers performance. For example, at the organisational (macro)-level,the potential variables that might affect incentive-based compensation scheme design and manage-rial performance include the organisations strategies (Fisher and Govindarajan, 1993; Chong andChong, 1997; Langfield-Smith, 1997), and the external environment (Chong and Chong, 1997; Mia andClarke, 1999; Chong and Rundus, 2004). At the individual (micro)-level, the potential variables includedecision-makers cognitive styles (Awasthi and Pratt, 1990) and personality traits (Chong and Eggleton,2003).

Second, this study focused only on the extent of the use of incentive-based compensation schemes byorganisations to address their agency problem (i.e. moral hazard). It has been suggested that monitoringsystems, which provide information about the agents behaviour, is another alternative approach availableto the principal to address the agency problem (see Eisenhardt, 1989). Conlon and Parks (1990) suggestinvestigating whether theoretical matches between incentive-based compensation schemes and monitor-ing systems produce better performance than mismatches between these variables. Milgrom and Roberts(1992), on the other hand, propose that both incentive-based compensation schemes and monitoringsystems can be used either as substitutes or complements.15 Thus, it is plausible that incentive-based com-pensation schemes and monitoring systems could interact to affect an agents performance. In addition,prior studies (see e.g. Fatseas and Hirst, 1992) have examined the types of compensation schemes (suchas fixed-pay and piece-rate) on individuals performance. Future research to explore the joint and inter-active effects of incentive-based compensation schemes, monitoring systems, and types of compensationschemes on performance would be worthwhile.

Third, the sample comprised only senior-level managers drawn from large manufacturing companiesin the Perth and Sydney metropolitan areas; consequently, the results are potentially generalisable tothe Australian managerial populations, but are restricted to a similar level of management. In particular,generalising the results to non-manufacturing industries should be viewed with caution. Future researchmay extend and replicate this work focusing on other industries, such as the financial services sector, andretailing industries. Fourth, the use of self-rating scales to measure perceptions are likely to have highermean values (higher leniency error) and a restricted range (lower variability error) in the observed scorecompared to more objective methods (Prien and Liske, 1962; Thornton, 1968). Future research mightusefully incorporate superiors ratings of their managers to compare with the managers self-ratings as ameans of assessing the validity of the construct.

15 Milgrom and Roberts (1992) suggest that incentive-based compensation schemes and monitoring systems act as substitutesif either managerial effort or the outcomes of managerial effort can be accurately assessed. When the effort can be accuratelymeasured, a monitoring system will result in outcomes desired by the principal. When the outcomes are accurately measured,the incentive-based compensation scheme can be designed in ways that align the agents and the principals interests. Otherresearchers (e.g. Holmstrom, 1979; Shavell, 1979) also suggest that both incentive-based compensation schemes and monitoringsystems are likely to result in benefits to the principal.


Finally, this paper relied on the standard principal-agent theory model which consists of a single-period and single-agent phenomena. Such a model has been criticised for its simplicity and narrowness(see e.g. McKean, 1975; Collard, 1978; Noreen, 1988; Baiman, 1990; Indjejikian, 1999). Thus, futureresearch can extend this study by relying on experimental design methodology to explore the impact ofthe reliance on incentive-based compensation schemes on performance in multi-period and multi-agentsettings.

Despite the above limitations, this study developed and tested an interactive model of incentive-basedcompensation system design, an important and complex area of management accounting research. Mostimportantly, the results of this paper contribute and extend the existing knowledge of the managementaccounting literature in the area of management control systems design, and provide a useful basis forsubsequent theoretical development in the field and related empirical analyses.

Acknowledgements

The authors would like to thank A. Rashad Abdel-Khalik, Michael Bromwich (the Editor), AmyLau, Chong Man Lau, Lokman Mia, two anonymous reviewers, and participants of the research sem-inars at Griffith University and the University of Western Australia for their helpful comments andsuggestions on earlier drafts of this paper. An earlier version of this paper was presented at the 2003Accounting and Finance Association of Australia and New Zealand (AFAANZ) Annual Conference, Bris-bane, Australia and the 2006 American Accounting Association (AAA) Annual Meeting. Washington,D.C. USA.

Appendix A. Factor analysis of managerial performance scale (n= 109) (Rotated factor matrix)


Appendix B. Additional results with the effort dimension of organisational commitment as oneof the independent variables

See Tables B.1B.4 and Figs. B.1 and B.2.

Table B.1Results of multiple regression analysis of managerial performance on information asymmetry, reliance on an incentive-basedcompensation scheme and effort dimension of organisational commitmentVariables Coeff. Eq. (1) (Two-way) Eq. (2) (Three-way)

Est. p Est. p1-tailed 1-tailed

Constant b0 5.756 0.001 5.726 0.001Information asymmetry (IA) b1 0.337 0.002 0.245 0.013Incentive-based compensation scheme (ICS)

b2 0.092 0.068 0.103 0.038Effort dimension of organisational commitment (EFFORT) b3 0.249 0.013 0.241 0.012IA ICS b4 0.126 0.045 0.089 0.103IA EFFORT b5 0.067 0.319 0.149 0.136ICS EFFORT b6 1.380 0.442 0.015 0.412IA ICS EFFORT b7 0.306 0.001R2 0.139 0.244F-value 2.750 4.657p< 0.008 0.001


Fig. B.1. The impact of the interaction between reliance on an incentive-based compensation scheme and information asymmetryon managerial performancelow effort dimension of organisational commitment sub-sample.


