Virtual Issue on Empirical Management Accounting Research1

Margaret A. Abernethy
Department of Accounting
The University of Melbourne

Dennis Campbell
Harvard Business School
Harvard University

1. Introduction

Management accounting research typically studies how to direct and motivate people ‘to do
the right things’ through incentives, information, or both. Since its very first issues, JAR has
drawn our attention to the difficulty of doing so as Devine (1964) highlights in his critique
of A Behavioral Theory of the Firm.The empirical management accounting research
published over the past decade in the journal notably picks up on this theme with a substantial
focus on the role of management accounting and control systems in organizational contexts
where tasks are complex, ambiguous and difficult to measure.

We focus on a set of 13 empirical papers published in JAR over the past 10 years that points
to the idea that management accounting and control practices in complex contracting
environments are not easily understood solely through the lens of traditional agency theory.
These papers tend to draw on a variety of theoretical frameworks ranging from newer
economic models of organizational culture and relational contracts to related theories from
sociology and psychology. They collectively give us new and important insights into the roles
of incentives, information, and employee selection in shaping norms, decision-making, and
performance in organizations.

2. Review of Selected Empirical Management Accounting Research Published in JAR During

the Past 10 Years
At least three empirical papers over the past decade explicitly explore management control
issues in settings where output is complex and difficult to measure.

1. Kachelmeier, Reichert and Williamson (2008) draw on both economics and psychology to

study the effects of incentives on output in the context of creativity, an objective that is
important for many firms but can be ambiguous and difficult to measure. Their well-designed
experiment draws our attention to the complexity of creating incentives that encourage both
productivity and creativity. Despite the possibility that firms can implement multidimensional
performance measurement systems (e.g. “balanced scorecards”) that include measures of both
productivity and creativity, their results indicate that people ‘tend to simplify
multidimensional objectives by prioritizing on one objective over others’ and that ‘adding
creativity to multidimensional performance measures can do more harm than good’. While
not the direct focus of the paper, their results point to the importance of other forms of
management control, such as employee selection, in contexts where creative or other output
can be difficult to measure.

2. Campbell (2012) draws on economic theories of corporate culture to examine this latter

issue directly by studying the role of selection as a means of influencing difficult to measure
performance outcomes in the context of consumer lending. Traditional incentive solutions to
control in his setting are difficult because employees are required to use judgment in their
current lending decisions, but the outcomes of these decisions can occur far into the future
and be affected by a variety of external factors. The results provide empirical evidence for the
idea that “input” controls – namely, the selection of employees whose preferences are better
aligned with organizational objectives – can be efficient and effective in complex contracting
environments where output measurement is difficult or costly.

3. While Campbell (2012) relies at least partially on the theory that employee selection and
incentive contracts can be substitutes under some conditions and complements under
others, Abernethy, Dekker and Schulz (2015) study this issue directly. They use survey data
across firms to assess if there is a trade-off between employee selection and the use of
incentive contracts. They limit their main analysis to firms which are expected ex ante to
operate in complex contracting environments, namely those for which learning is a key
organizational objective. The results are intriguing in identifying conditions under which
employee selection can act as either a substitute or as a complement to incentive contracts.
Another set of papers draws our attention to the importance of more subtle forms of control.
These studies collectively suggest an important link between management control system
design and organization culture through the development and reinforcement of social norms.

4. Tayler and Bloomfield (2011) examine how personal and descriptive norms can function
as informal controls, and how these norms can be activated or muted by formal control
systems. They find in an experimental setting that by activating individuals’ self-interested
norms, formal controls can mute desired personal norms (e.g., altruism) of individuals as well
as their tendency to conform to the desired behaviors of others around them (i.e., the
descriptive norms). Importantly, their evidence suggests these effects are long lasting and
persist even after controls are changed. Their results demonstrate the potentially influential
effect that formal controls can have on norms and behavior within organizations.

5. Chen and Sandino (2012) draw our attention to the role of compensation in facilitating the
development of social norms among rank and file employees. They collect archival data from
two retail stores and draw on efficiency wage theories to study the mitigation of employee
theft – a problem that is hard to control and costly to firms. Their work goes beyond the
traditional honesty-inducing control mechanisms in the accounting literature to examine how
paying workers more than their counterparts in other organizations – so called “efficiency
wages” – can activate norms of reciprocity . The results are consistent with the idea that
efficiency wages facilitate norms of reciprocity whereby employees are less likely to steal
and collude with each other.

