BEHAVIORAL RESEARCH IN ACCOUNTING Volume 20, Number 2, 2008 pp.

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Behavioral Effects of Nonnancial Performance Measures: The Role of Procedural Fairness

Chong M. Lau The University of Western Australia Antony Moser The University of Western Australia
ABSTRACT: Recent suggestions that nonnancial measures are essential to overcome the inadequacies of traditional nancial measures have led to the widespread adoption of such measures. It is, however, unclear how employees react to these new measures. This study hypothesizes that favorable employee behaviors will only occur if employees perceive performance evaluation criteria as fair. It is therefore important to ascertain if the use of nonnancial measures as performance criteria is procedurally fair. Based on a sample of 149 managers from the United Kingdom, the results indicate that the use of nonnancial performance measures was perceived as procedurally fair. We also nd that such perceptions are associated with higher organizational commitment which, in turn, enhances employee job performance. Keywords: nonnancial measures; procedural fairness; commitment; performance. Data Availability: Data are available upon request from the principal author, Chong M. Lau.

INTRODUCTION ecent developments in performance evaluation systems have advocated the use of nonnancial performance measures to overcome the inadequacies of traditional nancial measures (Kaplan and Norton 2001; Kaplan and Atkinson 1998). Financial measures have been criticized as too late, too aggregate, and too one-dimensional in nature to be useful (Kaplan 1984; Lynch and Cross 1991; Ittner and Larcker 1998). In contrast, nonnancial measures are considered broader, forward-looking, and useful for developing and sustaining long-term competitive advantages (Kaplan 1983; Kaplan and Atkinson 1998). This study seeks to explain how nonnancial performance measures affect employee behaviors. Specically, it investigates if and how the use of nonnancial measures affects employee procedural fairness perceptions and how such perceptions translate into favorable outcomes like high employee organizational commitment and job performance. Employee performance appraisals are important to employees. Not only are their compensation packages, such as their remuneration, rewards, and promotions, closely linked to their performance appraisals, such appraisals are also a reection of their success or failure. They affect

We are grateful to Rona Duthie for her assistance with the data collection. We thank the editor and two anonymous referees for helpful comments and suggestions.

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employees intrinsic values, such as their self-esteem and self-condence (Kaplan and Atkinson 1998). It should therefore not be surprising that employees are sensitive to their performance appraisals including the type of the performance measures, such as nancial or nonnancial, used to arrive at these appraisals (Kaplan 1984; Lipe and Salterio 2000; Banker et al. 2004; Libby et al. 2004). Anthony and Govindarajan (1995, 567) note that senior management can create the desired long-term versus short-term prot orientation on the part of business unit managers ... by a judicious choice of nancial and nonnancial criteria. Hence, the evaluation process, especially the evaluation criteria used, are likely to have a signicant effect on employees attitudes towards their organizations and their jobs. In this regard, the fairness of the evaluation system is likely to be a major determinant of employee behaviors where a fair evaluation process is expected to result in favorable employee commitment and performance (Lind and Tyler 1988; Lau and Lim 2002). Over the past few decades, the passing of antidiscrimination legislation in many countries has resulted in an entrenchment of justice. Employees are now more conscious of fairness and equity on the job. They hold their superiors and their organizations accountable and responsible for their wellbeing, especially with regard to the provision of fair treatment for their effort and performance. Kaplan and Atkinson (1998, 682) underscore the importance of fairness in performance evaluation systems as follows: There are important behavioral considerations that the performance measurement system must reect. First and above all, the individual must believe that the system is fair ... Absent this belief, the motivational potential of incentive compensation will be lost (emphasis added). Anthony and Govindarajan (1995, 556) similarly suggest that top management should be aware that objectives, goals and standards are likely to provide strong incentives only if the manager perceives them as fair (emphasis added).Procedural fairness refers to the fairness of the process or procedures used to determine these outcomes (Leventhal et al. 1980). In their study on procedural fairness, Lind and Tyler (1988, 141) conclude that: Wherever research has examined procedural justice it has been found that people care about the fairness of procedures. People may give different weights to various concerns as they decide in different situations what constitutes procedural justice, but they appear always to make procedural justice judgments and these judgments are always important to them. (emphasis added) Because fairness in performance evaluation is a critical aspect of employee wellbeing and the attainment of organizational objectives, it is useful to examine how employees who are used to being evaluated by traditional nancial measures react to nonnancial measures, particularly with regard to their perceptions of procedural fairness of nonnancial performance measures. Several issues are addressed in this study. First, would employees evaluated by nonnancial measures perceive such measures as procedurally fair or unfair? If they perceived them as fair, would such fairness perceptions affect their relationships with their organizations and, importantly, their job performance? Do nonnancial measures affect employee job performance directly or are their effects indirect through higher employees perceptions of procedural fairness and higher level of employee organizational commitment? The next section of the paper discusses the theoretical justication for the hypotheses developed to address these issues. This is followed by a description of the method used and the presentation of the results. The nal section provides the conclusions and the limitations of the study.