Table B.2Results of multiple regression analysis of managerial performance on information asymmetry and reliance on an incentive-basedcompensation scheme

Variables Coeff. Eq. (3) (Main effect) Eq. (4) (Two-way)Est. p Est. p

1-tailed 1-tailed

Panel A: Low effort dimension of organizational commitment sub-sample (n = 45)Constant b0 5.815 0.001 5.796 0.001Information asymmetry (IA) b1 0.537 0.002 0.403 0.014Incentive-based compensation scheme (ICS) b2 0.058 0.258 0.083 0.171IA ICS b3 0.229 0.022R2 0.198 0.274

F-value 5.183 5.167p< 0.005 0.002R2 explained by two-way interaction term = 7.6%


1-tailed 1-tailed

Panel B: High effort dimension of organizational commitment sub-sample (n = 64)Constant b0 5.612 0.001 5.600 0.001Information asymmetry (IA) b1 0.145 0.159 0.115 0.209Incentive-based compensation scheme (ICS)

b2 0.139 0.044 0.155 0.031IA ICS b3 0.108 0.128R2 0.057 0.077F-value 1.844 1.674p< 0.084 0.091R2 explained by two-way interaction term = 2.0%


Table B.3Mean performance of low effort dimension of organisational commitment sub-sample


Table B.4Mean performance of high effort dimension of organisational commitment sub-sample


Fig. B.2. The impact of the interaction between reliance on an incentive-based compensation scheme and information asymmetryon managerial performancehigh effort dimension of organisational commitment sub-sample.

Appendix C. Additional results with the value dimension of organisational commitment as oneof the independent variables

See Tables C.1C.4 Figs. C.1 and C.2.

Table C.1Results of multiple regression analysis of managerial performance on information asymmetry, reliance on an incentive-basedcompensation scheme and value dimension of organisational commitment

Variables Coeff. Eq. (1) (Two-way) Eq. (2) (Three-way)Est. p Est. p

1-tailed 1-tailed

Constant b0 5.814 0.001 5.813 0.001Information asymmetry (IA) b1 0.253 0.021 0.361 0.002Incentive-based compensation scheme (ICS) b2 0.136 0.027 0.099 0.071Value dimension of organisational commitment (Value) b3 0.038 0.382 0.048 0.349IA ICS b4 0.054 0.245 0.101 0.121IA Value b5 0.096 0.300 0.074 0.361ICS Value b6 0.184 0.019 0.104 0.114IA ICS Value b7 0.493 0.001R2 0.114 0.208F-value 2.155 3.795p< 0.027 0.001



Table C.2Results of multiple regression analysis of managerial performance on information asymmetry and reliance on an incentive-basedcompensation scheme


1-tailed 1-tailed

Panel A: Low value dimension of organizational commitment sub-sample (n = 48)Constant b0 5.862 0.001 5.869 0.001Information asymmetry (IA) b1 0.094 0.312 -0.155 0.208Incentive-based compensation scheme (ICS) b2 0.237 0.019 -0.203 0.035IA ICS b3 0.256 0.045R2 0.096 0.153F value 2.377 2.654p< 0.052 0.030R2 explained by two-way interaction term = 5.7%


1-tailed 1-tailed

Panel B: High value dimension of organisational commitment sub-sample (n = 61)Constant b0 5.845 0.001 5.832 0.001Information asymmetry (IA) b1 0.449 0.001 0.474 0.001Incentive-based compensation scheme (ICS) b2 0.035 0.322 0.038 0.305

IA ICS b3 0.134 0.053R2 0.154 0.193F-value 5.297 4.536p< 0.004 0.003R2 explained by two-way interaction term = 3.9%


Table C.3Mean performance of low value dimension of organisational commitment sub-sample


Table C.4Mean performance of high value dimension of organisational commitment sub-sample


Fig. C.1. The impact of the interaction between reliance on an incentive-based compensation scheme and information asymmetryon managerial performancelow value dimension of organisational commitment sub-sample.

Fig. C.2. The impact of the interaction between reliance on an incentive-based compensation scheme and information asymmetryon managerial performancehigh value dimension of organisational commitment sub-sample.

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The impact of reliance on incentive-based compensation schemes, information asymmetry and organisational commitment on managerial performanceIntroductionHypotheses developmentThe relation between incentive-based compensation schemes and performanceStandard agency theory view: the moderating role of information asymmetry on the relation between incentive-based compensation schemes and performanceThe effects of organisational commitmentThe three-way interaction hypothesis

Research methodSample selectionMeasurement of variablesInformation asymmetryOrganisational commitmentIncentive-based compensation schemeManagerial performance

ResultsConclusion, limitations and suggestions for future researchAcknowledgementsFactor analysis of managerial performance scale (n=109) (Rotated factor matrix)Additional results with the effort dimension of organisational commitment as one of the independent variablesAdditional results with the value dimension of organisational commitment as one of the independent variablesReferences

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