This experimental study examined whether sustainability performance measures matter in managerial appraisal and bonus decisions. Participants received financial and non-financial information about four branch managers of a commercial bank, with different combinations of sustainability and financial performance. Participants perceived sustainability measures as being less important than financial ones; still, the experiment revealed that sustainability performance had some impact on appraisal and bonus decisions (albeit it mattered less than financial performance). Evaluators seemed to penalize inferior sustainability performance less than they penalized inferior financial performance. They also seemed to reward sustainability success less than financial success. These findings have practical implications for the implementation of sustainability measures in managerial evaluation systems. The experimental results indicated that incorporating these measures in evaluations does not necessarily mean they will have a sizable effect in decision-making. Results from a companion experiment suggested that organizations using a sustainability balanced scorecard for appraisal and bonus purposes might benefit from an increased emphasis on communication and evaluator training, with a focus on how sustainability performance impacts the attainment of strategic objectives.
Bento, R.F., Mertins, L. and White, L.F. (2019), "Do Sustainability Measures Matter in Managerial Appraisal and Rewards?", Lehman, C.R. (Ed.) Beyond Perceptions, Crafting Meaning (Advances in Public Interest Accounting, Vol. 21), Emerald Publishing Limited, pp. 1-24. https://doi.org/10.1108/S1041-706020190000021001Download as .RIS
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Accountants face a pressing challenge: to help organizations develop measurement systems and tools that communicate the importance of sustainability to managers in the frontlines. Performance measures focusing on sustainability are needed to support decision-making and reporting of how managerial actions impact an organization’s social, environmental, and economic performance, the three pillars of corporate sustainability (Epstein & Buhovac, 2014).
Sustainability concerns are receiving growing attention at the societal level, and advances have been made in the reporting of sustainability performance to external stakeholders (Global Reporting Initiative, 2015). In a survey by the United Nations and Accenture, an international consulting firm, 89% of chief executive officers (CEOs) responded that “commitment to sustainability is translating into real impact in their industry” and 86% “believed that standardized impact metrics will be important in unlocking the potential of business” with respect to sustainability goals (United Nations Global Compact & Accenture, 2016).
So far, however, most of the focus of the emerging accounting literature in this area has been on the external reporting of sustainability initiatives (Bebbington, Unerman, & O’Dwyer, 2014). Kloviene and Speziale’s (2014) review of sustainability studies published in the 2000–2014 period identified 117 journal articles on sustainability reporting and performance measurement; yet, their review did not include any empirical study dealing with the impact of sustainability measures on the evaluation of managerial performance. A similar focus on external reporting was present in Huang and Watson’s (2015) extensive review of corporate social responsibility (CSR) research in accounting, where they analyzed the previous 10 years of CSR studies in the top 13 accounting journals (47 original research papers).
This leaves a significant gap in our knowledge about how societal and corporate concerns regarding sustainability are being translated within organizations, all the way to the level of individual performance: can we assume that a manager’s sustainability performance matters for evaluators, just because it is being measured, and even formally included in the managerial performance appraisal and reward process? That is the question at the core of this study.
Here we examine whether sustainability “matters” when evaluators make key decisions: how are appraisal and bonus decisions influenced by different combinations of high or low performance in sustainability measures, vis-à-vis high or low performance in financial measures?
We addressed these questions in an experimental study where participants were asked to evaluate the performance of four branch managers of a commercial bank and make decisions on their appraisal and rewards. Participants received information about how the managers had performed along the sustainability perspective and the four perspectives (Financial, Customer, Internal Business, and Learning & Growth) that are typical for the balanced scorecard (BSC). Managerial performance was manipulated within subjects to generate the following four scenarios (illustrated in Fig. 1):
“Both High” scenario: a win–win performance situation, where a manager had both high financial and high sustainability performance (HiF/HiS).
“Both Low” scenario: a lose–lose performance situation, where a manager had both low financial and low sustainability performance (LoF/LoS).
“Higher Finance” scenario: a mixed performance situation, where a manager had high financial performance, but low sustainability performance (HiF/LoS).
“Higher Sustainability” scenario: a reverse, mixed performance situation, where a manager had low financial performance, but high sustainability performance (LoF/HiS).
The next three sections review the literature and formulate the hypotheses for our study of the four scenarios, describe its methodology, and present its results. This is followed by a section about a companion experiment – a robustness test which focused on the two mixed performance scenarios (HiF/LoS vs LoF/HiS) –where we investigated how the perceived importance of sustainability might be affected by variables such as the presentation format of performance measures and the evaluators’ familiarity with those measures. This article concludes with a discussion about the implications and relevance of the study (including the companion experiment), as well as its limitations and directions for future research.
Main Study: Literature Review and Hypotheses Development
Corporate sustainability has been defined in many ways. At first, the term sustainability was mainly focused on environmental concerns, but it has evolved into a more comprehensive concept which also includes social and economic issues (Keijzers, 2002; Van Marrewijk, 2003); therefore, it has many similarities with the CSR paradigm which encompasses economic, social, and environmental aspects (Sharma & Mehta, 2012). Concerns about sustainability and CSR are increasingly being integrated into the corporate agenda (Massachusetts Institute of Technology (MIT) Sloan School of Management & Boston Consulting Group, 2011, cited in Pérez-López, Moreno-Romero, & Barkemeyer, 2015). Freedman and Stagliano (2010) point out that organizational sustainability performance can be a holistic concept, including not only environmental performance, but also the quality of systems of corporate governance, efficient use of resources, or the way an organization treats its employees (p. 73). Although sustainability and CSR are often used synonymously, Van Marrewijk (2003) suggests that there is a difference between the two concepts:
[one should link] CSR with the communion aspect of people and organizations and CS [corporate sustainability] with the agency principle. Therefore, CSR relates to phenomena such as transparency, stakeholder dialogue and sustainability reporting, while CS focuses on value creation, environment management, environmental friendly production systems, human capital management and so forth. (p. 102)
For the purposes of Huang and Watson’s (2015) extensive review of 10 years of CSR research in the top 13 accounting journals, CSR was defined as a
firm’s efforts to surpass compliance by voluntarily engaging in actions that appear to further some social good, beyond the interests of the firm and that which is required by law […] incorporating economic, legal, ethical and philanthropic responsibilities into decision-making. (p. 2)
Huang and Watson acknowledged the close relation between “corporate social responsibility” and “corporate sustainability,” remarking that a 2013 KPMG report revealed different usage among the world’s largest 100 firms: “corporate responsibility” (14%), “corporate social responsibility” (25%), and “sustainability” (43%). The articles they had included in their review, however, predominantly used “corporate social sustainability,” so that was the term they adopted for their own study of those articles.
