Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scor

Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scor
Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scorecard. The article is posted on Brightspace. Ding, S. and Beaulieu, P. 2011. The Role of Financial Incentives in Balanced Scorecard‐Based Performance Evaluations: Correcting Mood Congruency Biases, Journal of Accounting Research, 49(5), p.1223-1247. The article assignment is expected to: Provide the article’s title, source, and publication date. State the article’s major points [10 marks]. Explain the authors’ motivation for the article [10 marks]. Specify what major concepts from ADM4345 were discussed by the article [15 marks]. Comment whether or not the article provided you with additional understanding of these major concepts [10 marks]. Critically evaluate the application of the Balanced Scorecard (BSC) as a performance evaluation tool, using relevant theories, managerial practices, and/or your personal working experiences [40 marks]. Critically evaluate some extra studies on the BSC and discuss the implications of these studies on the application of this important MCS tool and their link to the final exam article. Extra studies on the BSC will be posted on Brightspace, but you may find additional articles by yourself through University of Ottawa’s library [10 marks]. You are not expected to comment on the article’s statistical analyses, if any. This article assignment should include a cover page and should be presented in size-12 font, 1.5 line spacing, with normal margins, and not more than 2,000 words plus no more than 2 appendices. The assignment is to be professionally written, using appropriate syntax, grammar, vocabulary, and spelling [5 marks]. Your signed Statement of Academic Integrity should be attached.
Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scor
The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases Author(s): SHUJUN DING and PHILIP BEAULIEU Source: Journal of Accounting Research , DECEMBER 2011 , Vol. 49, No. 5 (DECEMBER 2011), pp. 1223-1247 Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: https://www.jstor.org/stable/41328957 JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Wiley is collaborating with JSTOR to digitize, preserve and extend access to Journal of Accounting Research This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms DOI: 10.1111/J.1475-679X.2011.00421.X CHICAGO BOOTHS Journal of Accounting Research Vol. 49 No. 5 December 2011 Printed in U.S.A. The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases SHUJUN DING* AND PHILIP BEAULIEU* Received 14 September 2010; accepted 9 June 2011 ABSTRACT Moods are low-intensity affective states that individuals bring to a decision, and may be especially important when the balanced scorecard (BSCyf L s used for performance evaluation purposes. We propose that financial incen- tives can motivate decision-makers to correct mood congruency biases, in which judgments and decisions are consistent with moods. In experiment 1, participants rated the performance of one division manager based on two * University of Ottawa; ^ University of Calgary. An earlier version of this paper was presented at the 2008 AAA Midwest Regional Meeting, the 2008 AAA Annual Meeting, the 2008 CAAA Annual Meeting, and the 2009 ABO conference. It is based on the PhD dissertation (University of Calgaryyf R I W K H I L U V W D X W K R U V X S H U Y L V H G E W K H V H F R Q G D X W K R U 7 K H D X W K R U V Z R X O G O L N H W o thank the members of the committee, Cynthia Simmons, Kate White, and Michael Wright, and external examiners, Teresa Kline and Alan Webb. We also thank Douglas Skinner (the editoryf D Q G D Q D Q R Q P R X V U H I H U H H D Q G D F N Q R Z O H G J H W K H K H O S I X O F R P P H Q W V R I ) R G L O $ G M D R X G , Cam Graham, Linda Grensing-Pophal, Susan Haka, Irene Herremans, Steven Kaplan, Joanne Leek, Tim Miller, Cam Morrill, Janet Monili, Sean Peffer, Steve Salterio, Parbudyal Singh, and Gary Spraakman, and the comments of workshop participants at Brock University, Concordia University, University of Lethbridge, University of Manitoba, University of Ottawa, and York University. Financial support was provided by the University of Calgary to the first author. We thank Kate White for sharing her mood induction instrument. 1223 Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2011 This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1224 S. DING AND P. BEAULIEU accounting measures and another manager based on a 16-measure BSC; there were mood congruency biases at both levels of information load. Fi- nancial incentives to make benchmark-consistent judgments eliminated bias in the former condition but not in the BSC condition. In experiment 2, in- centives were offered and performance evaluations were based on an eight- measure BSC; mood congruency bias was eliminated. Results suggest that management control systems, specifically financial incentives, should be in- cluded in future affect correction research. 1. Introduction Many claim that the balanced scorecard (BSCyf L V R Q H R I W K H P R V W L P S R U W D Q t management accounting innovations in the last two decades, and surveys consistently list it as one of the most popular management tools around the world (Rigby and Bilodeau [2009]yf $ F F R X Q W L Q J U H V H D U F K H U V K R Z H Y H U , have documented several biases and problems associated with its applica- tion (e.g., Lipe and Salterio [2000], Banker, Chang, and Pizzini [2004], Ittner, Larcker, and Meyer [2003]yf 7 K H F R P S O H [ L W R I W K H % 6 & L V E H O L H Y H d to result in information overloading, which, in turn, compromises decision quality when using the BSC for performance evaluation, as is commonly found in practice. We test whether the BSC’s complexity leaves it vulnera- ble to the well-documented mood congruency bias, and whether this bias is affected by financial incentives, another element of management control systems (MCSyf 2 X U V W X G O L Q N V % 6 & U H O D W H G E L D V H V D I I H F W D Q G 0 & 6 O L W H U D – ture. The term “affect” refers to feelings, including both moods and emotions. Moods are defined as low-intensity affective states that individuals bring to the decision context, while emotions are defined as more-intensive affective states with a definite cause and clear cognitive content related to decisions (Forgas [1992] , Edda, Moreno, and Smith [2001] , Moreno, Kida, and Smith [2002]yf 7 K H P R R G V D Q G H P R W L R Q V R I G H F L V L R Q P D N H U V D U H F U L W L F D O O L P S R U – tant because individuals rarely make decisions devoid of feeling. Forgas and George [2001, p. 5] commented that moods are especially important in examining individuals’ behaviors and play a crucial role in organizational settings, because: Moods thus provide the underlying affective context for most of our on- going thought processes and behaviors. Enduring mood states may be triggered by such fleeting cues as a passing smile, the weather, a pleasant room, a tone of voice, or a nonverbal gesture. Indeed, mild, nonspecific moods often have a more subtle and insidious influence on organizational behavior precisely because they lack elaborate cognitive content and thus often escape conscious scrutiny. The distinction between emotions and moods is very important in judg- ment and decision-making research. Emotions may or may not be useful in organizational settings; sometimes they provide content that is irrelevant to This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1225 decisions, but positive emotions resulting from being treated fairly by team members increase willingness to cooperate with them in a common task (Cremer and Hiel [2006] yf % G H I L Q L W L R Q W K R X J K P R R G V D U H X Q H T X L Y R F D O O y irrelevant to decision-making contexts. It is crucial, therefore, to improve our understanding of how, when, and why mood will influence decision- makers’ thinking and behavior (Forgas [2001a, 2001b]yf . Numerous studies have demonstrated that mood states impact decision- makers’ behavior, resulting in mood-congruent judgments (Fiedler [2001], Schwarz and Clore [1983] yf ) R U H [ D P S O H D P D Q D J H U P D U H D G D Q H Z V S D S H r story about poor prospects for recovery from a global recession, and be in a pessimistic mood later that day when rating a subordinate’s performance as below expectations. The cause of the mood, speculation about the future course of the economy, is unrelated to the judgment of past performance, and the manager is unaware of its influence. Mood congruency, also known as affect infusion, has been found in a variety of contexts and is a reliable everyday phenomenon (Forgas [2001a, 2001b]yf , W K D V D O V R E H H Q V W X G L H d in behavioral economics, including the role played by moods in investors’ decision-making (e.g., Saunders [1993], Hirshleifer and Shumway [2003], Kamstra, Kramer, and Levi [2003], Edmans, Garcia, and Norli [2007], Kaplanski and Levy [2010]yf . Research on correcting for mood congruency biases (McFarland and Buehler [1998], McFarland, White, and Newth [2003], Schwarz and Clore [1988], Tice and Bratslavsky [2000]yf K D V I R F X V H G R Q D W W H Q G L Q J W R D Q G D F – knowledging moods. Mood acknowledgment is based on the assumptions that people can correct for biasing influences better if they have a theory to explain them and they are motivated to correct their judgments (Wil- son and Brekke [1994], Wegener and Petty [1995]yf + R Z H Y H U P R R G D F – knowledgment strategies have not always been effective in prior research (Detweiler-Bedell and Salovey [2003], Gohm [2003], Showers and Kling [1996], Smith and Petty [1995]yf . We contribute to the affect literature by proposing that MCS, which have not been considered in bias correction models, provide an alternative mo- tivation to correct mood congruency biases. Conversely, we contribute to the MCS literature by suggesting a benefit that has been neglected: reduc- tion of mood congruency biases in judgment and decision-making. Prior re- search in accounting and auditing has drawn upon the affect literature and employed acknowledgment to reduce congruency biases (Kadous [2001]yf , but has not discussed or tested the ability of conventional MCS components to perform the same function, especially in the environment of the BSC, a popular and complex evaluation tool. In other words, mood congruency biases have not been as fully incorporated into accounting contexts as we attempt. Given that moods constitute the underlying context of organiza- tional behavior (Forgas and George [2001]yf D Q G W K D W 0 & 6 D U H L Q S O D F H L n most, if not all, organizations, the coexistence of moods and MCS in orga- nizations presents an interesting setting to understand the role MCS play in correcting for congruency bias. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1226 S. DING AND P. BEAULIEU We design two experiments to examine our research questions. Our experiments tie monetary rewards to performance evaluations, an ar- rangement that is documented in both research and practice (Salvem- ini, Reilly, and Smither [1993], Murphy and Cleveland [1995], Grensing- Pophal [2001], Roch [2005], St-Onge et al. [2009]yf & R Q V L V W H Q W Z L W K S U L R r literature (e.g., Lipe and Salterio [2000, 2002], Libby, Salterio, and Webb [2004] , Banker, Chang, and Pizzini [2004] yf S D U W L F L S D Q W V L Q R X U V W X G P D N e subjective performance evaluations. Although the use of subjectivity in a BSC-based evaluation context may raise concerns, as some firms apply a formula-based approach to BSC evaluations (e.g., Malina and Selto [2001]yf W K H L Q Y R O Y H P H Q W R I V X E M H F W L Y L W L Q S H U I R U P D Q F H H Y D O X D W L R Q V L V Z H O l documented (Gibbs et al. [2004], Bol [2008], Ittner, Larcker, and Meyer [2003]yf . In experiment 1 , we establish a mood congruency bias affecting perfor- mance evaluation judgments in the absence of financial incentives; partici- pants who were induced to feel good (badyf J D Y H K L J K H U O R Z H U f evaluation scores to divisional managers. The bias appeared at a low level of infor- mation load, in which evaluations were based on two financial measures, and at a high level, where evaluations were based on a BSC including 16 measures. Our finding of mood congruency bias at both levels thus sug- gests that performance evaluation itself is a complex task that motivates evaluators to adopt an heuristic approach to complete it; the finding is also consistent with a recent affect study in which auditors feeling good (badyf made a higher (loweryf Y D O X D W L R Q R I L Q Y H Q W R U & K X Q J & R K H Q D Q G 0 R Q U R e [2008]yf : K H Q I L Q D Q F L D O L Q F H Q W L Y H V W R P D N H E H Q F K P D U N F R Q V L V W H Q W H Y D O X D – tions were added in experiment 1 , they eliminated mood congruency bias in the low, but not the high, information load condition, reflecting that information load and evaluators’ skills may influence the effectiveness of financial incentives as a correction tool. Experiment 2 introduced an inter- mediate level of information load in which performance evaluations were based on a reduced BSC that comprised eight measures. Financial incen- tives for benchmark-consistent evaluations were offered in experiment 2 and they eliminated mood congruency bias. This result suggests that, to en- able financial incentives to reduce mood congruency biases, the number of measures included in a BSC must be reduced to the capacity of working memory (Miller [1956]yf . 2. Theory and Hypotheses We first review in this section prior literature in psychology, accounting, and behavioral economics/finance on the mood congruency effect, then develop our first hypothesis, in which such an effect is expected when in- dividuals perform the task of evaluations without financial incentives. In section 2.1, we discuss mood de-biasing mechanisms proposed in prior re- search, and effects of financial incentives in accounting, economics, and organizational contexts. The second hypothesis on the correcting role of This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1227 incentives follows from this discussion. In section 2.2, we develop a research question regarding the role of information load in mood congruency bias correction. Mood congruency bias has been well documented in psychology litera- ture (e.g., Forgas and George [2001] yf E X W D I I H F W U H V H D U F K L Q D F F R X Q W L Q J K D s been devoted primarily to biases caused by emotions in capital budgeting and investment decisions (e.g., Kida, Moreno, and Smith [2001], Moreno, Kida, and Smith [2002], Sawers [2005], Kaplan, Petersen, and Samuels [2007]yf $ Q R W D E O H H [ F H S W L R Q L V & K X Q J & R K H Q D Q G 0 R Q U R H > @ Z K o document a mood congruency bias among auditing professionals and stu- dents.1 Emotional reactions occur in accounting contexts, but mood states are much more common and constitute the underlying affective context in which judgments are made (Forgas and George [2001], Chung, Cohen, and Monroe [2008]yf 7 K H P R U D O H L Q I L U P V D U H V X O W R I I D F W R U V V X F K D V P H U J – ers, expansion, good or bad leadership, success, and failure, probably cre- ates moods that employees bring to their tasks, and those who evaluate the performance of others may be especially prone to affective influences. Moods influence judgment and decision-making when individuals heuristically process information (Schwarz and Clore [1983], Forgas [1995], Forgas and George [2001]yf $ I I H F W D V L Q I R U P D W L R Q K H X U L V W L F V D U e found in both psychology and accounting literature (Clore, Schwarz, and Conway [1994], Schwarz and Clore [1983, 2003], Kadous [2001]yf L Q W K H V e heuristics, affect itself is a source of information. For example, in an au- diting litigation setting, jurors may feel really bad when they learn about negative audit outcomes, and may use their negative feelings as relevant information to blame auditors (Kadous [2001]yf . D G R X V V W X G L H G H P R W L R Q V , but recent research examining the behavior of investors also shows that stock returns are significantly affected by investors’ moods arising from avi- ation disasters (e.g., Kaplanski and Levy [2010]yf V R F F H U J D P H O R V V H V H J , Edmans, Garcia, and Norli [2007] yf D Q G Z H D W K H U + L U V K O H L I H U D Q G 6 K X P Z D y [2003]yf L Q D P R R G F R Q J U X H Q W Z D 7 K H U H I R U H W K H D I I H F W D V L Q I R U P D W L R n heuristic is related to both moods and emotions. Wilson and Brekke [1994, p. 128] argue that people tend to adopt heuristics when processing infor- mation in order to reduce effort; they are not aware that they use such heuristics, and thus the influence of irrelevant information in particular is difficult to correct (Wilson, Centerbar, and Brekke [2002]yf $ V . D G R X s [2001, p. 429] argues, the affect-as-information heuristic could be imple- mented when individuals make complex social judgments and difficult and complex evaluations. The first hypothesis applies the affect-as-information heuristic literature to performance evaluations based on accounting infor- mation, predicting that individuals may heuristically conduct performance 1 Our examination of mood effects is different from Chung, Cohen, and Monroe [2008]. First, we focus on the application of the BSC to performance evaluations, while they investi- gated auditor judgments. Second, more importantly, we focus on correction of mood congru- ency bias, while they did not. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1228 S. DING AND P. BEAULIEU evaluations, a complex task, when there is no financial incentive in place. It aims to replicate the mood congruency bias in this setting, and serves as a necessary baseline against which we examine the effects of financial incen- tives. We assert that HI holds regardless of the degree of information load, and defer a discussion of the role of information load in bias correction to section 2.2. HI: When financial incentives are not in place, performance evalua- tions will be higher (loweryf Z K H Q S R V L W L Y H Q H J D W L Y H f moods are present. 