Behavioral effects of fairness in performance measurement and evaluation systems: Empirical evidence from France

Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 323–332

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Advances in Accounting, incorporating Advances in International Accounting journal homepage: www.elsevier.com/locate/adiac

Behavioral effects of fairness in performance measurement and evaluation systems: Empirical evidence from France Chong M. Lau a,⁎, Brigitte Oger b, 1 a b

School of Accounting, Curtin Business School, Curtin University of Technology, GPO Box U1987, Perth WA 6845, Western Australia, Australia IAE de Paris, Universite Paris1, Pantheon-Sorbonne, 21 rue Broca 75005, Paris, France

a r t i c l e

i n f o

Keywords: Performance evaluation Procedural fairness Trust Job satisfaction Organizational commitment

a b s t r a c t The measurement and evaluation of employee performance are crucial aspects of the management accounting system because of their effects on employee motivation. It is therefore important for management accountants to understand how such effects occur. Fairness may be a key explanatory factor. This study proposes that the effects of the fairness of employee performance measurement and evaluation procedures on employee job satisfaction and organizational commitment are indirect. The results, based on a sample of 60 French managers, support these expectations. For the relationship between procedural fairness and job satisfaction, the effects are indirect through trust and fairness of outcomes. For the relationship between procedural fairness and organizational commitment, the effects are indirect through fairness of outcome, trust and job satisfaction. The results also indicate that affective effects through trust and satisfaction are substantially stronger than that through fairness of outcome. Fair performance evaluation procedures therefore do more than the mere provision of equitable outcomes among French managers. © 2012 Elsevier Ltd. All rights reserved.

1. Introduction This research examines the process by which the fairness of employee performance evaluation procedures affects the interests of employees (subordinates), senior management (superiors), and the organization itself in France. Employee performance evaluation in general and the fairness of the evaluation procedures in particular are important management accounting issues because they are key aspects of management control systems. Procedures for performance measurement, performance evaluation and compensation arrangements are selected for investigation in this study because the design of performance measurement and evaluation systems constitutes a crucial function of management accountants who play a pivotal role in the design of these procedures. Horngren, Datar, Foster, Rajan, and Ittner (2009, 822, 845) suggest that “performance evaluation and rewards are key elements for motivating individuals in an organization.” They also regard performance evaluation and employees' compensations as intricately linked and conclude that “many management accounting practices, such as the design of responsibility centers and the establishment of financial and nonfinancial measures, have as their goal better performance evaluation”. Kaplan and Atkinson (1998, 676) similarly regard performance evaluation and the design of compensation arrangements as ⁎ Corresponding author. Tel.: +61 8 93326398. E-mail addresses: [email protected] (C.M. Lau), [email protected] (B. Oger). 1 Fax: +33 1 53 55 27 01. 0882-6110/$ – see front matter © 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.adiac.2012.09.009

crucial management accounting functions because “compensation contracts, particularly incentives and bonus plans, provide important direction and motivation for corporate executives.” It is therefore not surprising that employee performance measurement and evaluation systems are an important management accounting research area. Hartmann (2000, 451) noted that “within the management accounting and control literature, considerable attention is paid to the behavioral and organizational effects of…performance evaluation on subordinate managers…The RAPM literature has earned a special position in the management accounting literature, not only because of its volume and thematic constancy, but also because of its impact on other streams of management accounting research.” Brownell and Dunk (1991,703) similarly suggested that “the continuing stream of research devoted to this issue constitutes, in our view, the only organized critical mass of empirical work in management accounting at present.” Our study contributes to this research area in the following aspects. First, as discussed above, whilst the issues of performance evaluation and the determination of compensations have been the focus of much management accounting research since the seminal work of Hopwood (1972), management accounting researchers have paid less attention to the behavioral effects of the fairness of accounting procedures (processes) employed to evaluate performance. This is despite the likelihood that fairness of the employee performance measurement and evaluation procedures may have profound behavioral and affective consequences on employees. According to Kaplan and Atkinson (1998, 681–682), fairness is the central issue in employee performance evaluation and compensation. They note that “there are important behavioral considerations that the performance measurement system must reflect.