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HYPOTHESES DEVELOPMENT Figure 1 depicts the model used to investigate the research issues of this study. It proposes that the use of nonnancial measures as employee performance evaluation criteria is associated with both procedural fairness and organizational commitment. These two variables, in turn, are likely to be associated with improvement in employee job performance. These relationships suggest that the effect of nonnancial measures on employee organizational commitment is indirect through procedural fairness. Further, the effect of nonnancial measures on employee job performance is indirect through (1) employee perceptions of procedural fairness, and (2) employee organizational commitment. Nonnancial Measures and Organizational Commitment (Link A) The model in Figure 1 proposes that nonnancial measure use is associated with organizational commitment. Organizational commitment is generally dened in terms of the strength of an individuals identication with and involvement in a particular organization (Porter et al. 1974; Mowday et al. 1979). Jaros et al. (1993) offer three possible concepts. The rst concept is continuance commitment, which suggests that employees remain with their organization because they need to. With normative commitment, employees stay because they feel they are obligated to. The third concept is affective commitment. Employees with strong affective commitment remain because they want to. Affective organizational commitment is the most widely adopted concept (Cohen 1993) and is also the one adopted by our study. Employees who are evaluated by nonnancial measures are likely to be highly committed to their organizations. Nonnancial measures are much less closely tied to the nancial reporting cycles than nancial measures. Consequently, the two categories of measures are likely to differ considerably. Because of the requirements to produce general purpose statements, nancial reports have traditionally focused on (1) what can be measured objectively, (2) what can be quantied in nancial terms, and (3) nancial outcomes (Ittner
FIGURE 1 Relationship between Nonnancial Performance Measure Use and Employee Behavioral Outcomes

Procedural fairness
B D C

Nonfinancial measure use

Organizational commitment

Managerial performance

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and Larcker 1998; Fisher 1992). With respect to time horizon, because of the need to produce periodic nancial reports, nancial measures are generally short-term measures corresponding to monthly, quarterly, or annual reporting periods (Kaplan 1984). Because of these preoccupations with objectivity, nancial outcomes, and short-term horizon, nancial measures may generally be (1) too narrow, (2) too aggregate, and (3) too myopic to capture comprehensively employee effort and performance in broader and longer-term settings (Kaplan 1983, 1984; Kaplan and Norton 2001). Performance evaluations based on such criteria may be problematic. In contrast, nonnancial measures are generally less closely tied to the annual nancial reporting cycle. Hence, there may be fewer constraints from accounting regulations and less pressure on time horizon. Consequently, these measures may be (1) expressed in broader (nonmonetary) terms, (2) measured over a longer time horizon, and (3) tailor-made to reect individualized situations (Fisher 1992; Ittner and Larcker 1998; Banker et al. 2004; Libby et al. 2004). Such a wide diversity of possible measures (e.g., setup time and defect rate) facilitates a greater focus on the causes as opposed to the outcomes of managerial actions. Problems are highlighted so that managers know where to focus their attention. Managers evaluated by such measures are likely to harbor favorable organizational attitudes, including their commitment to the organization which uses such measures. Accordingly, we suggest the following hypothesis: H1: The use of nonnancial measures as performance evaluation criteria is positively related to subordinates organizational commitment. Nonnancial Performance Measures and Procedural Fairness (Link B) The use of nonnancial measures as performance evaluation criteria is likely to affect employees judgments of fairness. There are two forms of fairnessdistributive fairness1 and procedural fairness. Procedural fairness is the concept of interest in this study. It has been referred to as the judgments about the fairness of the means (Folger and Konovsky 1989, 115; Tang and Sarseld-Baldwin 1996, 25) or of the rules and processes (Greenberg and Folger 1983, 236) that superiors use to make decisions. Employee perceptions of the fairness of the procedures used by others to evaluate their performance are critical to their judgments of how fairly they are being treated. What makes procedures fair? The literature suggests several fairness criteria including (1) completeness and accuracy of information, (2) adoption of a long-term perspective, (3) correctability of incorrect decisions, (4) retention of control over decisions, (5) consideration of the interests of all parties, and (6) the manner in which people are treated (Leventhal 1980; Lind and Tyler 1988). In the context of performance evaluation, employees will judge performance evaluation procedures as fair if such procedures (1) lead to performance appraisals that are based on complete and accurate information, (2) reect their long-term interests, (3) contain some provisions to appeal against and rectify unfair appraisals, (4) reect performance within their control, (5) protect their interests, and (6) indicate polite and dignied treatment of individuals. The following sections address why nonnancial measures are likely to satisfy these fairness criteria.
1