Huang and Watson’s (2015) review encompassed four main themes (determinants of CSR, the relation between CSR and financial performance, consequences of CSR, and CSR disclosure/assurance). A broad spectrum of areas of activity (with the attendant measurement difficulties) was considered, involving multiple elements of CSR: environment, corporate governance, community relations, employee relations, diversity, human rights, and product or industry-related characteristics or controversies. Huang and Watson pointed out the important role that accountants play in CSR, and highlighted that integrating CSR measures into management control systems (MCS) can significantly improve a company’s control over CSR objectives and positively influence its CSR performance. Moreover, their review indicated that integrating CSR elements into an MCS may increase both environmental performance and financial performance, while acknowledging the potential tension between CSR objectives and traditional performance objectives, and stressing this as an important point for future research.
Shabana and Ravlin (2016) recommend the consideration of organizational issues such as compensation and performance management for a better understanding of substantive and symbolic CSR reporting. While the individual measures used to evaluate sustainability performance have CSR characteristics, in this study we focus on strategic internal sustainability reporting for performance assessment. The current G4 guidelines and the GRI Sustainability Reporting Standards, announced in Fall 2016 (scheduled to go in effect in July 2018), emphasize that sustainability measures and standards “create a common language for organizations and stakeholders … [allowing] internal and external stakeholders to make informed decisions” (Global Reporting Initiative, 2016).
The institutionalization of sustainability measures plays an important role in successfully understanding and reporting corporate sustainability performance. The noticeable trend toward external sustainability reporting has been accompanied by another trend proposing the use of sustainability balanced scorecards (SBSC) as an internal tool to support the achievement of sustainability goals. SBSCs are often an integral part of MCSs because they provide a summarized overview of variances between a company’s goals and actual results. SBSCs can be an important tool to communicate CSR performance, along with financial and other non-financial information, throughout an organization.
The SBSC originated in the practice, dating back to the first half of the 1900s, of companies reporting multiple performance indicators using both financial and non-financial measures (see, e.g., Pezet, 2009 and Epstein & Manzoni, 1997 for a description of the “Tableau de Bord” used by French companies). Building on this practice of multiple key performance indicators, Kaplan and Norton (1992) introduced the BSC first as an effective tool for measuring managerial performance along four financial and non-financial dimensions, and later as a system for managing performance (Kaplan & Norton, 2007). The BSC organizes multiple performance measures into integrated dimensions and communicates, through causal linkages among these dimensions, how performance measures can facilitate strategy execution (Banker, Chang, & Pizzini, 2004).
These properties have led the BSC to be regarded as a logical tool to help organizations implement sustainability initiatives and track progress toward the achievement of strategic sustainability goals. Okcabol and Hoffman (2015) suggest that an enhanced BSC approach, combined with the Environmental Managerial Accounting Initiative, might help counteract the tendency for US organizational environmental reporting to stick to the legally mandated minimum.
Organizations have designed sustainability scorecards in different ways (Figge, Hahn, Schaltegger, & Wagner, 2002), but the most common practice documented in the literature is to develop a fifth SBSC perspective dedicated to sustainability measures (Hansen & Schaltegger, 2016). This format has several advantages: it illustrates that sustainability performance is strategically relevant enough to have a perspective of its own (Epstein & Wisner, 2001), and that sustainability measures can be integrated via causal links with the other perspectives of the typical BSC (Figge et al., 2002; Hansen, Sextl, & Reichwald, 2010; Van der Woerd & Van den Brink, 2004). Field research has confirmed the need for additional perspectives in the SBSC to capture the unique aspects of sustainability performance (Chalmeta & Palomero, 2011; Hubbard, 2009; León-Soriano, Munoz-Torres, & Chalmeta, 2010).
This approach of adding a fifth perspective to the BSC is consistent with a recommendation by Kaplan and Norton (1996) that organizations rename or add perspectives while designing a BSC to fit their particular strategies (p. 33). More recently, in a comprehensive survey of SBSC architectures, Hansen and Schaltegger (2016) emphasized that there is no single best way to design a SBSC, as each organization should choose the SBSC hierarchy and degree of integration among measures that represents its strategic focus. In our study, we examined the five-perspective SBSC, where sustainability measures are grouped in their own perspective.
Perceived Importance of Sustainability Measures
While the SBSC is generally considered an appropriate tool to highlight the importance of corporate sustainability (Hansen & Schaltegger, 2016), it shares implementation challenges with the conventional BSC, particularly with respect to how managers weigh and combine multiple performance cues (see review by Cheng & Humphreys, 2012). Performance measure results may be combined in subjective evaluations, allowing evaluators to adjust their assessments to the unique strategies of each business unit. Alternatively, performance results may be aggregated using objective weights, leading evaluators to consider performance aspects that have been determined to influence overall organizational performance. This topic of subjective versus preset weights has not been explored in the context of sustainability performance, leaving the possibility of several biases in decision-making. BSC researchers have documented a series of biases in the way subjects frame performance information and make judgments about which cues to prioritize and which ones to downplay (e.g., Banker et al., 2004; Dilla & Steinbart, 2005; Humphreys & Trotman, 2011; Lipe & Salterio, 2000, 2002).