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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. Second, the individual must believe that the organization's compensation policies are equitable.” Since the mid-1990s, there has been interest among management accounting researchers in the behavioral effect of organizational justice. These include studies by Magner, Welker, and Campbell (1995), Lindquist (1995), Libby (1999), Lau and Lim (2002), Wentzel (2002) and Lau and Tan (2006). Our study contributes with additional systematic empirical evidence to this stream of literature on the importance of fairness in performance measurement and evaluation systems. More importantly, our study contributes by addressing gaps in the literature. Organizational justice theory generally categorizes justice into two main categories — procedural fairness and distributive fairness. Procedural fairness includes interactional fairness which can be further decomposed into interpersonal and informational fairness (Colquitt, Conlon, Ng, Porter, & Wesson, 2001). Procedural fairness refers to the judgments on how fair are the “means” (Folger & Konovsky, 1989, 115; Tang & Sarsfield-Baldwin, 1996, 25) or the “rules and processes” (Greenberg & Folger, 1987, 236) people used to make decisions. Lind and Tyler (1988, 1) define it as the “judgments that procedures and social processes are just and fair.” They (1988, 3, 216) conceptualize it as the judgments on how fair are those social norms which deal with “how decisions are made” and “how people are treated by authorities and other parties.” Distributive fairness is concerned with the judgments on how fair are the decisions that are made (Folger & Konovsky, 1989, 115; Greenberg & Folger, 1987, 236). Tang and Sarsfield-Baldwin (1996, 25) suggest that this form of fairness “deals with the ends achieved (what decisions are).” Concepts of distributive fairness are based on the principle of equity which suggests that the benefits an individual receive should be proportional to the individual's contributions (Adams, 1965; Lindquist, 1995). Procedural fairness and distributive fairness may be related. The literature suggests that people judge procedures as fair when such the procedures result in fair or favorable outcomes (Lind & Tyler, 1988; Thibaut & Walker, 1975). Colquitt et al. (2001, 428) however note that “despite this, many studies of procedural justice do not also examine distributive justice.” It is therefore unclear if prior studies, particularly those in the management accounting domain, are able to explain how much of the effects of fairness may be attributable to (1) the effects of procedural fairness on distributive fairness, and (2) the effects of procedural fairness beyond that on distributive fairness through interpersonal trust. More recent management accounting studies have also extended this research area by focusing the role of organizational fairness in the context of multidimensional performance measurement systems such as the Balanced Scorecard. These include Lau and Sholihin (2005), Lau and Moser (2008), Burney, Henle, and Widener (2009), and Hartmann and Slapnicar (2009). Procedural fairness is included in the models of all four studies. However, while Lau and Sholihin (2005) and Hartmann and Slapnicar (2009) both consider and include interpersonal trust between the superior and the subordinate as a crucial mediating variable in their models, both studies have omitted distributive fairness in their studies. With Burney et al. (2009), even though they consider distributive fairness, their model proposes that distributive fairness influences procedural fairness instead of the other way around. More importantly, interpersonal trust was omitted from their model. Finally, Lau and Moser (2008) omitted both interpersonal trust and distributive fairness from their model. Hence, none of these studies have investigated the effects of procedural fairness on employee outcomes through the intervening effects of both interpersonal trust and distributive fairness within a single comprehensive model. We are therefore unable to ascertain from these studies how much of the effects of fairness on employee outcomes found in this studies are attributable to (1) the effects of procedural fairness through distributive fairness, and (2) the effects of procedural fairness through interpersonal trust. By studying the effects of procedural fairness on both distributive fairness and interpersonal trust, our study will be able to demonstrate if procedural fairness has

effects that are over and above those on distributive fairness, and if so, the relative strength of such effects. Moreover, according to Colquitt et al. (2001, 438), studies on the relationship between procedural fairness and interpersonal trust are underrepresented in their survey of studies on organizational justice. Our study of the effect of procedural fairness on employee outcomes through interpersonal trust will also address this gap in the literature (Colquitt et al., 2001; Lewicki, Wiethoff, & Tomlinson, 2005). Finally, this research is also motivated by the dearth of systematic empirical research undertaken in Continental Europe in general and France in particular. Considering the sophistication, development and economic importance of this region, this is surprising. The bulk of systematic empirical management accounting research is undertaken in Anglo-American and to a lesser extent in Asian settings. There is little systematic empirical evidence from elsewhere to provide insights into how management control systems in other settings are designed and implemented (Harrison, 1992). Systematic empirical management accounting research in France is rare due in part to language issues and in part to the general reluctance of French organizations to participate in research questionnaires (Bescos, Cauvin, Langevin, & Mendoza, 2004). Most of the investigations on culture on fairness issues are based on conflict resolution. There has been hardly any study on the effects of fairness in the context of performance evaluation. In a recent publication, Leung (2005, 564) notes that “systematic investigation of how performance appraisal is conducted across culture has yet to begin… we know relatively little about…cultural differences in procedural preferences outside of the conflict resolution domain.” Hence, a systematic empirical evaluation on important management accounting issues such as the behavioral and affective consequences of fairness of employee performance evaluation procedures in French organizations may help to ameliorate this gap in the literature by providing systematic empirical evidence from a new setting so that the results from different settings can be compared and evaluated. Fig. 1 presents the model employed for the study. It proposes that fairness of employee performance evaluation procedures is related to employee trust in their superiors (see H4). The model also proposes that fairness of employee performance evaluation procedures is related to fairness of outcome (see H1). Third, fairness of evaluation procedures is related to job satisfaction (see H8). However such effects are indirect through two intervening variables, namely, trust in superiors (see H4 and H5) and fairness of outcome (see H1 and H2). The final proposal suggests that fairness of evaluation procedures is related organizational commitment (H9). These effects are indirect through

Relationships between Fairness and Employee Work-Related Attitudes

Trust in Superior H6

H4 H5

H8

Fairness of Evaluation Procedures

Job Satisfaction

H7

Organizational Commitment

H2 H1

Fairness of outcome

H3

H9

Fig. 1. Relationships between fairness and employee work-related attitudes.