Concepts of distributive fairness are based on the principle of equity. The allocation of benets and costs within a group should be proportional to the contributions of group members.

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Because of the loose link with the nancial reporting cycles, nonnancial measures are broad, long-term, and cause-focused. Such characteristics allow a broader spectrum of performance to be measured. Financial measures are limited to what can be measured objectively in nancial terms, which tends to exclude or delay the effects of intangible investments (Kaplan and Norton 2001). The benets of managers efforts expended to improve intangible assets (e.g., investments in improving employees skills and customer relationships) are generally excluded by nancial measures. Nonnancial measures provide the means to overcome such inaccuracies by measuring intangible assets in nonmonetary terms. This allows the intangible to be valued and ensures that managers efforts are more accurately reected. Nonnancial measures may also be more accurate in measuring performance that is spread over several years. The benets arising from operating managers efforts to enhance organizational long-term viability in areas such as investment in innovation, future technologies and capabilities are generally not realizable within the annual nancial reporting cycle (Shank and Govindarajan 1994). Because nancial measures may be constrained by the annual nancial reporting cycle, their use here may be problematic. In contrast, nonnancial measures are unconstrained by time considerations. They may therefore measure employee long-term performance more accurately. Since accuracy and completeness of information are fundamental fairness criteria (Leventhal 1980), employees may perceive the use of such measures as fair procedurally. Employee procedural fairness judgments may also be inuenced by time period considerations. The Self-Interest Theory of procedural fairness suggests that people are fundamentally concerned with self-interests (Lind and Tyler 1988). However, because they may gain more in the long term if they engage in social interactions, the long-term effects of group procedures may matter more to them than any possible short-term losses. This suggests that procedural fairness judgment is inuenced by long-term considerations. Because nonnancial measures are unconstrained by time considerations, they are more useful as a means for communicating long-term organizational goals, expectations, and results. This allows employees to understand how their association with their organizations will be paid off in the long term. They may therefore view long-term nonnancial measures as fair procedurally. Procedural fairness judgments may also be enhanced if there are provisions for unfair decisions to be rectied (Leventhal 1980; Lind and Tyler 1988). Because nonnancial measures are measured in nonmonetary terms, they may be interpreted in a more exible and subjective manner. Additionally, nonnancial measures such as setup time and customer satisfaction rates may be easier to understand than aggregate nancial measures such as efciency variances (Johnson 1988; Fisher 1992). Given that (1) subordinates are likely to have a better understanding of the appraisal criteria, and (2) the appraisals are subject to exible interpretations, the subordinates may be in a better position to seek explanations about their performance appraisals and to submit alternative interpretations. This increases the likelihood for unfair appraisals to be properly discussed, explained, and rectied. The use of nonnancial measures as evaluation criteria may provide employees with a better sense of control over their performance appraisals and a means to protect their selfinterest. Leventhal (1980, 44) considered control an essential fairness criterion. Hence, even though people have surrendered the nal decision making to others, they still need to have some control to protect their interests (Thibaut and Walker 1975). With nancial measures, employees may nd it difcult to see the connection between their actions and nancial outcomes such as variances, which may have several causes, not all directly controllable