Among the judgment biases associated with BSC use in general (Chan, 2006), two have particular relevance for the implementation of the SBSC: financial measure bias and subjectivity bias. The financial measure bias, which is present not only in multiple measure systems (Carmona, Iyer, & Reckers, 2014) but also preceded BSC adoption and was a main impetus for its introduction (Johnson & Kaplan, 1987), leads evaluators to focus more on financial measures than non-financial ones (Cardinaels & Van Veen-Dirks, 2010; DeBusk, Killough, & Brown, 2005; Ittner, Larcker, & Meyer, 2003). The subjectivity bias stems from a lack of trust in the reliability of measures that are not independently audited or for which there are no consistent standards (Ittner et al., 2003; Malina & Selto, 2001). According to Ittner et al. (2003), when evaluations and rewards depend on subjective factors, evaluators focus on financial performance measures and place less emphasis on other BSC measures. In spite of the fact that the BSC was designed to highlight the importance of non-financial measures, the widespread practice of displaying the financial perspective first tends to create a sequencing effect that may contribute to the financial measure bias, since evaluators tend to emphasize the measures that are shown first (Neumann, Roberts, & Cauvin, 2011). Despite the fact that vocal support for sustainability has increased in recent years, the BSC judgment biases discussed above are still likely to affect how evaluators view sustainability measures in a SBSC, leading them to favor financial measures over sustainability measures.
Sustainability Performance Effect on Managerial Evaluations
Previous empirical findings suggest that good corporate governance and CEO public support of environmental initiatives are not enough to impact actual environmental performance at the firm level (Cong & Freedman, 2011; Cong, Freedman, & Park, 2014). Investors have often disregarded non-financial performance in areas such as sustainability because it is difficult to evaluate to what extent this information may have a material impact on financial performance (Ernst & Young, 2015). Inside organizations, even if evaluators perceive sustainability performance as important, that does not necessarily mean that these measures matter for their decision-making: evaluators might just pay lip service to the importance of sustainability performance, but not be influenced by it when making decisions about appraisals and rewards.
The process of making appraisal and bonus decisions involves dealing with multi-faceted information, in order to compare actual results vis-à-vis targets for a variety of measures, and to weigh these assessments to reach an overall performance rating. In practice, the SBSC typically includes four or more measures for each perspective, leading to a total of over a dozen measures being considered, which exceeds the conventional limits of human information processing (Miller, 1956). Under this cognitive load, evaluators are likely to resort to coping mechanisms, such as disregarding low-priority inputs (Eppler & Mengis, 2004). Evaluators may reduce cognitive effort by selecting certain performance measures and ignoring others when making decisions about which managers contributed to the achievement of the organization’s strategic objectives and thus should be rewarded. The critical question is which measures will be selected and which ones will be ignored.
According to outcome effect theory (Ghosh, 2005; Ghosh & Lusch, 2000; Long, Mertins, & Vansant, 2015), we expect evaluators to emphasize outcome indicators such as financial results (e.g., sales or profits) when assessing managers. While evaluators may pay attention to actions managers undertook to achieve sustainability targets, we hypothesize that the effect of financial performance on evaluations will be greater. Pojasec (2012) explained: “Most definitions of sustainability address action over the long term […] but […] too often, sustainability practitioners focus on ‘results,’ which reflect the outcome of performance” (p. 84). Dutta and Lawson (2009) further argue that, because organizational initiatives related to social and environmental goals may not translate into results immediately, they may be overlooked.
This financial emphasis is also predicted for bonus decisions: evaluators focus mainly on the achievement of financial targets because, if managers did not produce financial results as expected, there would be a smaller financial pool from which to draw the incentive compensation. As Kaplan and Norton (1996) acknowledged, the same organization may have performance appraisals based on a broad range of performance measures and still use only financial results as the basis for financial rewards. Dilla and Steinbart (2005) found that evaluators do consider unique measures of strategic importance; but, when assigning performance-based rewards, Van Veen-Dirks (2010) argued that evaluators emphasize the decision-influencing role of performance measures, and prioritize measures that have clear, unambiguous targets for bonus purposes. In the absence of explicit links between incentive compensation and efforts to reach sustainability targets or even exceed them (the “sustainability variance” studied by Dutta, Lawson, & Marcinko, 2016), evaluators may fail to focus on how sustainability performance is a key strategic imperative (Epstein & Wisner, 2001).
The discussion above leads us to propose that evaluators are likely to be influenced by both sustainability and financial performance when rating managers for appraisal and bonus purposes, but that the influence of financial results will be stronger than that of sustainability results. In other words, we expect that managers will be rewarded or penalized for excelling or failing in sustainability, but not as much as they will be rewarded or penalized for excelling or failing in financial performance.
We go beyond a simple test of statistical significance and focus on the effect size, as we are interested in comparing the effect sizes of differences in financial and sustainability performance. Even in cases where both financial and sustainability performance have a significant effect on appraisal and bonus ratings, assessing the magnitude of their effects and comparing them has practical relevance. Previous reviews of accounting literature (Borkowski, Welsh, & Zhang, 2001; McSwain, 2004) have alerted that accounting researchers need to pay greater attention to effect sizes, defined as “the degree to which a phenomenon is present in the population,” or “the degree to which the null hypothesis is false” (Cohen, 1977, p. 9, as cited in McSwain, 2004, p. 2). Effect sizes are particularly relevant for behavioral accounting research because of the relatively small sample sizes typical of accounting experiments, making effect sizes a crucial factor in determining statistical power, or the ability to detect an effect if one is present. As summarized by Borkowski et al. (2001, p. 64), “attention to statistical power and effect size can improve both the design and the reporting of behavioral accounting research,” consistent with the attention these topics have received in the psychology and education literatures. We formulate these hypotheses as follows:
H1. In appraisal decisions, the effect size of sustainability performance is smaller than the effect size of financial performance.