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three intervening variables: (1) trust in supervisor, (2) job satisfaction, and (3) fairness of outcome. These are important research issues which may have important practical implications. Specifically, if senior management and the organization believe that their employees are the only party to benefit from the employment of fair performance evaluation procedures, they may not be overly enthusiastic in ensuring fairness in their employee performance evaluation procedures especially if such procedures are costly to design and implement. In contrast, if they believe that they are the primary beneficiaries of fair employee evaluation procedures, they may be more willing to invest the time and the resources to design and implement procedures that are fair and equitable. In order to understand and explain these issues, there is a need to investigate systematically how the use of fair employee performance evaluation procedures affects the interests of the three major organizational parties, namely, the employees (subordinates), senior management (superiors) and the organization itself. Our model in Fig. 1 suggests that the use of fair evaluation procedures benefits the subordinates, the superiors and the organization. Subordinates derive benefits through fairer evaluation appraisals (outcomes) and higher job satisfaction. Superiors benefit from the higher level of trust from their subordinates. The organization benefits from a higher level of commitment from its employees. The theoretical justifications for these proposals are provided in the next section. 2. Hypothesis development 2.1. Fairness of performance evaluation procedures Fairness in the workplace is important to employees. Greenberg and Colquitt (2005, 5–6) note that “fair treatment of people provides support for the legitimacy of organizational authorities, thereby discouraging various forms of disruptive behavior and promoting acceptance of organizational change. Perceptions of fairness also reinforce the perceived trustworthiness of authorities, reducing fears of exploitation while providing an incentive to cooperate with one's co-workers. On a more personal level, fairness satisfies several individual needs such as the need for control and the need for esteem and belonging.” In the context of performance evaluation, employees are likely to react positively to the fairness of their evaluation procedures and negatively to the unfairness of such procedures. Fairness of employee performance evaluation procedures is therefore likely to be a key determinant of several important employee work-related attitudes. The following sections provide the theoretical justification on how fairness of performance evaluation procedures affects employee job satisfaction and organizational commitment through (1) fairness of outcomes (distributive fairness) and (2) trust in superior. 2.2. Effect of fairness of evaluation procedures on fairness of outcome (H1) Fairness of evaluation procedures is likely to be positively related to fairness of outcome (distributive fairness) (Colquitt et al., 2001). Fair procedures are likely to be the instrument to generate equitable outcomes. If the process used by the superior to evaluate the subordinate's performance is fair, it should not be surprising that the outcome or the appraisal will be fair. Fair evaluation procedures are likely to lead to fair appraisals (Van den Bos, 2005). There are two theoretical explanations on why procedural fairness may be related to fairness of outcome. Ambrose and Arnaud (2005) suggest that procedural fairness and distributive fairness may be functionally the same. Most early theories and research on procedural fairness were preoccupied with this proposition of fair outcome. The instrument theory proposed by Thibaut and Walker (1975) suggests that the main purpose of having fair procedures is to obtain fair outcomes and decisions. According to this theory, disputes over allocation involve conflict of interests because any outcome that favors one party is likely to be

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opposed by the other party. Hence, the best way to resolve such disputes would be the employment of fair procedures because fair procedures are more likely than unfair procedures to lead to the most equitable resolutions (outcome) of the dispute. People are therefore primarily concerned with the fairness of the outcome. Hence they prefer fair procedures to unfair procedures. The self-interest theory on procedural fairness proposed by Lind and Tyler is similarly concerned with the outcome. This theory suggests that people prefer fair procedures to unfair procedures primarily because fair procedures are more likely to serve their self interest in the long run. In social interaction, people cannot always get what they want. They need to compromise. Lind and Tyler (1988, 223) note that “one such social compromise, perhaps the fundamental one, is the acceptance of outcomes and procedures on the basis of their fairness, rather than on the basis of their favorability to one's own interests.” The second theoretical explanation for the suggestion that procedural may be related to distributive fairness is based on the premise that the two forms of fairness both contribute to an individual overall judgment of fairness. According to Lind (2001), people rely on all forms of fairness – whether procedural fairness and distributive fairness – to make an overall or general perception of fairness. They form a general fairness judgment based on their justice experience and the information available. Once this general fairness judgment is formed, it is resistant to change and they use this general fairness judgment to drive subsequent fairness judgment. In the management accounting domain, both Libby (1999) and Burney et al. (2009) suggest that procedural fairness and distributive fairness are related. Libby (1999) suggests that the presence of fair procedures (proxied as voice) leads to a greater acceptance of unfair resource allocation (distributive fairness). Based on the above discussion, it is reasonable to conclude that if employee performance evaluation procedures are fair, the performance appraisals the employees receive are also likely to be fair. We therefore propose: H1. Fairness of evaluation procedures is positively associated with fairness of outcome. 2.3. Effects of fairness of outcome on Job satisfaction (H2) and organizational commitment (H3) Fairness of outcome is likely to engender favorable employee work-related attitudes. Employees who receive fair evaluation appraisals are likely to be more satisfied with their jobs and their organizations. Since performance appraisals are generally closely related to employee compensation and reward, employees are likely to be concerned with the fairness of their performance appraisals. They are therefore likely to be more satisfied if their appraisals are commensurate with and reflect fairly their actual performance. On the importance of outcome on people attitudes and behaviors, Lind and Tyler (1988, 1) summarize as follows: People have often been viewed as evaluating social experiences, relationships, and institutions on the basis of the outcome they receive. Theorists have differed in precisely how they think outcomes are linked to evaluations, but a general focus on outcomes characterizes some of the most widely accepted explanations of social behaviour. Economists and public choice theorists have focused on the absolute favourability of outcomes…although these approaches differ in many ways, they all assume that people judge their social experiences in term of the outcomes they receive and that attitudes and behavior can be explained by this outcome-based judgement. Equity theory suggests that social behavior is profoundly affected by how allocation of benefits and costs is undertaken within a group (Adams, 1965; Lind & Tyler, 1988). Outcomes would be considered equitable if the benefits an individual in the group receives are proportional to the contributions of that individual. If allocation is proportional,

