Are More Formal Performance Management Systems More Successful?

Abstract

This paper focuses on the levels of formality of performance management systems (PMSs). The objective of the paper is to investigate the impact of the formality of PMS 1) on the key success factors (KFs) of PMS and 2) on the achievement of performance. The formality of PMS is investigated on three different levels: structured and formal PMS, formal PMS, and informal PMS. We define a PMS structured & formal when it is designed and built upon a well-known existing system structure, such as the BSC. It is regarded as formal when it is formal and designed by the own staff of the firm. PMS is considered informal when the firm does not use any formal system. The paper makes use of the chain framework developed by Kadak and Laitinen (2016) to assess the links between the formality and KFs. The links between the formality and performance are assessed by three different impact measures on performance. The results implicate that the usage of a structured & formal PMS has stronger links to KFs of PMS than the usage of the formal in-house designed PMS. Moreover, the usage of a formal PMS leads to stronger links with KFs than using an informal PMS. Formal PMSs make a stronger impact on financial performance than an informal PMS. The same finding can also be observed for achievement of strategic objectives and non-financial performance but the results are not statistically significant due to the small number of informal PMS (5) in the sample. Thus our empirical findings encourage organizations to implement PMSs based on the existing system structures rather than own in-house design and to move from the usage of informal PMSs to formal systems.

How Different Are Performance Management Systems? Empirical Typology of Performance Management Systems

“…The chain approach can be considered contemporary as it includes the elements and features of contemporary PMSs: 1) a PMS uses financial and non-financial performance measures (Cheng et al, 2007;Franco-Santos et al, 2007;Ittner et al, 2003); 2) translates business strategies into deliverable results (Hall, 2008); 3) aligns management processes, such as target setting, End of Table 1 decision-making, and performance evaluation, with the achievement of chosen strategic objectives (Matos et al, 2019;Ittner et al, 2003); and 4) adopts diverse key performance indicators (KPIs) and the KPIs are linked to the organization's business strategy (Matos et al, 2019;Franco-Santos et al, 2012). The chain model has been used as a framework for analysing the formality of PMSs (Kadak & Laitinen, 2016b) and the success of PMSs (Laitinen & Kadak, 2019). In this study, the KFs of the chain model will be used to extract the typology of PMS.…”

How different types of performance management systems affect organizational performance?

“…Their focus on PMSs, however, has been different from the focus of this study. First, Kadak and Laitinen (2016b) investigated the relations between the formality levels of PMS and the success (strength of CP chain) of PMS showing, PMSs that are more formal are more successful. Second, Laitinen and Kadak (2018) analyzed the relations between the size of the firm and the characteristics of PMS summarizing that PMSs are stronger the larger are the firms.…”