H2. In bonus decisions, the effect size of sustainability performance is smaller than the effect size of financial performance.
Main Study: Method
Participants and Procedure
The two hypotheses above were tested in an experimental study where participants were asked to evaluate the performance of four bank managers (Fig. 1), in order to make appraisal and reward decisions. The experiment involved 68 participants from a part-time graduate business program (Master of Business Administration/Master of Science in Accounting and Business Advisory Services) that caters to working professionals. They had an average work experience of 7.9 years, were 29.6 years old on average, and 44% of them were female. Participants completed the instrument in either a paper-based or an online format; when analyzing the responses, we controlled for the type of delivery method and found that it did not affect the results.
Participants were asked to evaluate performance reports of four branch managers of a commercial bank. They received information about how the four managers had performed in terms of 20 performance measures. The evaluation form for each branch manager appeared separately, one at a time, in a randomized sequence to reduce order effects. The 20 performance measures were chosen on the basis of a literature review that identified them as relevant for the banking industry and encompassed four measures for each of the four typical BSC perspectives (Financial, Customer, Internal Business, and Learning & Growth), plus four measures for a fifth perspective focused on CSR and sustainability.
The sustainability measures used in our study corresponded to the various categories included in the GRI guidelines (Global Reporting Initiative, 2013): the environmental category (percentage reduction in the use of energy, water, and paper); and the four sub-categories within the social aspect: (1) labor practices, (2) human rights (attraction and promotion of women and ethnic minorities as employees), (3) society (grants, donations, and loans to support local causes and community development), and (4) product responsibility (fair and responsible lending and pricing policies).
Even though we built on Lipe and Salterio (2000, 2002) and other experimental studies of the BSC (see, e.g., Banker et al., 2004; Banker, Chang, & Pizzini, 2011; Johnson et al., 2014), this study was set in the banking industry, a setting that is different from Lipe and Salterio’s retail stores. We expected that participants with work experience in other industries would be able to relate to the issues facing branch managers in a bank, and that the banking industry would offer a fruitful setting to examine both financial motives and sustainability concerns.
Financial measures are directly tied to what is arguably at the core of the industry’s raison d’être (Kahn, 2010). The preoccupation with attracting depositors creates pressure for banks to preserve their reputations in the communities they serve and to fulfill their fiduciary responsibilities. Banks also need to protect their legitimacy with various stakeholders, such as borrowers, investors, regulators, and communities at large. Thus, CSR and sustainability have become growing concerns in the banking industry, where sustainability reporting is increasingly more necessary (Buranatrakula & Swierczek, 2016; Carnevale & Mazzuca, 2014; Pan, 2016; Weber & Feltmate, 2016). According to the World Business Council for Sustainable Development, the financial industry is “an important sector for increasing sustainability” (Buranatrakula & Swierczek, 2016, p. 54); however, sustainability research has been mostly focused on manufacturing, despite the important role of the service sector in general and of financial services in particular (Pan, 2016). Recognizing the importance of a sustainable product portfolio, the Global Reporting Initiative issued specific guidelines for banks and other financial institutions regarding product responsibility. Competitive pressures, combined with increasing regulation, have prompted commercial banks to move to a strategic focus on “relationship banking” beyond simple compliance with sustainability guidelines, and to value customer service as well as community involvement.
Participants were asked to use the SBSC data about each of the managers depicted in Fig. 1 to evaluate these four managers for appraisal and bonus purposes. They were asked to provide an overall appraisal for each branch manager (from 1 = poor, to 100 = excellent), and make a bonus recommendation (from 1 = bonus definitely not recommended, to 10 = definitely recommended). At the end, participants rated the importance of each of the 20 measures for their decision-making (from 1 = low importance, to 5 = high importance), and indicated which (if any) of these measures were used in their own organizations; they also provided demographic information. The whole experimental task took around 15–20 minutes.
Main Study: Results
As predicted, sustainability performance measures were perceived as significantly less important than financial measures. When assessing the importance of the measures on a five-point scale (ranging from 1 = low importance, to 5 = high importance), participants rated sustainability significantly lower (p < 0.001) than financial measures (3.57 vs 4.04).
Sustainability Measures and Decisions about Appraisal and Bonus
H1. Sustainability versus financial performance and the appraisal decision: The results of appraisal ratings for the four managers are shown in Panel A of Table 1. The mean appraisal ratings were 86.29 for HiF/HiS, 79.09 for HiF/LoS, 61.96 for LoF/HiS, and 53.72 for LoF/LoS. Using analysis of variance (ANOVA), we found that these means are significantly different from each other (p < 0.01). We used paired-sample t-tests to examine the statistical significance of the differences in means for each of the six possible pairs of experimental conditions and reported them in Panel B of Table 1. All differences in means were statistically significant (p < 0.01).