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people are likely to be satisfied. In contrast, if the allocation within the group is disproportional, individuals will experience distress at the inequity. They will be dissatisfied and may respond appropriately, for instance, by reducing their contribution to restore equity. It is therefore reasonable to conclude that employees are likely to be more satisfied and more committed to their organizations if they perceive their performance appraisals as fair than when they perceive their appraisals as unfair. Based on the above discussion, we propose: H2. Fairness of outcome is positively associated with job satisfaction. H3. Fairness of outcome is positively associated with organizational commitment. 2.4. Effects of fairness of evaluation procedures on trust in supervisors (H4) Fairness of evaluation procedures may have important affective effects on employees which are independent of the cognitive effects through the greater fairness of outcome. One of such affective effects is likely to be the trust the subordinates have in their supervisors. Rousseau, Sitkin, Burt, and Camerer (1998, 395) define trust as “a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behaviour of another.” Trust may be conceptualized at interorganizational or interpersonal level. Since all the variables investigated in our study are within the organization and at personal level, trust is conceptualized as interpersonal trust. Specifically, it refers to the relational (affective) trust which the subordinates have for their superiors. Superiors who use fair evaluation procedures are likely to be perceived by their subordinates as trustworthy. For performance evaluation procedures to be perceived as fair, superiors will have to apply them consistently across subordinates and across time periods. Superiors will also need to base the evaluations of their subordinates' performance on accurate and complete information. The evaluations should also be free from personal bias, conforming to high standards of ethics and morality. Subordinates who are evaluated in such manners are likely to harbor a much higher level of trust towards their superiors. Within the accounting literature, Hartmann and Slapnicar (2009, 726) argue that procedural fairness is related to trust. According to them, “trust results from superiors acting consistently, accurately and honestly throughout the whole evaluation process, rather than giving subordinates a favourable evaluation…when superiors explicate performance targets in formal terms, attempt to quantify measurement and allocate rewards using … traceable procedures, this enhances procedural justice and therefore trust.” Brockner and Siegel (1996) suggest that people's trust in others grow if they are treated fairly. Lewicki et al. (2005) similarly note that the procedural fairness of an exchange influences perceivers' trust in the exchange partner and that people use information about procedural fairness to determine trust in the other party. We therefore propose: H4. Fairness of evaluation procedures is positively associated with trust in superiors. 2.5. Effects of trust in supervisors on job satisfaction (H5) and organizational commitment (H6) When subordinates have trust in their superiors, there are likely to be more honest relationships among them. Relationships are likely to be close and transparent with much more communication than when there is mistrust. Subordinates are likely to be more open and more willing to consult and discuss issues and problems and to work with their superiors for their mutual benefits. Superiors are also more likely to consult the subordinates and accord more participation privileges to the subordinates. When interpersonal trust is sufficiently high, there is likely to be greater tendency for the subordinates to

rely on their superiors to look after their interests. They may hence be more willing to open up and confide with their superiors. Zand (1997) suggests that the existence of high trust between individuals is likely to greatly increase their problem solving effectiveness and improve decision quality and its implementation. When trust exists, people are likely to be more willing to cooperate, accommodate and adjust to each other in order to work together constructively and effectively. They may also share common objectives and goals and have less inclination to pursue selfish interests at the expense of the other party. They are also more committed to each other. With such congenial relationships, the working relationship and environment are likely to be harmonious rather than stressful, helpful rather than confrontational. Lau and Sholihin (2005) argue that when subordinates and their superiors trust each other, they are more likely to be open to each other. Both parties are likely to express their feelings openly. This is likely to lead to lower stress, less frustration and conflicts, and hence higher job satisfaction. It should therefore not be surprising to expect subordinates who harbor high trust towards their superior to be more satisfied with their job and more committed to their organizations. Accordingly, we propose: H5. Subordinates' trust in their superiors is positively associated with job satisfaction. H6. Subordinates' trust in their superiors is positively associated with organizational commitment. 2.6. Effects of Job satisfaction on organizational commitment (H7) Employees' job satisfaction is likely to be positively associated with their commitment to their organizations. Satisfied employees are likely to be happy employees. They are less likely to harbor thoughts of quitting and withdrawal from the organizations. Instead, they are likely to feel positive towards the organization which provides the environment the opportunities to enjoy such feeling of satisfaction. They are therefore likely to be more committed to the organization and more likely than dissatisfied employees to engage in positive behaviors such as helping others including co-workers and customers. In contrast, dissatisfied employees are more likely to be uncooperative, aggressive, defiant and have defensive behaviors. They may also engage in job avoidance, absenteeism and withdrawal from the organizations, and hence their commitment to their organizations. Locke and Latham (1991, 249–250) note the relationship between job satisfaction and organizational commitment as follows: A number of studies have looked at the correlation between commitment and satisfaction. In every case, the correlations is substantial… There is some controversy over the causal interpretation of these concurrent, correlational data, however…it seems logical that satisfaction would affect organizational commitment, although satisfaction is certainty not its only determinant…we believe that the stronger causal relationship goes from satisfaction to commitment…. Satisfaction keeps the individual attached to the organization and make him or her willing to accept new goals. Based on the above discussion, it is reasonable to propose: H7. Job satisfaction is positively related to employee commitment to the organization. 2.7. Indirect effect of fairness in outcome, trust on job satisfaction and commitment The discussion in the proceeding few sections suggests that the effects of fairness of procedures on job satisfaction and organizational commitment may be indirect. Specifically H1 and H2 indicate that the effects of fairness in procedures on job satisfaction are indirect

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through fairness in outcome. Similarly, H4 and H5 indicate that the effects of fairness in procedures on job satisfaction are indirect through trust in superiors. Accordingly, we propose:

promotability. This instrument has been used by other prior management accounting studies including Lau and Moser (2008) and Sholihin and Pike (2009).

H8. The effects of fairness in procedures on job satisfaction are indirect through (1) fairness of outcome, and (2) trust in superiors. With regard to the relationship between fairness of procedures and organizational commitment, the discussion in the proceeding sections suggests that the effects may be indirect through (1) fairness in outcome, (2) trust in supervisor, and (3) job satisfaction. Accordingly, we propose:

4.2. Fairness of outcome (distributive fairness)

H9. The effects of fairness in procedures on organizational commitment are indirect through (1) fairness of outcome, (2) trust in superiors, and (3) job satisfaction. 3. Methodology We used a mail questionnaire survey to collect the data in France. The sample includes 177 managers located in Paris and the surrounding districts. These managers were involved in an Executives Master course at a French university located in Paris. One half of these managers (88) had completed the course. The remaining half (89) were in the processing of completing their studies. The questions were designed to be answered by managers from any functional areas. As the measurement instruments used in the questionnaire were adopted from prior studies which were conducted in the English language, it was necessary to translate them into French. The translation involved three steps. First, the English version was translated into French by one of the researchers who is a French national proficient in English. Second, the French version was translated back into English by a professional translator. Third, the translated English version was compared with the original English version. Based on this, some minor amendments were made to the French version to ensure that it is an accurate translation of the original English version. Two months after the initial distribution of the questionnaires to the managers, a follow-up letter was mailed to each manager. Seventeen of questionnaires were returned unopened to the sender because of incorrect postal addresses. For the remaining 160 questionnaires, a total of 81 responses were received. This constitutes a response rate of 51% which compares very favorably with the usual low response rate of most surveys undertaken in France (Bescos et al., 2004). Twenty one of the responses received were not useable because of the failure to complete essential parts of the questionnaire. The remaining 60 responses were used to test the hypotheses of the study. Non-response bias tests involving splitting the sample into early and late responses indicate no significant difference in the variables between the two groups. These results suggest that non-response bias may not be a problem for the study (Oppenheim, 2001). Demographic data from the responses indicate that 64% of respondents were in the area of finance or management; their mean age was 36; on average they had 6.7 years of experience in their current positions and an average of 3.2 employees under their responsibility. These demographic characteristics indicate that the respondents were experienced managers with responsible positions in their organizations. 4. Measurement instruments The following measurement instruments were used to measure the variables included in the study. 4.1. Fairness of evaluation procedures This variable was measured by the four-item McFarlin and Sweeney (1992) instrument. The four items ask the respondents to rate the fairness of procedures their superiors used to communicate performance feedback, determine pay increases, and evaluate performance and

This variable was measured by the instrument developed by Price and Mueller (1986). The instrument comprises five items which ask the respondents to rate the fairness of the reward that they received taking into consideration the amount of effort that they had put forth, the responsibilities that they had, the stresses and strains of their jobs, and the amount of education and training that they had and the work that they had done. 4.3. Trust in superior The instrument developed by Read (1962) was used to measure trust in superior. This instrument comprises four items which ask the respondents to rate the extent to which (1) their superiors take advantage of opportunities to further the respondents' interests, (2) they feel free to discuss their problems and difficulties with their superiors without jeopardizing their positions, (3) they feel confident that their superiors keep them informed about matters which might concern them, and (4) the trust they have that their superiors' decisions which seem against their interests are justified by other considerations. This instrument has been used by several prior management accounting studies (e.g., Lau & Tan, 2006; Ross, 1994). 4.4. Job satisfaction This variable was measured by the two items, seven-point Likert-type scale instrument developed by Dewar and Werbel (1979). The two items are: “All in all, I am satisfied with my job”; and “In general, I like working here.” Several studies in management accounting have also used this instrument. These include Abernethy and Stoelwinder (1995) and Chong, Eggleton, and Leong (2005). 4.5. Organizational commitment This variable was measured by a nine-item instrument developed by Mowday, Steers, and Porter (1979). It has been adopted by several management accounting studies on organizational commitment (e.g., Nouri, 1994; Nouri & Parker, 1998) and has been described as the most widely used measure of affective commitment to date (Meyer, Paunonen, Gellatly, Goffin, & Jackson, 1989). It has also been validated with the instrument by Allen and Meyer (1990) with the results indicating that both instruments measure the same phenomenon. 5. Results This study hypothesizes that the effects of procedural fairness on employee work-related attitudes (job satisfaction and organizational commitment) are indirect through intervening variables. Hence, it is necessary to decompose the total effect into direct and indirect effects. Structural equation modeling is a suitable technique to employ here because of its ability to compute such direct and indirect effects. Kline (2005) notes that SEM is also able to differentiate between the observed and latent variables and to analyze covariances and means. In terms of significance testing, it allows the evaluation of entire models instead of individual effects. Garson (2009, 1) similarly states that while SEM serves purposes similar to multiple regression, it is able to do so in a more powerful way including more flexible assumptions, use of confirmatory factor analysis to reduce measurement error by having multiple indicators per latent variable, the attraction of SEM's graphical modeling interface, the desirability of testing models overall rather than coefficient individually, the ability to test

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models with multiple dependents, the ability to model mediating variable rather than be restricted to an additive model and the ability to model error terms. This technique has been used extensively in social sciences as well as management accounting research (e.g., Burney et al., 2009; Hartmann & Slapnicar, 2009; Lau & Moser, 2008). 5.1. Measurement model Structural equation modeling based on AMOS Version 17 is used for the analysis of the latent variables. The initial measurement model provides the following fit indices. The Incremental Fit Index (IFI) is 0.863; the Tucker–Lewis Index (TLI) is 0.839; and the Comparative Fit Index (CFI) is 0.858. These indices are below the recommended threshold of above 0.9 (Arbuckle & Wothke, 1999; Bentler, 1995; Chau, 1997). In addition, the Root Mean Square Error of Approximation (RMSEA) is 0.093. This is also higher than the recommended threshold of less than 0.08 (Browne & Cudeck, 1993). These results suggest that the initial measurement model is not a good fit of the data. We adopt the approach of deleting items with low standardized regression weights (Kline, 2005). Deleting four items with low standardized regression weights from the measurement model results in a model that is a much better fit of the data. The four items deleted are: one item from the fairness of outcome variable with a standardized regression weight of 0.26; one item from the trust variable with a standardized regression weight of 0.597; and two items from the organizational commitment variable with standardized regression weights of 0.494 and 0.573, respectively. The revised model, based on the remaining 20 items, produces the following fit indices. The IFI is 0.922; the TLI is 0.904; and the CFI is 0.919. These are all above the threshold limit of 0.9 (Arbuckle & Wothke, 1999; Bentler, 1995; Chau, 1997). In addition, the RMSEA is 0.08 which is at the threshold limit of 0.08. The CMIN/DF ratio is 1.37 which is way below the recommended maximum of 5 (Wheaton, Muthen, Alwin, & Summer, 1977). Finally, the Hoelter's critical number of observations required is 55 (pb 0.01). This is less than our sample of 60. All these fit indices indicate that the revised model is a relatively good fit of the data. Table 1 presents the descriptive statistics of the 20 items including the means, standard deviations and the range. The Cronbach alphas are between 0.705 and 0.913. These results indicate high internal consistency among the items for each variable. Table 2 presents the standardized regression weights for the 20 items of the revised model. All items indicate standardized regression weight in excess of 0.5. As these results of the revised model estimation satisfy the measurement fit, we turned our attention to the structural parameters for hypothesis testing. 5.2. Results of tests of hypotheses H1 to H7 Table 3 and Fig. 2 present the results of the path coefficients of the various relationships in the model. These results provide support for hypotheses H1 (procedural fairness and fairness of outcome, est. = 0.676, p b 0.001), H2 (fairness of outcome and job satisfaction, est. = 0.361, p b 0.045), H4 (fairness of evaluation procedures and trust, est. = 0.542, p b 0.006), H5 (trust and job satisfaction, est. = 0.395, p b 0.038) and H7 (job satisfaction and organizational commitment, est. = 0.858, p b 0.001). They do not provide support for hypothesis H3 (fairness of outcome and organizational commitment, est. = − 0.163, p b 0.226) and hypothesis H6 (trust and organizational commitment, est. = 0.115, p b 0.398). Note that the effect of fairness of outcome on organizational commitment is negative. But this effect is not significant (p b 0.226). 5.3. Mediational effects: hypothesis H8 Hypothesis H8 states that the effects of fairness in procedures on job satisfaction are indirect through (1) fairness of outcome,