2.1 FINANCIAL INCENTIVES AND MOOD CONGRUENCY CORRECTION Financial incentives have rarely been discussed in prior research on bias correction and performance evaluation. This section reviews the limited research in these areas relevant to our second hypothesis and extends the literature review to the field of economics. We pay particular attention to Rickman and Witt [2008] and Salvemini, Reilly, and Smither [1993]; both examine the effects of financial incentives on correcting biases. Drawing upon these ideas, we predict the effect of financial incentives in mood cor- rection in H2. Performance-contingent financial rewards are a conventional means of motivating improved performance in organizations (Awasthi and Pratt [1990], Drake, Haka, and Ravenscroft [1999], Bonner et al. [2000], Bonner and Sprinkle [2002] yf % R Q Q H U D Q G 6 S U L Q N O H > @ S R L Q W R X W W K D W a monetary incentive works first by improving the incentive-effort link, then by enhancing the effort-performance relation. Improved performance re- quires success in both links. In general, affect correction research in psychology is uninformed by accounting research on cognitive effects of monetary incentives. The pri- mary method of correcting affect-induced biases in the psychology litera- ture is acknowledgment/attribution, in which decision-makers are directed to evaluate their affective states or attribute their feelings to other sources before making their judgments (McFarland, White, and Newth [2003] , Schwarz and Clore [1983]yf $ F N Q R Z O H G J P H Q W D W W U L E X W L R Q K D V D O V R E H H n studied as a correction mechanism in auditing research (Kadous [2001]yf . However, affect acknowledgment has not always been effective in correct- ing biases. Wilson and Brekke [1994, p. 126] attributed mixed results to the fact that people “underestimate their own susceptibility to bias, and they overestimate the extent to which they can control their judgments and feelings.” We propose that financial rewards can create motivation pow- erful enough to correct a mood congruency bias without requiring mood acknowledgment.2 2 Some may argue that the effect of financial incentives on mood congruency correc- tion is not due to the motivation induced, but because moods could be changed by the in- centives. Empirical evidence in psychology and accounting did not find that bias-correction This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1229 We now turn to the fields of economics and organizational behavior to further review the effect of financial incentives. The economics paper most relevant to our second hypothesis is that by Rickman and Witt [2008], in which a financial incentive eliminated unconscious bias. The bias was a fa- voritism in English soccer, in which referees awarded more injury (extrayf time when the home team was behind by one goal, and less time when it was ahead by one goal. In the 2001-2002 season, for the first time, the En- glish Premier League employed truly professional referees and paid them salaries. Rickman and Witt found that favoritism that had existed before that season was eliminated, and, after controlling for effects like changes in referee quality, concluded that incentives were responsible. In H2 we pre- dict that incentives can eliminate mood congruency, another unconscious bias. Before we review the particularly relevant study in performance eval- uation involving financial incentives, we first establish the practicality of incentivizing performance evaluations. The quality of performance evaluation and how to motivate managers to make effective evaluations concern both academics and managers. Ac- cording to Grensing-Pophal [2010], a Senior Professional in Human Re- sources (SPHRyf L W L V F R P P R Q S U D F W L F H W R U D W H P D Q D J H U V R Q W K H W L P H O L Q H V s and quality of their performance evaluations. Human resources (HRyf H [ – perts claim that managers should be held accountable for the quality of performance evaluation and such quality should be tied to managers’ com- pensation (Grensing-Pophal [2001, p. 47]yf / H D G L Q J V F K R O D U V L Q W K H K X P D n relations field (Murphy and Cleveland [1995] yf D Q G + 5 P D Q D J H U V 6 W 2 Q J e et al. [2009]yf D O V R U H F R P P H Q G W K D W W K H D F F X U D F D Q G T X D O L W R I S H U I R U – mance evaluations should be financially rewarded in order to provide suf- ficient incentives. Our study thus reflects both actual and recommended performance evaluation practices. Few judgment and decision-making studies have addressed the prac- tice of incentivizing performance evaluations; the studies by Salvemini and his coauthors are exceptions. Salvemini [1988] and Salvemini, Reilly, and Smither [1993] offered evaluators financial incentives to be accurate; they were motivated to give more accurate appraisals to customer sales repre- sentatives after watching videotapes in which such representatives were per- forming their tasks. In Salvemini, Reilly, and Smither [1993], a 3 x 3 fac- torial design was adopted, with financial incentives and prior performance information being independent variables. Financial incentives were either mechanisms changed participants’ experience of moods. In Schwarz and Clore’s [1983] clas- sic study, for example, participants receiving attribution manipulation no longer rely on their moods to assess their life satisfaction, but retain either positive or negative moods after the manipulation. Kadous [2001, p. 439] explicitly indicates that attribution instruc- tions/manipulations are “not expected to change the experience of affect,” and the empirical evidence presented in her experiment is consistent with her arguments. As discussed later, we did not measure mood states, but prior studies suggest that bias-correction schemes alone do not change moods. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1230 S. DING AND P. BEAULIEU present or absent; when they were present, raters were informed about such rewards either prior to viewing the tapes or after they viewed the tapes. Similarly, raters in the positive (negativeyf S U L R U S H U I R U P D Q F H L Q I R U P D W L R n condition were informed that ratees had received above (belowyf D Y H U D J e ratings for their prior work; the third group did not receive any information on prior performance. Salvemini, Reilly, and Smither [1993] manipulated financial incentives in a way quite similar to ours, which is discussed later in the section on experimental design. More specifically, they informed the raters that the true performance scores of ratees were provided by a group of experts, and raters would be rewarded cash depending on the extent to which their evaluations came close to expert ratings. Those who provided the most accurate evaluations, that is, closest to expert ratings, would re- ceive $200. Consistent with their hypotheses, when financial incentives were absent, prior performance information led to biased appraisals of the current pe- riod such that raters receiving positive (negativeyf S U L R U S H U I R U P D Q F H L Q – formation gave more (lessyf I D Y R U D E O H U D W L Q J V W K D Q W K H L U F R X Q W H U S D U W V Z L W K – out this information; that is, the lack of motivation resulting from the lack of financial incentives led to an assimilation effect. Furthermore, raters who were provided with prior performance information, either positive or negative, evaluated ratees less accurately compared to those with no such information. When monetary incentives were offered, as predicted, prior performance information failed to influence either the average rating or accuracy. Salvenimi et al. further found that the timing to offer incentives did matter; raters who were provided with the incentives before viewing the tapes of ratees’ performance gave evaluations of the highest quality. Financial incentives offered in these studies enabled participants to cor- rect for prior information bias without being made aware of it. Our proposi- tion differs significantly from Salvemini, Reilly, and Smither [1993] because we address mood congruency biases and correction, whereas Salvemini et al. were interested strictly in decision-making accuracy; as noted before, mood congruency bias is understudied in accounting, and using financial incentives to correct for such an effect has not been examined in account- ing and psychology. More importantly, we examine the application of the BSC, a popular yet complex performance evaluation tool, and consider the possible impact arising from information load when financial incentives are employed to debias moods. The widespread application of the BSC and the well-documented concerns arising from its application indicate that more work is needed to examine the design of this popular tool; our in- vestigation of BSC in the performance evaluation setting in which moods could be an important contextual factor sheds new light on this manage- ment accounting innovation. Evaluators in Salvemini et al. were required to evaluate customer sales representatives in just three dimensions, but the BSC employed by our study involves four perspectives, with each per- spective involving multiple measures, as discussed below. The evaluation task thus is much more complex in our study, but Salvemini et al. does This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1231 provide us with a precedent for experimental use of financial incentives in performance evaluation tasks. H2 proposes using incentives to eliminate an unconscious bias, similar to the result of Rickman and Witt (2008yf E X t in a controlled, rather than natural, experiment. We examine two levels of information load in the context of performance evaluation, but H2 does not predict whether incentives will be effective at only one or at both lev- els of information load. H2 reflects that individuals would be motivated to exert greater effort when financial incentives are present, but defers the role that information load may play in influencing the effectiveness of such incentives to section 2.2. H2: When financial incentives are in place, moods will not influence performance evaluations. 