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by specic individuals. In contrast, because of the variety of nonnancial measures which may be created in nonmonetary terms, it is generally easier to develop measures that are better reections of the individualized situations of subordinates. Consequently, they may have a better sense of control over what needs to be done to obtain favorable performance appraisals. Subordinates may regard the development of individualized measures as benevolent action by superiors who care about their interests. The Group Value theory suggests that procedural fairness judgments may be strongly inuenced by the manner in which people are treated (Lind and Tyler 1988). Procedures that enhance their importance in the group are perceived as fairer than procedures that demean their importance. In the context of performance evaluation, nancial measure use may be perceived as too impersonal and seen as a reection of a mentality to assume that employees are not unique and can be evaluated indiscriminately by inexible numbers (Harrison 1993). In contrast, because nonnancial measures can be tailor-made to reect their individualized situations, employees evaluated by such measures may feel that they are treated with dignity as unique individuals by their superiors. Consequently, they may perceive higher procedural fairness in nonnancial measures use. Based on the above discussion, we suggest the following hypothesis: H2: The use of nonnancial measures as performance evaluation criteria is positively related to subordinates perceptions (judgments) of procedural fairness. Procedural Fairness, Organizational Commitment, and Job Performance (Links C, D, and E) Procedural fairness is likely to engender favorable employee reactions including improved organizational commitment and job performance (see C and D in Figure 1). There are two theoretical explanations for this contention. First, Instrumental Theory (Thibaut and Walker 1975) suggests that people are concerned mainly with receiving desired outcomes (e.g., good appraisals, better remuneration, and promotions). They prefer fair procedures because they are more likely to produce fair outcomes. The Self-Interest Theory proposed by Lind and Tyler (1988) emphasizes such instrumental effects. This theory suggests that people, motivated by self-interest, engage in social interaction to gain more in the long term. However, with such social interactions, they may need to compromise their shortterm interest. In order to ensure that such sacrices will pay off in the long term, they rely on fair procedures. Fair group procedures simplify decision making by eliminating the need to negotiate complex allocations to provide fair outcomes. This averts group conicts and tensions, promotes harmonious group relations, and hence prevents the break-up of the group. Consequently, organizations that employ fair procedures are likely to enjoy a high extent of loyalty, commitment, and good performance from their employees. The second explanation is based on the noninstrumental effects of procedural fairness. The Group Value Theory maintains that people value their relations with social entities, be they individuals, groups, or organizations (Lind and Tyler 1988). They do so not merely for economic but also for social and psychological reasons. The employment of fair procedures is akin to being dealt with in a dignied and respectful way, thereby bolstering sense of self-worth within the group. Employees are therefore more loyal to groups that employ fair procedures. In contrast, Lind and Tyler (1988, 239) note that with violations of procedural fairness ... viewed as violations of basic group or individual values, we would

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expect procedural injustice to be a potent source of anger and dislike with respect to whoever is seen as producing the injustice. Empirically, several studies document a positive association between procedural fairness and organizational commitment (Cropanzano and Folger 1991; Kim and Mauborgne 1993). Some studies also found an association between procedural fairness and job performance (Cornelius 1985; Earley and Lind 1987). In a management accounting context, Libby (1999) found high procedural fairness (combination of voice and explanation) to be positively associated with performance improvements. Wentzel (2002) similarly found fairness perception to be positively associated with performance through goal commitment. Hence, both the instrumental and noninstrumental theories suggest that high procedural fairness promotes organizational commitment and job performance. We therefore propose the following: H3: Perception of procedural fairness is positively related to organizational commitment. H4: Perception of procedural fairness is positively related to job performance. Organizational commitment in turn may be associated with job performance (Link E). Jaros et al. (1993) suggest that unlike continuance commitment that reects a cold calculation of costs and benets, affective commitment involves the formation of an emotional bond. Employees who perceive procedural fairness in their organizations procedures are likely to remain in their organization because they want to and not because they have to or are obligated to. If employees choose to stay because they want to, they are likely to do so because of their emotional attachment and loyalty to the organization. This implies a strong belief and acceptance of their organizations goals and values and hence the willingness to exert effort to achieve these goals to help the organization to be successful. Hence, apart from a desire to maintain organizational membership, Porter et al. (1974, 604) suggest that affective organizational commitment is characterized by a willingness to exert considerable effort on behalf of the organization. Affective organizational commitment is therefore likely to be positively associated with employee job performance. Several studies have found such positive relationships (e.g., Mowday et al. 1979; Ferris and Larcker 1983; Meyer et al. 1989). Based on the above discussion, we suggest the following hypothesis: H5: Organizational commitment is positively related to subordinates job performance. The Indirect Effects through Procedural Fairness and Organizational Commitment The discussion in the preceding few sections suggests the following. First, nonnancial measures may be related to employee organizational commitment (A in Figure 1). Second, nonnancial measures may be related to procedural fairness (B) which in turn may be associated with employee organizational commitment and job performance (C and D). Third, organizational commitment may affect employee job performance (E). These relationships suggest two important hypotheses. The effects of nonnancial measures on employee organizational commitment may be indirect via procedural fairness. In addition, the effects of nonnancial measures on employee job performance may be indirect via procedural fairness and organizational commitment. Thus:

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H6: The relationship between the use of nonnancial measures as performance evaluation criteria and subordinates organizational commitment is indirect through procedural fairness. H7: The relationship between the use of nonnancial measures as performance evaluation criteria and subordinates job performance is indirect through procedural fairness and organizational commitment. METHOD We collect survey data from a sample of organizations from Kompass, the United Kingdom online database. We include only manufacturing organizations with more than 100 employees and an annual turnover of more than U.K. 75 million pounds. The selection of manufacturing organizations provided some degree of control for industry. We select relatively large-size organizations because accounting and control procedures tend to become more sophisticated and specialized with increasing rm size. The development and implementation of nonnancial measures by themselves or in conjunction with nancial measures may be a relatively complex and time-consuming process. For this reason, it is probable that only large organizations with signicant managerial expertise and resources will have the need and means to implement such systems. In order to avoid a potential bias that could result from different levels of management, we target functional department heads. The selection criteria were met by 142 organizations, which we contacted to obtain the names of their departmental heads to send the questionnaires. Six companies could not be contacted and 33 were not willing to participate because their policies prohibited the disclosure of their managers names. Contact with the remaining 103 resulted in a list of 296 functional heads. In order to avoid a company bias, we select no more than four managers from each organization. Consistent with previous studies, the selection of participants from different functional areas allows the results to be generalized to different functional areas (e.g., Hopwood 1972; Brownell 1982). A questionnaire, together with a cover letter explaining the purpose of the study and assuring condentiality of responses, was mailed to each of the 296 selected managers. A total of 158 responses were returned, which constitutes a response rate of 53.5 percent. Seven of the responses were substantially incomplete and two were completed incorrectly, which we excluded from the study, thus leaving 149 usable responses. To check for nonresponse bias, we split the sample in half based on the response dates. Mean comparisons for the variables used in the study indicate that there are no signicant differences between early and late responses (Oppenheim 1992). The average functional head in our sample is about 45 years of age, has spent nine years in the current job, and has 125 employees in their unit. These data suggest that the respondents are generally high level and experienced managers in their organizations. The mean score of the use of nonnancial measures as performance criteria is 4.57 out of a maximum of 7. One hundred and nine out of the 149 respondents reported nonnancial measures use scores in excess of the scale midpoint of 4. Selecting the highest mean score from among the three nonnancial perspectives (customer, internal business, and learning and growth) for each respondent resulted in a much higher mean score of 5.53 for nonnancial measures use. These results indicate that the use of nonnancial measures for employee performance evaluation was prevalent in the organizations selected for our study.

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Measurement Instrument Nonnancial Measures Use Because our study is designed to investigate the behavioral responses of individual employees to nonnancial measures use, we employ an instrument that measures the evaluation of individual employee performance rather the organizational or business unit performance. Hopwoods (1972) instrument asks respondents: When your superior is evaluating your performance, how much importance do you think he or she attaches to the following items? (emphasis added). As this reects individual rather than organizational performance, we adopt this wording for our study. The nonnancial measures items are based on the performance measures of a Balanced Scorecard. The Balanced Scorecard nonnancial perspectives are customer, internal business, and learning and growth. We employ 15 nonnancial performance items based on the generic measures suggested by Kaplan and Atkinson (1998). The ve learning and growth measures are employee satisfaction rate, number of employees trained, employee turnover rate, number of innovations developed, and the adoption of new technology. The ve internal business perspective measures are quality of output, defect rates, setup time, manufacturing cycle, and inventory level. The ve customer perspective measures are number of new customers acquired, response time to customers, number of customer complaints, number of overdue deliveries, and customer satisfaction rate. We use a seven-point scale for each item. Table 1 contains the results of a factor analysis with varimax rotation indicating that the 15 items load on three factors, each with an eigenvalue greater than 1. The three factors
TABLE 1 Nonnancial Measures: Factor Analysis Results and Cronbach Alphas Items Rotated factor loadings: Employee satisfaction rate Number of employees trained Employee turnover rate Number of innovations Adoption of new technology Quality of manufacturing output Defect rates Setup times Manufacturing cycle time Inventory level Number of new customers acquired Response time to customers Number of customer complaints Number of overdue deliveries Customer satisfaction rate Eigenvalue Variance explained Cronbach alpha Internal Processes Customer Learning and Growth 0.721 0.694 0.840 0.729 0.789 0.872 0.852 0.890 0.900 0.691 0.662 0.828 0.847 0.742 0.855 3.54 23.6% 0.899