and (2) trust in superiors. The results in Table 3 and Fig. 2 indicate that the relationship between fairness of evaluation procedures and job satisfaction is not significant (est.=0.019, pb 0.929). These results are in accordance with the expectation and hypothesis H8. They suggest that the effect of fairness in evaluation procedures on job satisfaction may be indirect through (1) fairness in outcome (see H1 and H2) and (2) trust in superiors (see H4 and H5). In order to ascertain these expectations, the approach proposed by Baron and Kenny (1986, 1177) is used. This approach suggests that for mediation to occur, three conditions must hold. First, the independent variable must significantly affect the dependent variable. Second, the independent variable must significantly affect the mediating variable(s). Third, the mediating variable(s) must significantly affect the dependent variable. Table 4 on the zero-order correlation coefficients of the variables in the model provides the results to ascertain if the first condition holds. The results indicate that the relationship between fairness of evaluation procedures and job satisfaction is significant (est. = 0.581, p b 0.01). This significant zero-order correlation coefficient indicates that the first condition of mediation holds for hypothesis H8. As discussed above, the results in Fig. 2 indicates that fairness of evaluation procedures is significantly related to fairness of outcome Table 1 Descriptive statistics. Latent construct

N

Fairness of evaluation procedures Procedural fairness to evaluate performance Procedural fairness to determine promotions Procedural fairness to communicate performance feedback Procedural fairness to determine pay increases Fairness of outcome Fairness in rewards Fairness in rewards responsibilities Fairness in rewards and strains Fairness in rewards and training

Mean Std. dev.

Min Max Cronb alpha

60 2.83

0.994 1

5

60 2.65

0.954 1

5

60 2.62

0.922 1

5

60 2.37

0.956 1

5

relative to effort relative to

60 2.47 60 2.50

0.999 1 0.983 1

5 5

relative to stresses

60 2.40

1.138 1

5

relative to education

60 2.57

1.184 1

5

1.170 1

5

1.219 1

5

0.989 1

5

0.705

60 4.48 60 4.53

1.524 1 1.556 1

7 7

0.913

60 4.38

1.519 1

7

60 3.5

1.501 1

7

60 4.25

2.030 1

7

60 4.38 60 3.10

1.439 1 1.714 1

7 7

60 3.77

1.609 1

7

60 4.05

1.731 1

7

Trust in superiors Superior takes advantage of opportunities 60 2.57 to further your interests. Freedom to discuss problems and 60 3.27 difficulties without jeopardizing your position Confident that your superior keeps you 60 2.73 fully and frankly informed. Job satisfaction All in all, I am satisfied with my job. In general, I like working here. Organizational commitment Talk up this organization as a great organization to work for. Find that my values and this organization's values are very similar. Proud to tell others that I am part of this organization. I really care about this organization. This is the best organization for which to work for. This organization really inspires the very best in me. I am extremely glad that I chose this organization to work for.

0.839

0.883

0.908

C.M. Lau, B. Oger / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 323–332 Table 2 Measurement model (maximum likelihood). Latent construct

N

Mean

Std. dev.

Std factor loading

60 60 60

2.83 2.65 2.62

0.994 0.954 0.922

0.774 0.809 0.687

60

2.37

0.956

0.751

relative to effort relative to responsibilities relative to stresses and

60 60 60

2.47 2.50 2.40

0.999 0.983 1.138

0.908 0.776 0.855

relative to education and

60

2.57

1.184

0.695

Fairness of evaluation procedures Procedural fairness to evaluate performance Procedural fairness to determine promotions Procedural fairness to communicate performance feedback Procedural fairness to determine pay increases Fairness of outcome Fairness in rewards Fairness in rewards Fairness in rewards strains Fairness in rewards training

Trust in superiors Superior takes advantage of opportunities to further your interests. Freedom to discuss problems and difficulties without jeopardizing your position Confident that your superior keeps you fully and frankly informed. Job satisfaction All in all, I am satisfied with my job. In general, I like working here. Organizational commitment Talk up this organization as a great organization to work for. Find that my values and this organization's values are very similar. Proud to tell others that I am part of this organization. I really care about this organization. This is the best organization for which to work for. This organization really inspires the very best in me. I am extremely glad that I chose this organization to work for.