2.2 THE EFFECT OF INFORMATION LOAD Complexity of accounting measurement is an important consideration because, as information complexity increases, individuals are required to have higher skill levels to improve task performance (Bonner et al. [2000], Bonner and Sprinkle [2002]yf $ P R Q J W K H H [ S H U L P H Q W V U H Y L H Z H G E y Bonner et al. [2000] , financial incentives are found to lead to improved per- formance only in 50yb R I W K H H [ S H U L P H Q W V L Q I R U P D W L R Q F R P S O H [ L W D P R Q g other things, is blamed for the failure of financial incentives to improve per- formance in almost half of the experiments. According to these authors, when information becomes cognitively complex, it increases the gap be- tween requirements of the task of interest and individuals’ knowledge and skill, thus eliminating the effect of monetary incentives. In experiment 1 , we include two information load conditions. The popu- larity of the BSC has attracted many firms to use it as a performance evalu- ation tool, with multiple perspectives and many measures, while others do not use the BSC framework and adopt only a few traditional financial mea- sures. The BSC serves as a proxy for the high information load condition, while the latter is used for the low information load condition. More specifically, the high information load condition bases perfor- mance evaluations on 16 BSC measures in four perspectives. The devel- opers of the BSC have indicated that it should be used for strategic plan- ning and management (Kaplan and Norton [1996a, 1996b, 2001a, 2001b]yf rather than as a performance evaluation tool. Nevertheless, the BSC is used for control purposes, such as performance evaluations, as evidenced by many accounting studies (e.g., Banker, Chang, and Pizzini [2004], Ittner and Larcker [1998], Lipe and Salterio [2000, 2002]yf . HI predicts that the absence of financial incentives will lead to a mood congruency effect, even for the evaluation based on two financial mea- sures only. This seems a plausible prediction because the task of perfor- mance evaluation itself is a complex one. According to Bonner et al. [2000] , performance evaluations should be classified as problem-solving tasks, the most difficult and cognitively challenging among the five types of tasks This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1232 S. DING AND P. BEAULIEU they reviewed. Problem-solving tasks, according to them, generally can be completed in numerous ways, and the existence of multiple options further increases the complexity of these tasks. Therefore, when it comes to perfor- mance evaluations, even with traditional financial measures only, individu- als may still find the task complex and effortful; when financial incentives are not in place, they may therefore use what they were feeling to make a shortcut to complete the evaluation task, that is, the affect-as-information heuristic. The mood congruency effect may arise due to the adoption of such heuristics. Bonner et al. [2000] suggest that complexity plays a significant role in determining whether incentives will affect performance. However, their re- view also indicates that, in any specific study, the precise point at which in- creasing information load eliminates incentive effects is an empirical ques- tion. When financial incentives are provided, a greater level of effort is expected, but whether an increased level of effort leads to improved per- formance and/or higher quality of decision-making depends on the in- formation load and the skills/ abilities of individuals performing the task. Consequently, we examine the impact of information load in the following research question. RQ1: At what level of information load will financial incentives elimi- nate the mood congruency bias? 3. Method and Results 3.1 experiment 1 The dependent variable in experiment 1 was performance ratings on a 101-point scale. There were three independent variables, each having two levels: mood (positive and negativeyf I L Q D Q F L D O L Q F H Q W L Y H D E V H Q W D Q d presentyf D Q G L Q I R U P D W L R Q O R D G W Z R D F F R X Q W L Q J P H D V X U H V D Q G % 6 C measuresyf . 3.1.1. Participants. One hundred and four MBA students participated in three sessions, one in the no-incentive conditions and two in the incentive conditions.3 There were 52 subjects in each mood condition, and 37 (67yf subjects were in the no-incentive (incentiveyf F R Q G L W L R Q 7 K H P H D Q D J H R f subjects was 33.4 years and they had been in business for 9.6 years on av- erage (median = 8yf 7 K H U H Z H U H P D O H byf D Q G I H P D O H byf students. Among 104 participants, the majority (75, 72.1yb f had experience of evaluating others, and 34 (32.7yb f of them had used the BSC as a perfor- mance evaluation tool. On average, participants had been evaluating others in their organizations for 4 years (median = 3yf . 3 Three sessions were available and it was necessary to designate each as either no-incentive or incentive. The no-incentive condition replicates prior congruency bias research, and we accordingly introduced HI as a “baseline.” The third session was designated incentive because this condition is the focal point of the paper. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1233 3.1.2. Procedure. Students were invited to participate in a study designed to improve our understanding of performance evaluations involving the BSC. They were informed that the study included two tasks. The first task was called “visual imagery style,” asking them to recall and describe a life event in order to show their visual imagery style, and the second task in- volved performance evaluations. Participants were informed that the re- searchers were interested in how their imagery style influences perfor- mance evaluations. Participants were paid $10 for their participation in a 40- or 50-minute session, depending on the condition (discussed belowyf and in addition to the participation fee, there was a lottery at the end of the session in which the winner would receive $400 cash. Participants listened to the experimenter explain the general instruc- tions; completed the first task, visual imagery; and read the evaluation case (the second taskyf W K H P V H O Y H V 7 K H I L U V W W D V N Y L V X D O L P D J H U Z D V X V H G W R L Q – duce moods. Participants were not asked between the two tasks to acknowl- edge their moods and no theory or instructions for mood correction were given. The case began with a passage containing background information illus- trating the evaluation systems used by two divisions. Included in the case information was a selection of performance data on two divisions of a firm that were being evaluated for annual review. Included also was the name of each division manager, the target market of each division, and the divisional strategies. In the case information, participants were informed that this was an initial evaluation for annual performance review, and they needed to try their best to give evaluations on each division manager given data limita- tions. They rated divisional managers’ performance based on a 101-point scale that has been used in prior studies (Lipe and Salterio [2000, 2002], Libby, Salterio, and Webb [2004] yf $ U D W L Q J R I L Q G L F D W H G H [ F H O O H Q W S H U – formance and 0 indicated extremely poor performance. Participants were then asked to indicate the extent to which they were happy with each di- visional manager’s performance and whether or not they would promote each manager based on the information given. After completing the case evaluation, they completed a demographic questionnaire. Before partici- pants left the session, a debriefing was conducted to remove the impact of the mood induction. 3.1.3. Manipulations. Moods were manipulated between subjects at two levels, positive and negative, by the first “visual imagery style” task. Par- ticipants were asked to recall and describe an event they experienced, a mood induction method that has been widely used by affective studies in psychology literature (e.g., DeSteno et al. [2000], McFarland, White, and Newth [2003], Ruder and Bless [2003], Rusting and DeHart [2000], Tamir and Robinson [2004]yf 3 D U W L F L S D Q W V Z H U H U H T X L U H G W R U H P H P E H U D S D U W L F X – larly positive and pleasant (negative and unpleasantyf H Y H Q W V X F K D V K H D U – ing some very good (badyf Q H Z V 7 K H Y L V X D O L ] H G H L W K H U S R V L W L Y H R U Q H J D W L Y e events that still made them have very positive or negative feelings for about This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1234 S. DING AND P. BEAULIEU 2 minutes, and then spent 10 minutes writing a description of them on sheets provided, in as much detail as they could as though these events were happening again. We did not include a manipulation check of moods in the experiments because Erber, Wegner, and Therriault [1996] and McFar- land, White, and Newth [2003] found that explicit questions about moods may enable participants to acknowledge their moods and correct biases. Incentives to give benchmark-consistent evaluations were manipulated as either present or absent. As noted before, offering financial incentives to evaluators was adopted in prior experimental research (e.g., Salvem- ini, Reilly, and Smither [1993], Roch [2005]yf D Q G L V D Q H P H U J L Q J E X V L – ness practice. When financial incentives were absent, participants were in- formed that their chances of winning the lottery did not depend on their performance evaluation answers; there would be one card containing their participant number (i.e., one chanceyf L Q W K H O R W W H U E R [ I R U H D F K R I W K H m regardless of their answers. This instruction clarified that the draw was a random result unrelated to performance. When financial incentives were in place, participants were also informed that a group of professionals had given a benchmark performance score for each divisional manager using the same evaluation scale, and that incentives would be determined by the degree of correspondence between their scores and the scores given by the professionals. Specifically, they were told that if both of their scores fell within the range of ±3 of the benchmark scores, they would have 10 cards containing their participant number placed in the lottery box; otherwise they had only 1. Thus, participants giving benchmark-consistent perfor- mance scores would be rewarded by having nine additional cards in the lottery box. This design follows Roch [2005] and Salvemini, Reilly, and Smither [1993], in which evaluators were given monetary incentives and those whose ratings came closest to the expert ratings would receive a