6. Maas and Van Rinsum (2013) use an experiment to show how the firm’s incentive system
can interact with its information policy to influence managers’ social preferences and their
misreporting behavior. They find that the design of an incentive contract can determine
whether managers’ social preferences will lead to more, or less, performance misreporting.
They also show that managers’ misreporting behavior can be mitigated by their tendency to
be honest (following personal norm) and their desire to appear honest in front of others. The
openness of the information policy also increases honesty. This paper is notable in
documenting that incentive contracts are not only useful in rewarding and motivating effort,
but can also be used to shape the norms in the organization.

7. Cardinaels and Yin (2015) draw our attention to how ‘tone at the top’ can influence social
norms within a firm. Using a two-stage experiment they demonstrate that it is not just the
design of the incentive contract that matters but the ‘soft’ information that flows from the
choices a principal makes about providing incentives in the first place. When the principal
actively uses an incentive contract rather than a fixed salary to reward employees, it conveys
to a new agent that the descriptive norm in the firm is self-interest. The agent responds to this
soft information by conforming to what they perceive are the descriptive norms of their peers.
This has a negative consequence as the agent is now more likely to engage in undesirable
behavior (e.g., misreporting).

Another set of related papers focuses on the prevalence of implicit incentives in organizations
– that is incentives that do not reside in any explicit performance contract but depend on the
expected future relationships between employees, managers, and firms. These studies
examine different forms and consequences of implicit incentive contracts.

8. Hales and Williamson (2010) examine implicit incentive contracts in a multi-period

experimental setting. In their work, implicit incentives arise based on expectations about how
the manager will allocate post-production resources between owners and employees. Their
findings indicate that reputation concerns in this setting encourage higher firm productivity
and employee payoffs, but only under conditions in which manager pay is relatively
insensitive to the owner's ex post allocation. The findings are important in providing a
potential explanation for why executive compensation is relatively insensitive to owner
returns.

9. Campbell (2008) explores implicit incentives by examining the role of nonfinancial

performance metrics in organizational promotion decisions. Promotions provide incentives
when they reward past performance with increased pay and rank in the organization.
Promotions serve a matching function when they sort employees into the jobs for which their
skills and abilities are best suited. The results show that non-financial performance measures
facilitate this latter matching role by providing important information about the capabilities
and expected future performance of lower-level employees. This use of nonfinancial
measures for matching creates powerful multi-period implicit incentives in his research
setting: employees subject to the strongest promotion incentives exert more effort and, more
intriguingly, more learning on nonfinancial dimensions of performance.

10. Grabner and Moers (2013) explore the incentive versus sorting role of performance
measures even more directly. Using unique panel data from a retail bank, they show that as
the difference between the current task environment and that at the next level of promotion
increases, promotion decisions of superiors become less sensitive to objective measures of
performance in the current job and more sensitive to subjective assessments of individual
ability. In using novel data and clever empirical design to directly measure these dynamic
shifts in the weighting of different types of metrics, their work provides important new
insights on how performance measures are chosen and incorporated in promotion-based
implicit incentive contracts.

While the above papers focus largely on various types of formal and
informal incentive mechanisms, a more recent stream of empirical research uses novel field-
experiments to examine important questions on the potential impact of information on
decision-making, productivity, and performance.

11. Li and Sandino (2018) conduct a field experiment at a retail organization in which they
were able to exogenously increase access to information about the creative work of peers
through a randomized implementation of a new information sharing system. While they find
no average effect of this system on the quality of creative work, job engagement, or financial
performance, they do find important heterogeneous treatment effects. Positive effects of
information access materialize only under three conditions in their study: (1) when users
engage more actively with the system, (2) when users have greater potential to learn from
new information given their lack of creativity, lack of exposure to others’ creative work (due
to distance from other business units), or both; and (3) their need to customize their creative
work to divergent local market conditions.

12. Lorenco, and Martinez-Jerez (2017) conduct a field-experiment in which they

exogenously vary both the frequency and level of detail of feedback on customer satisfaction
and other nonfinancial performance measures. Their results are important and surprising in
showing that more detailed and frequent feedback does not necessarily lead to better
performance. In their field-setting, better performance is achieved when feedback is detailed
but infrequent. Their results are consistent with a dynamic by which previous information is
disregarded as new information becomes available. This information “salience” effect has
potentially important theoretical implications for the optimal frequency of performance
feedback.