60

2.57

1.170

0.561

60

3.27

1.219

0.713

60

2.73

0.989

0.742

60 60

4.48 4.53

1.524 1.556

0.868 0.968

60

4.38

1.519

0.836

60

3.5

1.501

0.816

60

4.25

2.030

0.674

60 60 60 60

4.38 3.10 3.77 4.05

1.439 1.714 1.609 1.731

0.568 0.842 0.742 0.916

329

mediating effect. The results in Table 3 and Fig. 2 indicate that after controlling for the effects of fairness in outcome and trust, the relationship between fairness of evaluation procedures and job satisfaction becomes insignificant (est. = 0.019; p b 0.929). These results indicate that fairness in outcome and trust mediated fully the relationship between fairness of evaluation procedures and job satisfaction (Baron & Kenny, 1986). In order to ascertain the relative strength of the indirect effect via (1) fairness of outcome and (2) trust, the following computations based on the path coefficients in Fig. 2 are undertaken: Path (1) Path (2) Total indirect effect

FP–TR–JS FP–FO–JS

0.542 × 0.395 0.676 × 0.361

0.214 0.244 0.303

Path (1) indicates the indirect effect of 0.214 through trust. Path (2) indicates the indirect effect of 0.244 through fairness of outcome. According to Pedhazur (1982, p.617) and Bartol (1983, 809), an indirect effect in excess of the magnitude of 0.05 may be considered meaningful. As the indirect effect via trust (0.214) and that via fairness of outcome (0.244) are both substantially above the 0.05, they are therefore meaningful. Accordingly, hypothesis H8 is supported. 5.4. Hypothesis H9

(second condition), which in turn, is significantly related to job satisfaction (third condition). These results indicate that all three conditions of Baron and Kenny (1986) for mediation to occur are met. Baron and Kenny (1986) suggest that if a significant relationship between the two variables becomes insignificant after controlling for the indirect effect, the intervening variables are deemed to have a full mediating effect. In contrast, if a significant relationship between two variables remains significant after the indirect effects have been partialled out, the intervening variables are deemed to have a partial

Hypothesis H9 states that the effects of fairness in procedures on organizational commitment are indirect through (1) fairness of outcome, (2) trust in superiors, and (3) job satisfaction. The results in Table 4 indicate that the relationship between fairness in evaluation procedures and organizational commitment is significant (est. = 0.37, p b 0.01). In contrast, after controlling for the indirect effects through fairness of outcome, trust and job satisfaction, the relationship between fairness of evaluation procedures and organizational commitment becomes insignificant (est. = 0.046. p b 0.756 in Table 3 and Fig. 2). These results indicate that the relationship between fairness in evaluation procedures and organizational commitment is fully mediated by (1) fairness in outcome, (2) trust, and (3) job satisfaction. In order to ascertain the relative strength of the indirect effect via the three mediating variables, the following computations based on the path coefficients in Fig. 2, are undertaken: Path (1) Path (2) Path (3) Path (4) Path (5) Total indirect effect

FP–TR–OC FP–TR–JS–OC FP–JS–OC FP–FO–JS–OC FP–FO–OC

0.542 × 0.115 0.542 × 0.395 × 0.858 0.019 × 0.858 0.676 × 0.361 × 0.858 0.676 × −0.163

0.062 0.184 0.016 0.209 −0.110 0.361

Table 3 Structural model — standardized coefficients. Dependent variable

Independent variable

Proposition

Hypothesized direction

Standardized coefficient

p-Value

Fairness of outcome Trust Job satisfaction

Fairness of procedures Fairness of procedures Fairness of output Trust Fairness of procedures Fairness of outcome Trust Job satisfaction Fairness of procedures

H1 H4 H2 H5 H8 H3 H6 H7 H9

+ + + + None + + + None

0.676 0.542 0.361 0.395 0.019 −0.163 0.115 0.858 0.046

0.001 0.006 0.045 0.038 0.929 0.226 0.398 0.001 0.756

Organizational commitment

Model fit statistics: IFI (>0.9) TLI (>0.9) CFI (>0.9) RMSEA (b0.8) CMIN/DF (b5) Hoelter's critical N b 149 responses

0.922 0.904 0.919 0.080 1.380 55 (0.01)

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C.M. Lau, B. Oger / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 323–332 Structural Model - Standardized Coefficients

Trust in superior 0.542**

0.115 0.395*

0.019

Fairness of Evaluation Procedures

Job Satisfaction

0.858**

Organizational Commitment

0.361* 0.676**

-0.163

Fairness of Outcome

0.046 **p<0.01; *p<0.05

Fig. 2. Structural model — standardized coefficients.

These results indicate a total indirect effect of 0.361. Path (3) indicates the indirect effect via job satisfaction alone is 0.016. This is way below the meaningful threshold of 0.05 and hence is not meaningful (Bartol, 1983, 809; Pedhazur, 1982, 617). In contrast, Paths (1) and (2) indicate that the indirect effect via trust and job satisfaction is 0.246 (0.062 + 0.184). This is way above the meaningful threshold of 0.05 and hence is meaningful. Paths (4) and (5) indicate that the indirect effect via fairness in outcome and job satisfaction is 0.099 (0.209– 0.110). This is also above the meaningful threshold of 0.05 and hence is meaningful. Hypothesis H9 which states that the effects of fairness in procedures on organizational commitment are indirect through (1) fairness of outcome, (2) trust in superiors, and (3) job satisfaction is therefore supported. Note that the effect via trust is 0.246 which more than twice that via fairness in outcome is 0.099. Overall, the result from this study indicates that fairness of evaluation procedures affects employee job satisfaction and organizational commitment via fairness in outcome and trust in superior. For job satisfaction, the indirect effect via fairness in output (0.244) is approximately the same as that via trust in superior (0.214). In contrast, for organizational commitment, the indirect effect via fairness in output (0.099) is less than half of that via trust in superior (0.246). 6. Conclusions As fairness and equity issues are important affective and behavioral considerations to the management accountants in the design of employee performance evaluation systems, this study therefore seeks to understand how fairness of employee evaluation procedures affects employee work related attitudes such as job satisfaction and Table 4 Correlation matrix among independent and dependent variables. Dependent variable