cash reward. As was explained in section 2, information load may affect the ability of decision-makers to correct biases. Therefore, information load was manip- ulated within subjects at two levels: the task was based on two accounting measures (low information loadyf D Q G D F F R X Q W L Q J P H D V X U H V L Q D % 6 C (high information loadyf $ V L Q W K H / L S H D Q G 6 D O W H U L R > @ L Q V W U X – ment, participants were informed that RACK Incorporated is a firm that specializes in women’s apparel, and has two divisions: TeenWear and Work- Wear, with each having a different strategy. WorkWear Division specialized in business uniforms and focuses on its financial performance. Only two financial measures were provided for the division; this was the low informa- tion load condition. The measures, return on sales and revenues per sales visit, were indicated to be equally relevant and important to reaching Work- Wear Division’s strategic goal. One measure was above target, one measure was below target, and the percentage by which one measure exceeded the target was equal to the percentage by which the other measure fell short of the target. Return on sales is a common measure (used by both divi- sionsyf Z K L O H U H Y H Q X H V S H U V D O H V Y L V L W L V D P H D V X U H X Q L T X H W R : R U N : H D U 1 L Q e This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1235 faculty members in several business schools were asked to give a per- formance score, which indicated an approximately average performance (mean = 53.3yf . TeenWear Division was the high-information load condition. It special- ized in clothing for teenagers and had developed a BSC. It had four cate- gories: financial, customer-related, internal business processes, and learn- ing and growth, with each category having four measures. Within each category, two measures were above target, two measures were below target, and the percentage by which two measures exceeded targets was equal to the percentage by which another two measures fell short of targets (Bhat- tacharjee and Moreno [2005]yf , W Z D V I X U W K H U L Q G L F D W H G W K D W H D F K F D W H – gory and measure in TeenWear’s BSC was equally relevant and important to reaching its strategic goal. This design was employed in Bhattacharjee and Moreno [2005] in order to indicate an approximately average perfor- mance. A group of managers in Bhattacharjee and Moreno’s study (the control groupyf G L G U D W H S H U I R U P D Q F H D V D S S U R [ L P D W H O D Y H U D J H P H D Q = 58.3yf X V L Q J W K L V G H V L J Q D Q G W K H V D P H V F D O H H P S O R H G L Q W K L V V W X G D Q G W K L s mean score was used as the benchmark for the BSC division. The BSC in- formation given for TeenWear Division is presented in the appendix. With a total of 16 measures organized into four related BSC categories, TeenWear Division’s accounting information was more complex than Work- Wear Division’s two measures. Half of the participants evaluated Work- Wear Division first and TeenWear Division second, while the other half per- formed the task in a reverse order, to counterbalance order effects.4 3.1.4. Results. At the end of sessions in experiment 1, participants were asked to indicate the extent to which they agreed with two statements based on a seven-point scale, with one (sevenyf P H D Q L Q J V W U R Q J O G L V D J U H e (agreeyf 7 K H I L U V W V W D W H G V S H F L I L F D O O W K D W F K D Q F H V R I Z L Q Q L Q J W K H O R W W H U G H – pended on their performance evaluation answers, and the second stated that they had a financial incentive. For statement (1yf W K H P H D Q Y D O X H I R r participants in the nonincentive condition (incentive conditionyf Z D V 8 (4.91yf D V L J Q L I L F D Q W G L I I H U H Q F H ) S f. For statement (2yf , the mean response for participants in the nonincentive condition (incen- tive conditionyf Z D V f, also significant (F = 14.383, p < .001yf . These differences indicate that the manipulation of financial incentives was successful. As noted before, the mood manipulation was not checked.5 4 Order did not significantly affect performance evaluations as a main effect or interacting with the independent variables. Before participants left the session, they were asked to indicate the extent to which they were feeling good or bad, with seven (oneyf G H Q R W L Q J Y H U J R R G E D G f . They were also asked a second question about whether they felt positive or negative, using a similar scale where seven (oneyf L Q G L F D W H G Y H U S R V L W L Y H Q H J D W L Y H f . The purpose of these questions was to obtain some information about how subjects were feeling, so that the debriefing process that followed could be more targeted and effective. To some extent, the questions may help in assessing the This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1236 S. DING AND P. BEAULIEU TABLE 1 Evaluation Scores by Financial Incentive, Moods, and Information Load* Positive Negative Difference No financial BSC (16-measureyf E fc [19]d 52.78 (12.53yf > @ 4 incentive Traditional (2-measureyf f [19] 46.67 (13.28yf > @ 8 Financial BSC (16-measureyf f [33] 53.18 (13.04yf > @ 9 incentive Traditional (2-measureyf f [33] 56.47 (13.88yf > @ 2 Evaluations were made using a 101-point scale adapted from Lipe and Salterio [2000]. bMean evaluation scores. c Standard deviation. d Cell size. Performance evaluation scores given by participants are presented in table 1, and will be discussed further below for each condition of the experi- ment. First, a 2 x 2 x 2 Repeated Measures ANCOVA was conducted on the complete data set, including experience as a covariate. Both general work- ing experience and experience of evaluating others were employed in the tests. The sample sizes of experimental groups in this study were not equal and this inequality might affect the F tests performed. However, Boneau [1960, 1961] found that the combination of heterogeneity of variance and different sample sizes could be the only situation in which significance tests will be adversely affected. Levene’s test was conducted to test whether the error variance of the dependent variable was equal across groups. The P- values were .353 and .561, respectively, failing to reject the null hypothesis of equal error variance. Therefore, the inequality of sample sizes should not adversely affect the significance tests. The ANCOVA results are presented in table 2, with general working ex- perience as the covariate. Table 2 indicates that moods significantly affected evaluation judgments (p = .005yf 7 K H L Q W H U D F W L Y H H I I H F W R I L Q I R U P D W L R Q O R D d (the BSC vs. traditional financial measuresyf D Q G P R R G V Z D V D O V R V L J Q L I L – cant (p = .041yf V X J J H V W L Q J W K D W P R R G V G L I I H U H Q W L D O O D I I H F W H G S H U I R U P D Q F e evaluations, depending on the information load employed. The difference in mean evaluation scores between positive and negative moods with tra- ditional measures (incentive and no-incentive conditions combinedyf Z D s 1.94, but with BSC measures was 10.27 (un tabulatedyf 7 K H P R R G V [ L Q – formation load x incentive interaction is marginally statistically significant (p=.O96yf . We then examine the effect of mood congruency under the no-incentive and incentive conditions, respectively. When no incentives are in place, as can be seen from table 1, performance evaluations were lower in the effectiveness of the mood manipulation. For a combined variable in which responses to the questions are summed, the mean response of participants who were instructed to visualize negative and unpleasant events was 8.00, whereas those who visualized positive and pleasant events had a mean response of 9.47. This difference is consistent with our expectations (F = 3.466, p = .071yf 6 W D W L V W L F D O U H V X O W V D U H F R Q V L V W H Q W I R U H D F K T X H V W L R Q F R Q V L G H U H G V H S D U D W H O . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1237 TABLE 2 Results of Repeated Measures ANCOVA of Performance Evaluations: Business Working Experience as a Covariate Variables Between subjects: Moods 1 2,481.04 2,481.04 8.210 .005 Incentive 1 78.16 78.16 .259 .612 Business working experience 1 .318 .318 .001 .974 Moods x incentive 1 684.78 684.78 2.266 .135 Error 99 29,919.28 302.22 Within subjects Information load 1 2.36 2.36 .018 .894 Information load x moods 1 571.16 571.16 4.305 .041 Information load x incentive 1 378.51 378.51 2.853 .094 Information load x moods x incentive 1 375.66 375.66 2.831 .096 Error TABLE 3 Experiment 1: Simple Effects Tests Holding Financial Incentives Absent Adjusted Mean Positive Moods Negative Moods F Value P Value BSC (16-measureyf 4 Traditional (2-measureyf negative mood condition than in the positive mood condition in both lev- els of information load; the difference was 10.38 with two measures and 11.64 with 16 measures. Table 3 presents simple effects tests by holding fi- nancial incentives constant at the absent level; the main effect of moods is significant for both levels of information load (p = .014 for the BSC condi- tion and p = .043 for the two-measure conditionyf V X S S R U W L Q J P R R G F R Q – gruency as predicted in HI; the result is also presented in figure 1. The FIG. 1 – Experiment 1 : performance evaluations when financial incentives are absent. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1238 S. DING AND P. BEAULIEU Fig. 2 – Experiment 1: performance evaluations when financial incentives are present. finding suggests that even with two financial measures evaluators may still consider performance evaluation a complex and difficult task and thus rely on their moods to make a shortcut; they may have used the well- documented affect-as-information heuristic when evaluating the perfor- mance of divisional managers, affirming the impression based on figure 1 that the mood effect was equally strong with respect to the two financial measure and 16-measure BSC conditions.6 ‘ears of business experience is included as a covariate in the simple effects tests.7 When financial incentives are provided, results are as presented in fig- ure 2. Mood congruency was completely eliminated with two measures; the (rawyf P H D Q L Q W K H Q H J D W L Y H S R V L W L Y H f mood condition was 56.47 (53.85, t = -0.742yf 0 R R G F R Q J U X H Q F S H U V L V W H G L Q W K H P H D V X U H % 6 & F R Q G L – tion, where mean evaluation scores were 62.67 and 53.18 in the positive and negative mood conditions. The difference in these scores, 9.49, is simi- lar to the difference in the nonincentive condition, 11.64. Table 4 presents simple effects tests by holding financial incentives constant at the present level. The main effect of moods was not significant (p = .450yf I R U W K e two-measure condition, but was highly significant for the BSC condition 6 As previously mentioned, in addition to performance evaluation scores, we employed two supplemental measures: participants’ happiness with managers’ performance and their will- ingness to promote managers. Simple effects tests were also conducted for these two measures by holding financial incentives constant at the absent level. For participants’ happiness with managers’ performance, the results of the simple effects tests remain unchanged; the main effect of mood was significant for the two-measure condition (p – .022yf D Q G I R U W K H % 6 & F R Q – dition (p = .058yf ) R U S D U W L F L S D Q W V Z L O O L Q J Q H V V W R S U R P R W H P D Q D J H U V W K H P D L Q H I I H F W R I P R R G s was significant (p = .040yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q R Q O W K H P D L Q H I I H F W R I P R R G V I R r the BSC condition was not significant at the conventional level (p = .190yf . 7 When years of evaluating others was used as the covariate, the results remain unchanged. The main effect of moods was significant for the two-measure condition (p = .042yf D Q G I R r the BSC condition as well (p = .015yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1239 TABLE 4 Experiment 1: Simple Effects Tests Holding Financial Incentives Present Adjusted Mean Positive Moods Negative Moods F Value P Value BSC (16-measureyf 6 Traditional (2- measureyf (p = .006yf < H D U V R I E X V L Q H V V L V L Q F O X G H G D V W K H F R Y D U L D W H L Q W K H V L P S O e effects tests.9 These results support H2 with respect to the two-measure condition, where mood congruency bias was eliminated, but suggest that decision-makers have difficulty eliminating mood congruency when a 16- measure BSC is used. The finding that mood congruency bias persisted in the BSC environment when financial incentives were in place partially answers our research question; a conventional BSC, with four perspectives and 16 measures, could be too complex for financial incentives to elimi- nate mood congruency biases. Having clearly obtained mood correction in the two-measure condition but not with a 16-measure BSC, we designed a second experiment to see whether less complex BSC-based performance evaluations would respond to financial incentives. 3.2 EXPERIMENT 2 A total of eight measures were included in experiment 2, two in each of four BSC perspectives. Eight measures fall within Miller’s [1956] boundary condition regarding the capacity of working memory of seven items plus or minus two. Regardless of how participants consider items from different perspectives, with a grand total of eight it is unlikely that working mem- ory would be overloaded, and financial incentives may be able to eliminate mood congruency bias. The inclusion of only two measures under one per- spective is found in practice; for example, the BSC examined by Campbell [2008] is used by a major fast-food retailer, and only two measures are in- cluded under the perspective of “people.” In experiment 2, the dependent variable is performance ratings, the same as in experiment 1. However, mood is the only independent variable, 8 Consistent with our previous analyses, we further conducted simple effects tests using par- ticipants’ happiness with managers’ performance and their willingness to promote managers, respectively, with years of business experience as the covariate; financial incentives were held constant at the present level. The results remain unchanged. When participants’ happiness with managers’ performance was used, the main effect of moods was not significant (p = .099yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q E X W Z D V V L J Q L I L F D Q W I R U W K H % 6 & F R Q G L W L R Q S f . Re- garding participants’ willingness to promote managers, again the main effect of moods was not significant (p = .473yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q E X W Z D V V L J Q L I L F D Q W I R U W K H % 6 & F R Q G L W L R n (A =.011yf . 9 When years of evaluating others was used as the covariate, the results remain unchanged. The main effect of moods was not significant for the two-measure condition (p = .426yf E X t was highly significant for the BSC condition (p = .008yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1240 S. DING AND P. BEAULIEU again at two levels (positive and negativeyf $ I L Q D Q F L D O L Q F H Q W L Y H L V S U R Y L G H d and an eight-measure BSC is the only level of information load. 3.2.1. Participants. Thirty-two MBA students participated; 16 were ran- domly assigned to each mood condition, positive and negative. They also had business experience (mean years = 4.2yf D Q G H [ S H U L H Q F H L Q H Y D O X D W L Q g others (mean years = 2.8yf . 3.2.2. Procedure. The same procedure and materials were used as in ex- periment 1 except that only eight measures were presented, two in each of the same four BSC perspectives, and there was no manipulation of incen- tives (incentives were always present in experiment 2yf 7 K H V H H L J K W P H D – sures were a subset of the 16 measures used in experiment 1. Consistent with its design, within each perspective one measure was above target, one measure was below target, and the percentage by which they exceeded or fell short of targets was equal. The same group of faculty members that provided performance scores for the low information load (two financial measuresyf F R Q G L W L R Q L Q H [ S H U L P H Q W J D Y H V F R U H V I R U W K L V Y H U V L R Q R I W K H L Q – strument. They indicated an approximately average performance (mean = 53.0yf . 3.2.3. Results. The same financial incentive manipulation check ques- tions were asked in experiment 2. Recall that participants were asked to indicate their agreement with two statements on a seven-point scale, with one (sevenyf P H D Q L Q J V W U R Q J O G L V D J U H H D J U H H f. For the statement about chances of winning the lottery depending on performance evaluation an- swers, the mean response in experiment 2 was 5.62. Recall that the mean re- sponses in experiments 1 were 1.68 for the nonincentive condition and 4.91 for the incentive condition, respectively. For the statement about having a financial incentive, the mean response was 5.19 (3.11 and 4.76 for the non- incentive and incentive conditions in experiment 1, respectivelyyf 7 Z R R Q H – way ANOVAs (un tabulatedyf Z H U H F R Q G X F W H G I R U W K H W Z R H [ S H U L P H Q W V R Q e for each manipulation check question, and both models were significant (F = 57.111 and 10.288, respectively, and both Rvalues < .001yf 3 R V W K R c multiple comparisons were also conducted; for chances of winning lottery depending on performance, the mean response score for the no-financial incentives condition in experiment 1 is significantly lower than that in the incentive condition in experiment 1 and in experiment 2 (Bonferroni and Scheffe tests were consistent, Rvalues <. 001yf 7 K H G L I I H U H Q F H E H W Z H H Q W K e incentive condition of experiment 1 and experiment 2 (financial incentives were in place in bothyf L V Q R W V L J Q L I L F D Q W S f. Regarding individuals’ incentives, the mean response score in the nonincentive condition in ex- periment 1 is significantly lower than that in the incentive condition in experiment 1 (p = .001yf D Q G L Q H [ S H U L P H Q W S f. No difference is found between the incentive condition of experiment 1 and experiment 2 (¿=.633yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1241 TABLE 5 Results of One-Way ANCOVA of Performance Evaluations: Experiment 2 Business working experience as a covariate Moods 1 .070 .070 .000 .987 Business working experience 1 58.267 58.267 .220 .642 Error 29 7,667.671 264.402 Experience of evaluating others as a covariate Moods 1 1.191 1.191 .004 .947 Experience of evaluating others 1 21.631 21.631 .081 .777 Error Evaluation scores in experiment 2 were almost identical in the positive mood condition (mean = 56.50, std. dev. = 16.95yf D Q G Q H J D W L Y H F R Q G L W L R n (mean = 56.44, std. dev. = 15.09yf $ V S U H V H Q W H G L Q W D E O H W K H P D L Q H I I H F t of moods on performance evaluations was not significant in one-way AN- COVA using either business working experience or experience of evaluat- ing others as a covariate (main effect F < .005 in both modelsyf 7 K H U H V X O W s of experiment 2 indicate that, in the case of a four-perspective scorecard with eight measures in total, financial incentives were able to eliminate the mood congruency bias. Therefore, an eight-measure BSC seems to reflect an appropriate level of information load that enables financial incentives to correct for mood congruency bias. Given that participants in experiment 2 are less