|Panel A: Average Performance Appraisal and Bonus Ratings|
|Managers||Average Appraisal||Average Bonus|
|Panel B: Differences in Appraisal and Bonus Ratings|
|Manager Comparisons||Difference in Appraisala||Difference in Bonusa||Implications|
|1. HiF/HiS versus HiF/LoS||7.21||0.97||Sustainability performance has an effect|
|2. HiF/HiS versus LoF/HiS||24.34||3.43||Financial performance has an effect|
|3. HiF/HiS versus LoF/LoS||32.57||4.47||Financial and sustainability performance effects cannot be determined|
|4. HiF/LoS versus LoF/HiS||17.13||2.46||Financial and sustainability performance effects cannot be determined|
|5. HiF/LoS versus LoF/LoS||25.37||3.5||Financial performance has an effect|
|6. LoF/HiS versus LoF/LoS||8.24||1.04||Sustainability performance has an effect|
|Panel C: Effect size of sustainability and financial performance on appraisals and bonusesb|
|Manager Comparisons||Appraisal||Bonus||Implications: Effect Size|
|Cohen’s d||95% Confidence Interval||Cohen’s d||95% Confidence Interval||(0.2 = small;0.5 = medium;0.8 = large)|
|1. HiF/HiS versus HiF/LoS||0.742||0.50–0.98||0.636||0.39–0.88||Sustainability: medium to large effect|
|2. HiF/HiS versus LoF/HiS||1.936||1.69–2.18||2.021||1.78–2.26||Financial: very large effect|
|3. HiF/HiS versus LoF/LoS||2.138||2.08–2.56||2.418||2.18–2.66||Financial and sustainability effects cannot be determined|
|4. HiF/LoS versus LoF/HiS||1.456||1.21–1.70||1.512||1.27–1.75||Financial and sustainability effects cannot be determined|
|5. HiF/LoS versus LoF/LoS||1.869||1.63–2.11||2.095||1.85–2.34||Financial: very large effect|
|6. LoF/HiS versus LoF/LoS||0.633||0.39–0.87||0.609||0.37–0.85||Sustainability: medium effect|
aAll differences in means are statistically significant (p < 0.01).
bBased on dependent t-tests.
When comparing HiF/HiS and HiF/LoS (the managers in the two upper quadrants in Fig. 1), we find that participants rated the manager in the right upper quadrant (HiF/HiS) significantly higher (a difference of 7.21 out of 100) than the manager in the left upper quadrant (HiF/LoS), indicating that sustainability performance is important. When comparing the managers in the two lower quadrants of Fig. 1 – LoF/HiS and LoF/LoS (a difference of 8.24 out of 100) – again we find that sustainability is important.
In contrast, the differences in ratings between the two right quadrants (upper and lower) – HiF/HiS versus LoF/HiS (24.34 out of 100) – as well as between the two left quadrants (upper and lower) – HiF/LoS versus LoF/LoS (25.37 out of 100) – are much larger, suggesting that participants penalized HiF/LoS and LoF/LoS for low sustainability performance less than they penalized LoF/HiS and LoF/LoS for low financial performance.
In order to further investigate the effect size of sustainability versus financial performance on appraisals, we computed a Cohen’s d statistic for each of the six comparisons, and calculated the 95% confidence intervals for each Cohen’s d estimate (Cohen, 1992). As shown in the effect sizes reported in Panel C of Table 1, all effects can be considered medium or large (according to conventional interpretations of Cohen’s d results). It is worth noting that the confidence intervals for the two financial effect sizes (Panel C of Table 1, rows 2 and 5) do not overlap with the confidence intervals for the sustainability effect sizes (Panel C of Table 1, rows 1 and 6), suggesting that the effect size of sustainability performance is significantly smaller than the very large effect of financial performance. For example, in row 2 of Panel C, the estimated effect size of financial performance is 1.936, with the 95% confidence interval ranging from 1.69 to 2.18. In contrast, in row 1 of Panel C, the estimated effect size of sustainability performance is 0.742, with the 95% confidence interval ranging from 0.50 to 0.98.
Even if our study overestimated the effect size of financial performance (e.g., if the true value of d is at the lower end of the confidence interval, for example, around 1.69), and underestimated the effect size of sustainability performance (e.g., if the true value of d is closer to 0.98), the magnitude of the effect of sustainability on the appraisals of HiF/HiS and HiF/LoS would still be smaller than the effect of financial performance on the difference in appraisals between HiF/HiS and LoF/HiS, consistent with H1.
H2: Sustainability versus financial performance and the bonus decision: In our next hypothesis, we focused on the impact of sustainability versus financial performance on the bonus decisions. The average bonus ratings for the four experimental conditions shown in Panel A of Table 1 follow a very similar pattern to the one obtained for appraisals: the mean bonus ratings vary from 8.32 for HiF/HiS to 3.85 for LoF/LoS. As explained in the description of the experimental task above, the participants were asked if they recommended each manager for a bonus, using a scale of 1 (definitely not) to 10 (definitely yes).
The ANOVA results for bonus ratings confirm significant differences in bonus ratings among the four conditions (p < 0.01). Again, we compared the ratings of the four branch managers two by two using paired-sample t-tests. Similarly to the results for appraisal ratings (H1), all differences in mean bonus ratings were statistically significant (p < 0.01). As shown in Panel B of Table 1, while superior sustainability performance resulted in higher bonus ratings for HiF/HiS compared to HiF/LoS (a difference of 0.97 out of 10), and for LoF/HiS compared to LoF/LoS (a difference of 1.04 out of 10), the bonus differences between HiF/HiS and LoF/HiS (3.43 out of 10) and between HiF/LoS and LoF/LoS (3.50 out of 10) are significantly higher, suggesting that financial performance is more rewarded than sustainability performance for bonus purposes.
The tests on effect sizes using Cohen’s d statistics for bonus comparisons (Panel C of Table 1) led to results similar to those for appraisals: across experimental conditions, the effect sizes of sustainability performance on bonuses were smaller than the effect sizes of financial performance. The 95% confidence intervals for the effect sizes of sustainability performance (Panel C of Table 1, rows 1 and 6) had lower ranges and did not overlap with the same intervals obtained for financial performance (Panel C of Table 1, rows 2 and 5). This result regarding confidence intervals suggests that sustainability performance had a smaller effect size on bonuses, consistent with H2.
