Title

Noncontrollable factors in the performance evaluation of profit center managers under divisionalized organization environment (research on the determinants of interorganizational differences in controllability principle implementation)

Date of Award

1996

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Business Administration

Advisor(s)

Badr Ismail

Keywords

Accounting, Management, controllability principle

Subject Categories

Accounting

Abstract

This dissertation analyzes practices of large divisionalized organizations which consider noncontrollable factors when they evaluate and compensate for performance of profit center managers, contrary to controllability principle. According to the controllability principle, no account should be taken of matters outside the profit center manager's control in appraising and compensating for the performance of divisional management.

Empirical studies and a wide variation in the implementation of controllability principle in practice. There are interorganizational (across organizations) and intraorganizational (within an organization) differences of the controllability principle implementation. However, research regarding factors which explain these differences in practice is limited. Empirical researchers suggest several organizational factors as determinants of these differences. But they are unable to show a strong statistical relationship between practice and those organizational factors.

In this study, the autonomy of a division, an exogenous organizational factor, is tested. The objective of this study is to see whether exogenous organizational structure variables, particularly divisional autonomy, are determinants of the difference in firms' implementation of the controllability principle (interorganizational difference). In addition, different degrees of consideration of noncontrollable factors within an organization depending on various noncontrollable cost items (signals) are studied (intraorganizational difference). The second objective is to identify the properties of the optimal controllability and an agent, density functions of revenue and cost, and organizational characteristics.

The results of this study show that organizational factors which are claimed by a number of empiricists as determinants of controllability principle implementation do not seem to influence the implementation of the controllability principle directly. Rather, endogenous variables such as risk attitude, moral hazard, and correlation of signals seem to be determinants of varying degree of controllability principle implementation. In terms of optimal allocation of noncontrollable costs among organizations, the strength of risk aversion, moral hazard, and correlation between revenues and costs are factors that differentiate the controllability principle in practice vis-a-vis theoretic propositions. Factors which may affect these endogenous variables provide an opportunity to suggest several hypotheses.

As an extension of this dissertation, hypotheses suggested here (about interorganizational and intraorganizational differences) can be tested based on survey data regarding direct endogenous factors. But data collection about the risk attitude of a principal and an agent, moral hazard of a principal and an agent, and correlation needs extended research. In addition, other than the autonomy variable that is tested here, other exogenous environmental organizational variables can be included into this model as test variables. Lastly, the research on the relationship between exogenous and endogenous factors will also clear the inability of exogenous variables to explain interorganizational difference of the controllability principle implementation.

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