4.12 27.4% 0.927

3.18 21.2% 0.847

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correspond with the three different perspectives of the Balanced Scorecard. All items load satisfactorily onto their respective perspectives, with loadings ranging from 0.662 to 0.900. The Cronbach alpha for the 15 items is 0.910. These results support the internal consistency of the instrument. We calculate the mean for each perspective to obtain an overall nonnancial measure score per perspective, which are then averaged to obtain an overall mean. Table 2 presents the descriptive statistics of this overall mean of nonnancial measure use. The standard deviation is 1.21 and the mean is 4.57, which is reasonably close to the scale midpoint of 4. The actual range of between 1.07 and 6.87 is close to the scale endpoints (i.e., 1 to 7). Procedural Fairness in Performance Evaluation We use McFarlin and Sweeneys (1992) instrument to measure the managers perceptions of procedural fairness. There are four items for which managers indicate on a vepoint Likert scale the fairness of the procedures used to evaluate performance, communicate feedback, and determine pay raises and promotions. The overall procedural fairness score derives from summing these four items. The factor analysis results in Table 3 on the four items of this variable combined with the nine items from the organizational commitment instrument support the unidimensional nature of the four items for the procedural fairness instrument. The rotated factor loadings for these four items range from 0.781 to 0.829 and load on a single factor with an eigenvalue of 3.23 that explains 25 percent of the variance. The four-item scale has a Cronbach alpha of 0.858. The mean score is 13.75 and the standard deviation is 2.91. Organizational Commitment We measure this variable using Mowday et al.s (1974) instrument that comprises nine items measured on a seven-point Likert scale. This instrument has been tested extensively and used widely in both management accounting studies and other disciplines. Respondents are asked to rate statements such as the following: I nd that my values and this organizations values are very similar, I am proud to tell others that I am part of this organization, and I really care about this organization. Combining the nine items of this variable with the four items from procedural fairness above, the factor analysis results in Table 3 support the unidimensional nature of the nine items for the organizational commitment instrument. All nine items load on one factor with an eigenvalue of 5.18 and explain 40 percent of the variance. Only one item loads at 0.473, which is close to the 0.5 benchmark. The remaining item loadings range from 0.674 to 0.853. The scales Cronbach alpha is 0.913. The mean is 44.65 and the standard deviation is 9.2.
TABLE 2 Descriptive Statistics Theoretical Range Min Max 1 4 9 1 7 20 63 7 Actual Range Min Max 1.07 6 19 4 6.87 20 63 7

Variable Nonnancial measure use Procedural fairness Organization commitment Managerial performance

Mean 4.57 13.75 44.65 5.60

Std. Dev. 1.21 2.91 9.20 0.73

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TABLE 3 Factor Analysis Results for Procedural Fairness and Organizational Commitment Items Rotated factor loadingsa: OC1 OC2 OC3 OC4 OC5 OC6 OC7 OC8 OC9 PF1 PF2 PF3 PF4 Eigenvalue Variance explained
a

Organizational Commitment 0.693 0.722 0.473 0.674 0.853 0.829 0.825 0.782 0.781

Procedural Fairness

0.808 0.829 0.814 0.781 5.18 40% 3.23 25%

OC Organizational Commitment item, PF Procedural Fairness item.

Managerial Performance We use the Mahoney et al. (1963) instrument to measure managers performance. This instrument requires managers to rate nine dimensions of performance: planning, coordinating, evaluating, investigating, supervising, stafng, negotiating, representing, and overall performance. According to Brownell (1982), this instrument is able to capture the multidimensional nature of performance without introducing excessive dimensionality. We base the performance score for our study on the overall performance of the respondents. This approach is consistent with previous studies (e.g., Brownell 1982; Kren 1992; Lau. et al. 1995). In order to ensure that the overall performance score is a reection of the subdimension scores, we regress the eight dimensions of performance on the overall performance score. The results indicate that the eight dimensions account for 57.7 percent of the variations in overall performance, which is slightly higher than the 55 percent benchmark suggested by Mahoney et al. (1963). Accordingly, we use the overall performance scores to test the hypotheses pertaining to managerial performance. RESULTS This study investigates whether the relationships between nonnancial performance measures use and employee organizational commitment is indirect through procedural fairness. It also examines if procedural fairness and organizational commitment mediate the relationship between nonnancial measures use and managerial performance. Structural equation modeling is the appropriate technique to analyze these hypothesized relationships. We use AMOS for the structural equation analysis.