Companion Experiment: Mixed Performance Scenarios
We conducted a companion experiment to examine more closely the two mixed performance scenarios (HiF/LoS and LoF/HiS). As a robustness test, this other experiment investigated how the perceived importance of sustainability measures might be affected by the format in which they were presented and by the evaluators’ familiarity with those measures.
Theoretical Background and Hypotheses for the Companion Experiment
One possible way of mitigating the lower perceived importance of sustainability measures is through increased familiarity with such measures. In the accounting and finance literatures, familiarity has been linked to preferences for domestic investments and perceptions of their lower risk (Wang, Keller, & Siegrist, 2011), less bias in auditor judgments (Arnold, Collier, Leech, & Sutton, 2000), and increased confidence in the quality of accounting disclosures (Maroney, McGarry, & Ó hÓgartaigh, 2008). Cardinaels (2008) reported that when subjects are more familiar with managerial accounting concepts through education, they make more accurate decisions, even in complex settings such as customer profitability evaluations. Similarly, Neumann et al. (2011) found that subjects tend to assign greater importance to the measures with which they are most familiar. Therefore, we expected evaluators who are more familiar with sustainability measures to pay more attention to those aspects of performance. Hence, we examined the following hypothesis in the companion experiment:
H3. Evaluators who are more familiar with sustainability measures perceive them as more important, compared with those who are less familiar.
Another possible way of mitigating the lack of importance attributed to sustainability measures is to integrate them into the framework of the SBSC. As stated by Chenhall (2005), the “integrativeness” of a strategic performance measurement system helps managers understand how operational activities affect strategic goals, how measures of different dimensions of performance are interrelated, and how competitive strategies are developed. According to Banker et al. (2004), this ability of the BSC to integrate multiple measures and show their causal links is what makes the BSC an effective performance management system. In a later study, they found that “managers must view these measures within their strategic context” in order to use several and diverse performance measures (Banker et al., 2011, p. 259). Lipe and Salterio (2002) further explain the effect of categorizing measures into the BSC framework:
[…] when data items are grouped in ways meaningful to the decision maker, they may be combined …. The information is divided into groups, an assessment can be made of each group, and these assessments can then be combined. The organization of the BSC lends itself quite naturally to this kind of mental approach. (Lipe & Salterio, 2002, p. 533)
Cheng and Humphreys (2012) also found that organizing performance measures into the BSC categories may improve participants’ ability to judge accurately whether an information item is appropriate to a division’s strategy. In this case, the BSC perspectives offer a mental structure or “slots” in which an individual can store information, and build a cognitive representation of how each measure relates to the overall strategy. It is important for sustainability measures to be well integrated into the BSC design and not overshadowed by financial measures, since an overemphasis on financial performance may limit the focus on corporate sustainability performance (Contrafatto & Burns, 2013; Huang & Watson, 2015).
We hypothesize that the BSC structure with a sustainability perspective can also help managers appreciate the importance of those measures. Figge et al. (2002) support this assertion, arguing that such integration of sustainability into the SBSC is a necessary condition for organizations to succeed along the economic, environmental, and social dimensions of performance. Thus, the companion experiment tested the following hypothesis:
H4a. Evaluators using the SBSC perceive sustainability measures as more important than those using the List format.
Enhancing information about non-traditional strategic objectives such as those related to the environment has been found to increase evaluators’ emphasis on those objectives (Kaplan & Wisner, 2009). A powerful way to communicate such strategic information is through the use of a strategy map (Kaplan & Norton, 2001c). A strategy map, through its graphic representation of the causal linkages among performance measures, illustrates the relative importance of each measure and its relationship to strategic objectives (Kaplan & Norton, 2001a, 2001b). Ittner and Larcker (2003), for example, pointed out that not using strategy maps can result in companies adopting too many and irrelevant measures. In their experiments, Cheng and Humphreys (2012) demonstrated that organizing performance measures into the BSC perspectives did improve the participants’ judgments about strategy appropriateness. However, this effect was present only when the BSC was accompanied by a statement of strategic objectives. Furthermore, judgments about which pieces of information were relevant to the strategy were improved only with the use of a strategy map. The map helps subjects form a mental representation of the causal linkages among the strategic objectives, beyond linkages among performance measures.
Several studies have documented the power of the strategy map to reduce judgment biases. For example, Banker et al. (2004) found that strategy maps changed the way managers perceived performance measures: managers paid more attention to measures unique to the strategy of each business unit. Similarly, Banker et al. (2011) found that participants provided with a strategy map and a narrative containing information about the strategy made decisions that are more consistent with the strategic objectives. Banker et al. (2011) concluded that strategy maps are both a problem-structuring tool and a communication tool.
We extended this body of evidence on the benefits of strategy maps to examine whether it also improves perceived importance of sustainability measures. Figge et al. (2002) specifically recommended that organizations use a strategy map to show, graphically, how economic, environmental, and social dimensions of performance in the SBSC are causally linked to strategic objectives. We thus used the companion experiment to test the following hypothesis:
H4b. Evaluators using the SBSC with a strategy map perceive sustainability measures as more important than those using the SBSC without a strategy map.
Method of the Companion Experiment
The companion experiment involved 117 participants, averaging more than 14 years of business experience; they were on average 37 years old, and both genders were represented in roughly equal proportions (52% females). Out of the total number of 117 participants, 49 were attendees of a Research Lab session of the Institute of Management Accountants Conference. The remaining 68 were graduate students, who did not take part in the main study, but came from the same part-time graduate business program which caters to working professionals (MBA/MSc in Accounting and Business Advisory Services).
