Multidimensional performance evaluation styles: budget rigidity and discretionary adjustments

Abstract

Purpose This study aims to reconceptualize performance evaluation styles and reveal their performance effects. Design/methodology/approach Based on a literature review, this study conceptualizes performance evaluation styles on two dimensions: priority of budgetary targets when setting performance criteria and use of accounting information for ex-post performance evaluation. This study discusses two concepts – budget rigidity and discretionary adjustments – to explain these two dimensions, and their optimal combination is then investigated by considering environmental uncertainty. The empirical analysis uses survey data from Japanese firms. Findings The results indicate that suitable combinations of budget rigidity and discretionary adjustments differ depending on environmental uncertainty. As expected, a combination of lower budget rigidity and higher discretionary adjustments is optimal in an uncertain environment. Contrary to expectations, a combination of higher budget rigidity and higher discretionary adjustments is optimal in a stable environment. Moreover, higher discretionary adjustments complement budgetary targets’ motivational effects, regardless of environmental uncertainty. Originality/value This study’s theoretical and empirical analysis suggests that it is difficult to understand the performance implications of performance evaluation styles without recognizing their multidimensionality and interdependencies. Moreover, the results demonstrate that discretionary adjustments in budget-based performance evaluations seem to act rationally in practice.

Editorial

“…The third paper appearing in the special issue is by Masuya and Yoshida (2020), with the title "Multidimensional Performance Evaluation Styles: Budget Rigidity and Discretionary Adjustment." This paper continues the tradition of management accounting research that was quite popular in the 1980s and early 1990s.…”