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Tests of compliance with the assumptions of multivariate analyses indicate that the data are normal and homoscedastic and the residuals are randomly distributed. As different managers completed the surveys, free of inuence from one another although sometimes within the same organization, the data are reasonably independent. We assess the goodness of t of the structural equation models by the comparative t index (CFI), which is 0.931, the IFI (delta2) which is 0.932 and the TLI (rho2) which is 0.916. These t indices are all higher than the recommended 0.9 benchmark (Segars and Grover 1993; Hartwick and Barki 1994; Bentler 1995), thus indicating acceptable model t. Consequently, we use the standardized direct effects (path coefcients), the standardized indirect effects, and the standardized total effects generated by the structural equation for hypotheses testing. Tests of H1 to H5 Table 4 presents the correlations among the variables in Figure 1. It indicates that the correlation coefcients of the relations between (1) nonnancial measure use and organizational commitment (H1, r 0.396, p 0.01), (2) nonnancial measure use and procedural fairness (H2, r 0.290, p 0.01), (3) procedural fairness and organizational commitment (H3, r 0.537, p 0.01), (4) procedural fairness and job performance (H4, r 0.346, p 0.01), and (5) organizational commitment and job performance (H5, r 0.370, p 0.01), are all signicant and in the predicted direction. These results provide support for H1 to H5. They also provide the justication for further analysis of the data to test H6 and H7. Tests of H6 and H7 According to H6, the relationship between nonnancial measures use and subordinates organizational commitment is indirect through procedural fairness. From H7, the relationship between nonnancial performance measures use and subordinates job performance is indirect through procedural fairness and organizational commitment. In order to test for the intervening effects of procedural fairness and organizational commitment, it is necessary to ascertain the direct and indirect effects. We obtain the standardized direct effect (path coefcients), standardized indirect effects, as well as the standardized total effects of the various relationships in Figure 1 from the outputs of AMOS as shown in Table 5 and Figure 2. The results in Table 5 indicate that, rst, nonnancial measures use is positively and signicantly related to organizational commitment as indicated by the total standardized effect of 0.385 (p 0.01). Of this total effect, the direct effect is 0.218 and the indirect effect through procedural fairness is 0.167. This also can be computed from the path coefcients in Figure 2 as follows: nonnancial measure use minus procedural fairness minus
TABLE 4 Correlation Matrix among Independent and Dependent Variables Procedural Fairness Nonnancial measures use Procedural fairness Organizational commitment
a

Organizational Commitment 0.396*** 0.537***

Managerial Performance 0.276*** 0.346*** 0.370***

0.290***a

*** p 0.01 (two-tailed).

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TABLE 5 Standardized Direct, Indirect, and Total Effectsa Independent Variable Nonnancial Nonnancial Fairness Nonnancial Fairness Commitment
a

Dependent Variable Fairness Commitment Performance

Standardized Direct Effects 0.312 0.218 0.536 0.134 0.221 0.193

Standardized Indirect Effects 0.167 0.143 0.103

Standardized Total Effects 0.312 0.385 0.536 0.277 0.324 0.193

Based on AMOS Version 7.0 (Arbuckle 2006).

FIGURE 2 Standardized Direct Effectsa

Procedural fairness
0.221** 0.312*** 0.536***

0.218**

Nonfinancial measure use

Organizational commitment

0.193**

Managerial performance

0.134

** = p < 0.05; *** = p < 0.01.

organizational commitment 0.312 0.536 0.167. According to Pedhazur (1982, 617) and Bartol (1983, 809), an indirect effect in excess of a magnitude of 0.05 can be considered meaningful. As the indirect effect through procedural fairness is well above this threshold, it is considered meaningful. Hence, H6 is supported. The results in Table 5 also indicate that the standardized total effect of nonnancial measures use on managerial performance comprises both direct and indirect effects. The direct effect is 0.134 and the indirect effect is 0.143. Using the path coefcients from Figure 2, this indirect effect can be decomposed into the portion attributable to procedural fairness and the portion attributed to organizational commitment as follows:

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68 Path (1) Path (2) Path (3) Indirect effect Direct effect Total effect NF PF MP NF PF OC MP NF OC MP 0.312 0.221 0.312 0.536 0.193 0.218 0.193

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0.069 0.032 0.042 0.074 0.143 0.134 0.277