Just as in the main study, participants in the companion study also completed the instrument in either a paper-based or an online format, and our analysis of the responses, when controlling for the type of delivery method, revealed no effect on the results. The presentation format of the performance data was manipulated between subjects, as participants were randomly assigned to three experimental groups: List (measures listed without an organizing framework), SBSC (measures displayed in a SBSC format), and SBSC with map (SBSC supplemented by a strategy narrative and a strategy map). The level of familiarity with the different types of measures was assessed on the basis of participants’ self-reports.
Results on Factors Affecting the Perceived Importance of Sustainability
H3. Familiarity and perceived importance of sustainability: Just as in the main study, the companion experiment also found that sustainability performance measures were perceived as significantly less important than financial measures. On a five-point scale (ranging from 1 = low importance, to 5 = high importance), participants rated sustainability significantly lower (p < 0.001) than financial measures (3.47 vs 4.11).
We then tested whether this comparatively lower importance of sustainability vis-à-vis financial measures might be affected by familiarity with sustainability measures. Participants reported which of the sustainability performance measures in the study were also used in their organizations. This usage data enabled us to classify respondents into two groups (Table 2): (a) those who were “more familiar” with sustainability measures (defined as those whose organizations used a majority of the four sustainability measures in the study, that is, three or all four measures), and (b) those who were “less familiar” with sustainability measures (whose organizations used zero, one, or a maximum of two sustainability measures). This enabled us to compare the difference in perceived sustainability importance between the “more familiar” and “less familiar” groups. After an F-test revealed that the two groups had different variances (p = 0.018), we used the separate-variance t-test and found a statistically significant (p < 0.01) difference in means (3.82 vs 3.43), suggesting that individuals who are more familiar with the sustainability measures perceive them as more important. These results support H3.
|Familiarity with Sustainability Measures|
|More familiar (three or more sustainability measures)||3.82a||0.88|
|Less familiar (two or fewer sustainability measures)||3.43a||1.14|
aThe difference in means between the two groups is statistically significant (p < 0.010) based on a t-test dependent variable: sustainability importance rating (scale 1–5)
In addition, we conducted this analysis at different levels of familiarity (e.g., being familiar with two or more measures, being familiar with one or more measures), but found no statistically significant differences (p > 0.10). Consequently, it seems that familiarity with sustainability measures only increases their perceived importance when participants are familiar with at least the majority of these measures (in this case at least three of the four measures).
H4a. Use of SBSC and perceived importance of sustainability: We employed an ANOVA (Table 3, Panels A and B) to examine the difference in perceived sustainability importance between the “List” and the “SBSC with or without map” formats. Although participants in the “SBSC with or without map” format perceived the importance of sustainability measures higher (3.54) than the participants in the “List” format (3.36), this difference was not statistically significant. Therefore, H4a is not supported.
|Perceived Importance of Sustainability Measures - List versus SBSC with or without Map|
|Panel A: Descriptives|
|SBSC with or without map||304||3.54||1.12|
|Panel B: Analysis of Variance|
|Source of Variation||df||Sum of Squares||Mean Square||F||p-Valuea|
|Perceived Importance of Sustainability Measures - SBSC with/without Map|
|Panel C: Descriptives|
|SBSC without map||144||3.54||1.06|
|SBSC with map||160||3.53||1.17|
|Panel D: Analysis of Variance|
|Source of Variation||df||Sum of Squares||Mean Square||F||p-Valuea|
Note: Dependent variable: Perceived importance of sustainability measures (scale 1–5).
H4b: Use of a strategy map in the SBSC and perceived importance of sustainability: In addition, individuals with a strategy map were expected to rate the importance of sustainability measures higher than those in the SBSC without map condition. The results do not support this prediction. In Table 3, Panels C and D reveal that there were no statistically significant differences in perceived importance between the two conditions.
Discussion, Conclusion, and Implications
This study investigated the perceived importance of sustainability performance measures, vis-à-vis financial measures, and tested whether sustainability performance “matters” in appraisal and bonus decisions. It suggests that accounting scholars and practitioners may have reasons to be concerned about the lack of importance of sustainability measures in managerial evaluations. On the other hand, it also opens intriguing theoretical and practical directions to address those concerns.
In spite of the growing support for sustainability at the societal level, and widespread sustainability reporting to external stakeholders, our results suggest that sustainability concerns may still not have gained enough impact inside organizations. Both in the main study and in the companion experiment, evaluators explicitly rated sustainability as less important than financial measures, for the purposes of appraisal and bonus decisions. This empirical finding inspires concern about the lesser importance of sustainability. As discussed later, however, the results of the companion experiment suggest some promising avenues for counteracting this lower perceived importance of sustainability measures.
Effect of Sustainability Performance on Appraisals and Bonuses
The results from the main study’s comparisons of the four branch managers with different combinations of sustainability and financial performance suggest that sustainability performance does matter for appraisal and bonus decisions, even if does not matter as much as financial performance. Evaluators seemed to penalize inferior sustainability performance less than they penalized inferior financial performance. They also seemed to reward sustainability success less than financial success.
These findings have practical implications for the implementation of sustainability measures in managerial evaluation systems. Our results suggest that simply incorporating these measures in evaluations does not necessarily mean they will have a sizable effect in decision-making. Future studies should examine how evaluators’ consideration of sustainability performance when making appraisal and bonus decisions might improve with specific training on the use of the SBSC for appraisal and bonus purposes, with a focus on how sustainability performance impacts the attainment of strategic objectives.