13. Eyring and Narayanan (2018) explore information effects in the context of peer
comparison. Using the novel setting of online education, they conduct a field-experiment to
measure the performance effects of setting high reference points (top quartile versus median).
Their empirical analysis yields a performance effect that is concave in initial performance,
with the effect being negative for students below the median and positive for those between
the median and top quartile. Their results point to reference points as a critical design choice
in information display for purposes of peer comparison.

Overall, these 13 papers collectively address the challenges of designing management

accounting and control systems when firms face complex contracting environments. A key
theme is that economic frameworks provide useful insights to study how informal controls
and the design of the internal information environment can influence behavior, build desired
social norms and perhaps even shape organizational culture. These frameworks recognize the
importance of integrating social psychology into traditional economic models in order to
solve complex control problems. This set of empirical papers also points to the opportunities
of using unique databases and well-designed experiments to study accounting and control
systems in practice, and they demonstrate the symbiotic relation that has developed between
experimental and field-based research. We believe there remains great scope for management
accounting researchers to get into the field and document empirically the nature, causes, and
consequences of these often complex systems. Research in this area should also continue to
be informed by theoretically grounded and well implemented experimental studies. We are
optimistic that JAR has been, and seems poised to remain, at the forefront of publishing high
quality research in this area.

References

1. ABERNETHY, M. A., DEKKER, H. C. and SCHULZ, A. K. (2015), Are Employee

Selection and Incentive Contracts Complements or Substitutes? Journal of Accounting
Research, 53: 633-668.

2. CAMPBELL, D. (2008), Nonfinancial Performance Measures and Promotion‐Based

Incentives. Journal of Accounting Research, 46: 297-332.

3. CAMPBELL, D. (2012), Employee Selection as a Control System. Journal of Accounting

Research, 50: 931-966.

4. CARDINAELS, E. and YIN, H. (2015), Think Twice Before Going for Incentives: Social
Norms and the Principal's Decision on Compensation Contracts. Journal of Accounting
Research, 53: 985-1015.
5. CASAS‐ARCE, P. , LOURENÇO, S. M. and MARTÍNEZ‐JEREZ, F. A. (2017), The
Performance Effect of Feedback Frequency and Detail: Evidence from a Field Experiment in
Customer Satisfaction. Journal of Accounting Research, 55: 1051-1088.

6. CHEN, C. X. and SANDINO, T. (2012), Can Wages Buy Honesty? The Relationship

Between Relative Wages and Employee Theft. Journal of Accounting Research, 50: 967-
1000.

7. DEVINE, CARL THOMAS. “A Behavioral Theory of the Firm: A Review

Article.” Journal of Accounting Research, vol. 2, no. 2, 1964, pp. 197–220.

8. EYRING, H. and NARAYANAN, V. G. (2018), Performance Effects of Setting a High

Reference Point for Peer‐Performance Comparison. Journal of Accounting Research, 56:
581-615.

9. GRABNER, I. and MOERS, F. (2013), Managers' Choices of Performance Measures in

Promotion Decisions: An Analysis of Alternative Job Assignments. Journal of Accounting
Research, 51: 1187-1220.

10. HALES, J. and WILLIAMSON, M. G. (2010), Implicit Employment Contracts: The

Limits of Management Reputation for Promoting Firm Productivity. Journal of Accounting
Research, 48: 147-176.

11. KACHELMEIER, S. J., REICHERT, B. E. and WILLIAMSON, M. G.

(2008), Measuring and Motivating Quantity, Creativity, or Both. Journal of Accounting
Research, 46: 341-373.

12. LI, S. X. and SANDINO, T. (2018),  Effects of an Information Sharing System on

Employee Creativity, Engagement, and Performance. Journal of Accounting Research, 56:
713-747.

13. MAAS, V. S. and VAN RINSUM, M. (2013), How Control System Design Influences
Performance Misreporting. Journal of Accounting Research, 51: 1159-1186.

14. TAYLER, W. B. and BLOOMFIELD, R. J. (2011), Norms, Conformity, and Controls.

Journal of Accounting Research, 49: 753-790.