experienced than the participants in experiment 1, it is necessary to rule out the possibility that it is the difference in experience, rather than information load, that led to our findings in experiment 2. We combined data from experiment 1 (high information load condition with incentivesyf D Q G H [ S H U L P H Q W L Q – termediate information load conditionyf W R U X Q D [ $ 1 & 2 9 $ 7 K H I L U V t between-subject factor is information load, and the second is moods; evalu- ation scores for the BSC-based division are used as the dependent variable. The ANCOVA was run twice, once each with business experience and ex- perience of evaluating others as a covariate. The interaction of information load and moods was significant at the 5yb O H Y H O Z L W K E R W K F R Y D U L D W H V L Q G L – cating that results reported in table 5 cannot be attributed to differences in experience. Business experience and experience of evaluating others were not significant covariates. Although experiment 2 was conducted after experiment 1 (incentive conditionyf Z L W K D G L I I H U H Q W V D P S O H R I 0 % $ V W X G H Q W V W K H V H F R P E L Q H G U H V X O W s suggest that the rule of seven measures plus or minus two (Miller [1956]yf could be an important complexity factor. However, given that participants were not randomly assigned between experiment 1 (incentive conditionyf and experiment 2, a more conservative interpretation is that it remains for future research to establish whether incentives can eliminate the bias when four-perspective scorecards having more than eight total measures are employed. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1242 S. DING AND P. BEAULIEU 4. Conclusions Field and experimental accounting studies on the application of the BSC to performance evaluation provide evidence regarding its limitations, in- cluding: the common-measure bias (Lipe and Salterio [2000]yf W K H J U R X S – ing effect (Lipe and Salterio [2002]yf W K H R Y H U U H O L D Q F H R Q I L Q D Q F L D O P H D – sures (Ittner, Larcker, and Meyer [2003]yf D Q G W K H F R Q G L W L R Q D O X V H R f strategy-linked measures (Banker, Chang, and Pizzini [2004]yf 7 K L V V W U H D m of research indicates that effects of the BSC’s complex design on indi- viduals’ cognitive effort should be considered, especially in the perfor- mance evaluation context. Our study further examines this context by di- recting attention to another well-documented effect, the mood congruency bias. In experiment 1, we establish that mood congruent judgments are a re- liable phenomenon in an application of the BSC; this mood-congruency effect had been found in other decision-making research (Forgas [1995], Chung, Cohen, and Monroe [2008] yf D V Z H O O : H W K H Q H [ S O R U H Z K H W K H U a conventional element of MCS, monetary incentives, enables individuals to correct for mood congruency bias, and find that evaluation judgments us- ing a 16-measure BSC are susceptible to affective influences even in the presence of incentives to make benchmark-consistent judgments. In ex- periment 2, we show that financial incentives successfully eliminate mood congruency bias when a simplified BSC with only eight measures, but re- taining four perspectives, is employed. This result suggests that the critical aspect of information load is the upper limit of individuals’ processing ca- pacity (Miller [1956]yf 2 X U I L Q G L Q J L Q H [ S H U L P H Q W W K D W P R R G F R Q J U X H Q F y bias occurs even when only two financial measures are used for evaluation purposes also provides supporting evidence that information load is an im- portant issue to consider in the context of performance evaluations, as the evaluation task itself is complex and cognitively difficult. The results are also consistent with the existence of a boundary con- dition between autonomie responses in regions of the brain not subject to conscious control (described in Critchley [2005], Kerfoot, Chattillion, and Williams [2008]yf D Q G F R Q V F L R X V M X G J P H Q W L Q G H F L V L R Q P D N L Q J Z K H n anticipating gain. It may be that incentive response and mood correction were autonomie processes in the two- and eight-measure conditions, but at the level of complexity with 16 measures, correction cannot be autonomie. This is speculation now, but future judgment and decision-making research aided by advances in neural science may explore the boundaries between autonomie and deliberate bias correction. Future avenues may be explored to solve the information load problem associated with BSC applications. A limitation of this study is that it does not directly address judgment accuracy. Incentives to make judgments consis- tent with organizational benchmarks Were offered, as in Roch [2005] , but consistency is not equivalent to accuracy, which is difficult to determine This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1243 in performance evaluation contexts. Evaluation accuracy is sometimes judged in practice by correlating assessments with future performance of evaluatees (DeNisi and Pritchard [2006]yf E X W Z H F R X O G Q R W U H S O L F D W e this extended time frame in our experiment. Like Salvemini, Reilly, and Smither [1993] and Roch [2005], we employed “expert” ratings in our experiments as a benchmark, but we acknowledge that our panel of fac- ulty may not be experts at this task and it could be difficult to know the benchmark for performance evaluations in practice. Finally, we acknowl- edge that using financial incentives in performance evaluations could be a challenge. The experimental task excluded many performance evaluation duties, such as interactions with evaluation committees and those being evaluated. To the extent that feedback and complaints by the latter may deter evalua- tors from judging performance with bias, and that the performance review may involve interactions among members of the evaluation committee, the role of moods in influencing performance evaluations could be exagger- ated. To the best of our knowledge, the role of group decision processes in correcting mood congruency biases has not been studied. Beyond the topic of mood congruency bias in performance evaluation applications of the BSC, we make an original theoretical contribution to af- fect correction research by inserting the concept of MCS. We propose that one component of MCS, financial incentives, may provide enough moti- vation for decision-makers to overcome mood congruency bias without re- quiring them to acknowledge their moods, when information load is not too high. This represents a significant departure from extant research, in- cluding studies of affect in accounting and auditing. Financial incentives are just one component of MCS; other components, including budgets and organizational hierarchies, might also correct bias without requiring decision-makers to acknowledge their moods. Budgets and hierarchies impose accountability on decision-makers, and account- ability has been shown to affect social judgment (Tetlock and Kim [1987]yf , although its ability to attenuate the effects of emotions is complex and equivocal (Lerner and Gonzalez [2005]yf + R Z H Y H U D F F R X Q W D E L O L W K D V F R U – rected judgment biases involving accounting information (Dezoort, Harri- son, and Taylor [2006], Libby, Salterio, and Webb [2004], Webb [2002]yf . Financial incentives are one of the most frequently used and effective management control techniques (Bonner and Sprinkle [2002], Sprinkle [2003] yf E X W L W P D E H W K D W R W K H U R U J D Q L ] D W L R Q D O F R Q W U R O V F R U U H F W P R R G F R Q – gruency biases more effectively and efficiently. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1244 S. DING AND P. BEAULIEU APPENDIX The Balanced Scorecardfor the TeenWear Division* Measure Target Actual Financial 1. Return on sales* 15 yb b 2. Sales growth 10yb b 3. New store sales 25yb b 4. Market share relative to retail space $80 $73.6 Customer-related 1. Repeat sales 30yb b 2. Customer satisfaction rating (1-1 00yf 7 3. Mystery shopper program rating (1-100yf 3 4. Returns by customer as yb R I V D O H V b 9.69yb Internal business processes 1 . Average major brand names/store 34 35 2. Returns to suppliers** 5yb b 3. Sales from new market leaders 25 yb b 4. Average markdowns** (average yb P D U N G R Z Q b 10.4yb from original retail priceyf Learning and growth 1. Hours of employee training/ employ ее 20 17.5 2. Average tenure of sales personnel (in monthsyf 2 3. Employee suggestions/ employee 8 9 4. 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Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scor