Perceived Importance, Familiarity, and Presentation Format
The results of the companion experiment (focused on the mixed performance scenarios) suggest several implications for research and practice. Particularly relevant is the fact that they supported our “familiarity” prediction – that is, the perceived importance of sustainability measures tended to increase with familiarity. Therefore, interventions targeted at increasing familiarity offer a promising direction for scholars and practitioners interested in the theoretical and practical question of how to increase the perceived importance of sustainability measures. For example, a study that examines how perceived sustainability importance might be influenced by training (comparing perceived importance before and after a training intervention that highlights the relationship between sustainability measures and overall strategic objectives) may lead to interesting insights about how evaluators may consider sustainability in their appraisal and bonus decisions.
Behavioral research has questioned the traditional assumption that changes in attitudes drive changes in behaviors, proposing instead that sometimes changes in behaviors may lead to changes in attitudes. This would suggest that organizations do not need to wait for an increase in the perceived importance of sustainability measures to lead to an increase in their use; instead, if organizations increasingly use sustainability measures, evaluators will become more familiar with these measures and will be more likely to perceive them as important. For example, organizations can promote sustainability behaviors by incorporating sustainability in day-to-day performance measurement systems and, with time, training, and experience, managers are likely to believe that these measures are indeed important for organizational success.
From a research standpoint, the specific direction of causality needs to be explored: does use of sustainability measures drive perceptions of importance or vice versa? What types of training could increase familiarity? What social-proof mechanisms could influence adoption (Cialdini, 2007)? Our results point out that familiarity with more than a few measures is necessary in order to change attitudes. It seems that it is not enough for an organization to adopt one or two sustainability measures when experimenting with sustainability performance management; they have to make sustainability visible with a group of measures. But more research is needed on what is the ideal number of sustainability measures that engender effective use, without causing information overload (Eppler & Mengis, 2004).
Another factor we expected would improve the perceived importance of sustainability measures was to present them in a format that contextualized their contribution to the achievement of strategic objectives. However, the results of the companion experiment did not support the predicted impact of format, given that presenting performance data in a list, in the SBSC framework, or in a SBSC with a strategy map did not seem to influence evaluators’ perceptions of sustainability importance. This lack of support for the predicted impact of format suggests that displaying sustainability performance in the context of a SBSC may not be enough to assist managers in integrating “conventional strategic management with corporate sustainability management” (Hansen & Schaltegger, 2016, p. 196). These findings suggest a possible role for training in SBSC use and strategic maps, to help managers recognize how performance in each SBSC perspective can contribute to success in other perspectives.
Limitations and Directions for Future Studies
For over a decade, experimental research in performance management has typically used the same industry setting and performance measures as Lipe and Salterio (2000, 2002), focusing on clothing retail stores (Banker et al., 2004; Cardinaels & Van Veen-Dirks, 2010; Kaplan, Petersen, & Samuels, 2012; Neumann, Roberts, & Cauvin, 2010, 2011). We placed our experimental setting in the banking industry, where sustainability has become an increasingly recognized issue (Buranatrakula & Swierczek, 2016; Carnevale & Mazzuca, 2014; Pan, 2016; Weber & Feltmate, 2016). On the other hand, this innovation may become a limitation, if future replication studies indicate a difficulty in generalizing the findings to other industries. In addition, the participants in this study may not have had sufficient experience with the banking industry, or lacked knowledge about the relevance of sustainability for the bankers’ performance, even though they had an average work experience of 8 years in the main experiment, and 14 years in the companion experiment. Studies across a variety of industries and types of organizations would be useful to investigate perceived importance of sustainability performance and identify major factors driving evaluations of sustainability performance in different settings.
In our study, we focused on whether sustainability measures matter from a very specific standpoint: the evaluator’s decision-making about managerial appraisal and rewards. This is a relevant question, but it leaves out another area of inquiry: do the appraisal and bonus decisions of evaluators, in turn, matter for the sustainability performance of the managers themselves? Future empirical research, including experiments, in-depth field studies, and large-scale surveys, should investigate under what conditions, and to what extent, explicit performance measures and monetary incentives help or hinder the motivation, behavior, and performance of managers toward sustainability.
We also envision that our study opens up several questions for a broad research agenda on sustainability measurement. External environmental disclosures are still driven by actual or anticipated mandates (Freedman, Park, & Stagliano, 2015) and all too often an organization’s reputation for sustainability reflects just “greenwashing,” not actual sustainability performance (Freedman & Stagliano, 2010). In interviews with accounting professionals conducted in parallel to this study, we heard several times that they often do not trust how sustainability measures are defined and targets are set. Rahman and Post (2012) also highlighted that environmental CSR measures often suffer from problems with transparency, consistency, inter-rater reliability, convergent, and discriminant validity. Accounting researchers and practitioners can collaborate to identify sustainability measures that will elicit more trust from managers and be perceived as more important.
When evaluators consider how managers perform along multiple dimensions (including sustainability), they may need to make appraisal and bonus decisions about managers with different types of performance records, some of whom may excel in sustainability but not in other measures, and vice versa. Our findings suggest that evaluators may see success in sustainability measures as something “nice,” but not as important for overall performance as financial results. The core question motivating our study was: “Do sustainability measures matter in managerial appraisal and rewards?” The results from our experiment suggest that, for now, the answer to that question is: “They matter, even though not as much as financial measures ... but that can change, depending on what we do about it in accounting theory and practice.”
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- 1 Do Sustainability Measures Matter in Managerial Appraisal and Rewards?
- 2 An Examination of the Perceptions of Auditors and Chief Financial Officers of the Proposed Statement of Financial Accounting Concept Definition of Materiality
- 3 An Evaluation of the Effectiveness of SEC Oversight of Climate Change Disclosures: An Analysis of Comment Letters
- 4 The Banks and Market Manipulation: A Financial Strain Analysis of the LIBOR Fraud
- 5 Environmental Efficiency, Firm Efficiency, and Managerial Ability