Fairness of outcome

Trust

Job satisfaction

Organizational commitment

Fairness of procedures Fairness of outcome Trust Job satisfaction

0.581⁎⁎

0.447⁎⁎

0.417⁎⁎

0.370⁎⁎

0.250

0.423⁎⁎

0.312⁎

0.449⁎⁎

0.426⁎⁎ 0.762⁎⁎

⁎⁎ p b 0.01. ⁎ p b 0.05.

organizational commitment. It proposes that fairness in evaluation procedures significantly affects employee job satisfaction and organizational commitment. The effects are indirect with fairness in outcome and trust in superiors as intervening variables. The results are as follows. First, with respect to job satisfaction, they indicate that the effects of fairness of employee evaluation procedures on employee job satisfaction are indirect through (1) fairness of outcome, and (2) the affective variable of trust in superiors. Second, with respect to organizational commitment, the results indicate that the effects of fairness of evaluation procedures on employee organizational commitment are similarly indirect through (1) fairness of outcome, and (2) the two affective variables of trust in supervisors and job satisfaction. A number of conclusions can be drawn from these results. First, fairness of evaluation procedures is significantly related to the two key employee affects of job satisfaction and organizational commitment. Second, when procedures are fair, employees have higher trust in their superiors. They also perceive the appraisals they received as fair. Employees, who trust their supervisors and who received fair evaluation appraisals, are more satisfied with their jobs. Third, satisfied employees are more committed to their organizations. Fourth, trust in superior and fairness of outcome do not affect organizational commitment directly. Instead, their effects are indirect through job satisfaction. Finally, job satisfaction is a key determinant of organizational commitment. Most of the effects of fairness of evaluation procedures on organizational commitment are through job satisfaction. These conclusions indicate that the fairness of evaluation procedures is indeed important. There are cognitive effects. Fairness of procedures does lead to fairer appraisals for employees. This is in accordance with expectation. It should not be surprising for fair evaluation procedures to result in fairer employee evaluation appraisals. However, what is surprising is the relative magnitude of this effect. It is small and accounts for only 0.099 out of a total effect of 0.361 for the relationship between fairness of evaluation procedures and organizational commitment. The dominant portions of the effects of fairness of procedures on employee affects are affective (trust and job satisfaction). For the relationship between fairness of procedures and organizational commitment, they account for 0.246 which is more than twice that attributable to fairness of outcome. From a practical perspective, there are important implications in these findings. The results suggest to organizations that the employment of fair evaluation procedures does far more than benefiting their employees. Undoubtedly, employees will benefit through the fairer performance appraisals and the rewards they receive. But the organizations will also benefit. Indeed, the results suggest that they are by far the bigger beneficiaries. It appears that the organizations themselves will reap significant benefits through the enhancement of (1) employee trust in their supervisors, (2) employee job satisfaction, and ultimately, (3) employee commitment to the organizations. Lind and Tyler (1988, 179) note as follows: We believe that attitudes toward the organization as a whole, including such things as organizational commitment, loyalty and work group cohesiveness, are strongly affected by procedural justice judgments. Fair procedures, we hypothesize, are a critical aspect of the quality of work life, and are well-nigh essential to good employer–employee relations. Organizations that ignore procedural justice concerns run the risk of engendering negative organizational attitudes, dissatisfaction with organizational outcomes and decisions, non-compliance with rules and procedures, and, in some instances, lower performance (emphasis added). Our results not only support the assertion of Lind and Tyler on the importance of ensuring that the organizational evaluation procedures are fair, but also demonstrate the manners as well as the magnitude by which the organizations themselves can benefit if fair procedures are employed. Hence, it is very much in the organization's interest

C.M. Lau, B. Oger / Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 323–332

to employ fair evaluation procedures. It is hoped that our results will persuade management accountants to pay greater attention to the issues of procedural fairness so that both the employees and the organizations themselves will enjoy the win–win benefits of fair procedures. In this regard, Lind and Tyler (1988, 201) note that: these benefits can be realized at very little cost to the organization; in fact, it is quite likely that the investment of organizational resources in the achievement of procedural justice would produced much greater benefits…at less cost than would most other changes to organizational policy or practices. There are several limitations in our study. First, our study was undertaken in France with French managers. Systematic empirical studies in management accounting undertaken in continental Europe and France in particular are rare. It is therefore unclear if our results will be generalizable to organizations outside France. Hence, generalizing our result to other settings should be made with caution. Second, while the response rate of our survey of above 50% and our statistical analysis based on the responses of 60 managers may be regarded as above average for empirical studies in France (Bescos et al., 2004), a higher response rate and a larger number of observations would be desirable. Third, the instruments used in our study are based on those developed by English-speaking researchers. Even though great care was taken to ensure that the translation was undertaken as accurately as possible, it is nevertheless possible that differences between the two very distinct languages may have resulted in some misunderstanding of the questionnaire. Nevertheless, despite the above limitations, our study may provide important insights into the processes by which the use of fair procedures to evaluate employee performance affects employee work-related attitudes. It may also be one of the relatively few management accounting studies undertaken in France in this important research area. While there is an abundance of systematic empirical management accounting studies in Anglo-American settings and to a lesser extent, in Asian setting, such studies are rare in continental Europe in general, and France in particular. This may be due partly to language issues as well as the relatively close-door policy of many French organizations which are generally reluctant to respond to research surveys (Bescos et al., 2004). Our study may therefore be one of the relative few which can provide systematic empirical evidence and some insights into how French management control systems function. This is important as continental Europe is a major economic force with highly sophisticated industries and systems. The study of management accounting would be incomplete if management accounting researchers do not at least attempt to uncover the evidence needed to understand the control systems of different important regions.

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