The results indicate that the indirect effect through procedural fairness is 0.069. The indirect effect through organizational commitment is 0.074. As both again are above the meaningful threshold of 0.05, they are presumed meaningful. Hence, H7 is supported. DISCUSSION AND CONCLUSION This study focuses on the process by which the use of nonnancial measures as performance evaluation criteria affect employees behaviors including their fairness judgments, organizational commitment, and job performance. It also attempts to evaluate the role of procedural fairness in these relationships. Specically, it addresses the question of (1) whether the effects of nonnancial measure use on employee organizational commitment is indirect through procedural fairness, and (2) whether the effects of nonnancial measures use on employee job performance is indirect through procedural fairness and organizational commitment. The results indicate that nonnancial measures use is associated with improvement in employee organizational commitment and job performance. The results also indicate that a substantial portion of these effects is indirect through the enhancement of employee perceptions of procedural fairness. This leads us to draw the following inferences. First, the use of nonnancial measures as employee performance evaluation criteria can be benecial, as it appears to enhance both employee organizational commitment and job performance. Second, the use of nonnancial measures as performance evaluation criteria also appears to be perceived as procedurally fair by employees whose performances are evaluated by such measures. This conclusion is based on the substantive indirect effects of nonnancial measure use through procedural fairness. The effects of nonnancial measures use on employee job performance appear to occur through two distinct processes. First, nonnancial measure use affects procedural fairness, which then affects organizational commitment, which in turn affects managerial performance. This indicates that employees who are evaluated by nonnancial measures perceive the evaluation procedures as fair. Employees who perceive the evaluation procedures as fair experience higher commitment with their organizations and, consequently, appear to perform better. These results suggest that the effects of procedural fairness on employee job performance are dependent on the enhancement of employee organizational commitment. The second process by which procedural fairness affects employee job performance is as follows. Nonnancial measures use affects procedural fairness, which in turn inuences employee job performance. Unlike the aforementioned effects, these effects are independent of organizational commitment. These results underscore the importance of fairness in organizational procedures. The effects of nonnancial measures use may be attributable to the perception of higher procedural fairness of the organizations performance evaluation procedures. The overall conclusion, then, is that the use of nonnancial measures as performance evaluation is benecial.

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The studys ndings have important practical and theoretical implications. First, the results highlight the importance of maintaining fairness in the workplace, particularly with respect to employee performance evaluations. Management accountants should ensure that performance evaluation procedures are designed to be fair. This will help to promote favorable employee behaviors. From a theoretical perspective, the results support both the self-interest and the group value theories of procedural fairness. Lind and Tyler (1988, 232) suggest that because procedures are very important aspects of the perceptions of groups, evaluation of procedures ... would be expected to have strong effects on group relevant attitudes (emphasis added). Our results indicate that evaluation of institutions, as measured by the level of employee commitment to the organization, is not only an important outcome of procedural fairness judgments, but also serves as the intervening variable through which procedural fairness affects job performance. Finally, our study highlights the role of nonnancial measures in promoting workplace fairness. While research on the consequences of procedural fairness helps practitioners to appreciate the importance of procedural fairness, research on the antecedents of procedural fairness is even more useful as it demonstrates to practitioners how procedural fairness can be enhanced. In this regard, most prior management accounting studies that investigate fairness issues have focused primarily on how employee participation, particularly in the budget-setting context, enhances procedural fairness (e.g., Libby 1999; Lindquist 1995; Wentzel 2002; Lau and Tan 2006). In contrast, the role of nonnancial measures in enhancing procedural fairness has generally been overlooked. Hence, the results of our study may provide some insights into how these increasingly popular measures can be used to enhance fairness in the workplace. There are a number of limitations associated with this study. First, while care was taken to obtain a representative sample, bias in the sample may still occur. For instance, there may be a higher likelihood for those who generally have good experiences with their performance measurement systems to respond than those with poor experiences. Second, problems of error in measurement may occur because of our reliance on self-reported performance measures. Finally, our study has focused only on fairness issues; namely, perception of procedural fairness so that the role of fairness in the context of nonnancial measures can be better understood. It is likely that there are other variables that may have important intervening effects. The existence of such intervening effects is evident from our results. Note that while the magnitudes of the indirect effects found in our study are substantial, they are unable to account for all the effects of performance measure use on employee behaviors. This is not surprising as employee behaviors are likely to be affected by more than fairness considerations. Variables such as the business strategy employed and the extent of employee involvement in the selection of performance measures may also have intervening effects. As always, this leaves opportunities for further research in this important and relevant area.

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