The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases Author(s): SHUJUN DING and PHILIP BEAULIEU Source: Journal of Accounting Research , DECEMBER 2011 , Vol. 49, No. 5 (DECEMBER 2011), pp. 1223-1247 Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: https://www.jstor.org/stable/41328957 JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Wiley is collaborating with JSTOR to digitize, preserve and extend access to Journal of Accounting Research This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms DOI: 10.1111/J.1475-679X.2011.00421.X CHICAGO BOOTHS Journal of Accounting Research Vol. 49 No. 5 December 2011 Printed in U.S.A. The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases SHUJUN DING* AND PHILIP BEAULIEU* Received 14 September 2010; accepted 9 June 2011 ABSTRACT Moods are low-intensity affective states that individuals bring to a decision, and may be especially important when the balanced scorecard (BSCyf L s used for performance evaluation purposes. We propose that financial incen- tives can motivate decision-makers to correct mood congruency biases, in which judgments and decisions are consistent with moods. In experiment 1, participants rated the performance of one division manager based on two * University of Ottawa; ^ University of Calgary. An earlier version of this paper was presented at the 2008 AAA Midwest Regional Meeting, the 2008 AAA Annual Meeting, the 2008 CAAA Annual Meeting, and the 2009 ABO conference. It is based on the PhD dissertation (University of Calgaryyf R I W K H I L U V W D X W K R U V X S H U Y L V H G E W K H V H F R Q G D X W K R U 7 K H D X W K R U V Z R X O G O L N H W o thank the members of the committee, Cynthia Simmons, Kate White, and Michael Wright, and external examiners, Teresa Kline and Alan Webb. We also thank Douglas Skinner (the editoryf D Q G D Q D Q R Q P R X V U H I H U H H D Q G D F N Q R Z O H G J H W K H K H O S I X O F R P P H Q W V R I ) R G L O $ G M D R X G , Cam Graham, Linda Grensing-Pophal, Susan Haka, Irene Herremans, Steven Kaplan, Joanne Leek, Tim Miller, Cam Morrill, Janet Monili, Sean Peffer, Steve Salterio, Parbudyal Singh, and Gary Spraakman, and the comments of workshop participants at Brock University, Concordia University, University of Lethbridge, University of Manitoba, University of Ottawa, and York University. Financial support was provided by the University of Calgary to the first author. We thank Kate White for sharing her mood induction instrument. 1223 Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2011 This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1224 S. DING AND P. BEAULIEU accounting measures and another manager based on a 16-measure BSC; there were mood congruency biases at both levels of information load. Fi- nancial incentives to make benchmark-consistent judgments eliminated bias in the former condition but not in the BSC condition. In experiment 2, in- centives were offered and performance evaluations were based on an eight- measure BSC; mood congruency bias was eliminated. Results suggest that management control systems, specifically financial incentives, should be in- cluded in future affect correction research. 1. Introduction Many claim that the balanced scorecard (BSCyf L V R Q H R I W K H P R V W L P S R U W D Q t management accounting innovations in the last two decades, and surveys consistently list it as one of the most popular management tools around the world (Rigby and Bilodeau [2009]yf $ F F R X Q W L Q J U H V H D U F K H U V K R Z H Y H U , have documented several biases and problems associated with its applica- tion (e.g., Lipe and Salterio [2000], Banker, Chang, and Pizzini [2004], Ittner, Larcker, and Meyer [2003]yf 7 K H F R P S O H [ L W R I W K H % 6 & L V E H O L H Y H d to result in information overloading, which, in turn, compromises decision quality when using the BSC for performance evaluation, as is commonly found in practice. We test whether the BSC’s complexity leaves it vulnera- ble to the well-documented mood congruency bias, and whether this bias is affected by financial incentives, another element of management control systems (MCSyf 2 X U V W X G O L Q N V % 6 & U H O D W H G E L D V H V D I I H F W D Q G 0 & 6 O L W H U D – ture. The term “affect” refers to feelings, including both moods and emotions. Moods are defined as low-intensity affective states that individuals bring to the decision context, while emotions are defined as more-intensive affective states with a definite cause and clear cognitive content related to decisions (Forgas [1992] , Edda, Moreno, and Smith [2001] , Moreno, Kida, and Smith [2002]yf 7 K H P R R G V D Q G H P R W L R Q V R I G H F L V L R Q P D N H U V D U H F U L W L F D O O L P S R U – tant because individuals rarely make decisions devoid of feeling. Forgas and George [2001, p. 5] commented that moods are especially important in examining individuals’ behaviors and play a crucial role in organizational settings, because: Moods thus provide the underlying affective context for most of our on- going thought processes and behaviors. Enduring mood states may be triggered by such fleeting cues as a passing smile, the weather, a pleasant room, a tone of voice, or a nonverbal gesture. Indeed, mild, nonspecific moods often have a more subtle and insidious influence on organizational behavior precisely because they lack elaborate cognitive content and thus often escape conscious scrutiny. The distinction between emotions and moods is very important in judg- ment and decision-making research. Emotions may or may not be useful in organizational settings; sometimes they provide content that is irrelevant to This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1225 decisions, but positive emotions resulting from being treated fairly by team members increase willingness to cooperate with them in a common task (Cremer and Hiel [2006] yf % G H I L Q L W L R Q W K R X J K P R R G V D U H X Q H T X L Y R F D O O y irrelevant to decision-making contexts. It is crucial, therefore, to improve our understanding of how, when, and why mood will influence decision- makers’ thinking and behavior (Forgas [2001a, 2001b]yf . Numerous studies have demonstrated that mood states impact decision- makers’ behavior, resulting in mood-congruent judgments (Fiedler [2001], Schwarz and Clore [1983] yf ) R U H [ D P S O H D P D Q D J H U P D U H D G D Q H Z V S D S H r story about poor prospects for recovery from a global recession, and be in a pessimistic mood later that day when rating a subordinate’s performance as below expectations. The cause of the mood, speculation about the future course of the economy, is unrelated to the judgment of past performance, and the manager is unaware of its influence. Mood congruency, also known as affect infusion, has been found in a variety of contexts and is a reliable everyday phenomenon (Forgas [2001a, 2001b]yf , W K D V D O V R E H H Q V W X G L H d in behavioral economics, including the role played by moods in investors’ decision-making (e.g., Saunders [1993], Hirshleifer and Shumway [2003], Kamstra, Kramer, and Levi [2003], Edmans, Garcia, and Norli [2007], Kaplanski and Levy [2010]yf . Research on correcting for mood congruency biases (McFarland and Buehler [1998], McFarland, White, and Newth [2003], Schwarz and Clore [1988], Tice and Bratslavsky [2000]yf K D V I R F X V H G R Q D W W H Q G L Q J W R D Q G D F – knowledging moods. Mood acknowledgment is based on the assumptions that people can correct for biasing influences better if they have a theory to explain them and they are motivated to correct their judgments (Wil- son and Brekke [1994], Wegener and Petty [1995]yf + R Z H Y H U P R R G D F – knowledgment strategies have not always been effective in prior research (Detweiler-Bedell and Salovey [2003], Gohm [2003], Showers and Kling [1996], Smith and Petty [1995]yf . We contribute to the affect literature by proposing that MCS, which have not been considered in bias correction models, provide an alternative mo- tivation to correct mood congruency biases. Conversely, we contribute to the MCS literature by suggesting a benefit that has been neglected: reduc- tion of mood congruency biases in judgment and decision-making. Prior re- search in accounting and auditing has drawn upon the affect literature and employed acknowledgment to reduce congruency biases (Kadous [2001]yf , but has not discussed or tested the ability of conventional MCS components to perform the same function, especially in the environment of the BSC, a popular and complex evaluation tool. In other words, mood congruency biases have not been as fully incorporated into accounting contexts as we attempt. Given that moods constitute the underlying context of organiza- tional behavior (Forgas and George [2001]yf D Q G W K D W 0 & 6 D U H L Q S O D F H L n most, if not all, organizations, the coexistence of moods and MCS in orga- nizations presents an interesting setting to understand the role MCS play in correcting for congruency bias. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1226 S. DING AND P. BEAULIEU We design two experiments to examine our research questions. Our experiments tie monetary rewards to performance evaluations, an ar- rangement that is documented in both research and practice (Salvem- ini, Reilly, and Smither [1993], Murphy and Cleveland [1995], Grensing- Pophal [2001], Roch [2005], St-Onge et al. [2009]yf & R Q V L V W H Q W Z L W K S U L R r literature (e.g., Lipe and Salterio [2000, 2002], Libby, Salterio, and Webb [2004] , Banker, Chang, and Pizzini [2004] yf S D U W L F L S D Q W V L Q R X U V W X G P D N e subjective performance evaluations. Although the use of subjectivity in a BSC-based evaluation context may raise concerns, as some firms apply a formula-based approach to BSC evaluations (e.g., Malina and Selto [2001]yf W K H L Q Y R O Y H P H Q W R I V X E M H F W L Y L W L Q S H U I R U P D Q F H H Y D O X D W L R Q V L V Z H O l documented (Gibbs et al. [2004], Bol [2008], Ittner, Larcker, and Meyer [2003]yf . In experiment 1 , we establish a mood congruency bias affecting perfor- mance evaluation judgments in the absence of financial incentives; partici- pants who were induced to feel good (badyf J D Y H K L J K H U O R Z H U f evaluation scores to divisional managers. The bias appeared at a low level of infor- mation load, in which evaluations were based on two financial measures, and at a high level, where evaluations were based on a BSC including 16 measures. Our finding of mood congruency bias at both levels thus sug- gests that performance evaluation itself is a complex task that motivates evaluators to adopt an heuristic approach to complete it; the finding is also consistent with a recent affect study in which auditors feeling good (badyf made a higher (loweryf Y D O X D W L R Q R I L Q Y H Q W R U & K X Q J & R K H Q D Q G 0 R Q U R e [2008]yf : K H Q I L Q D Q F L D O L Q F H Q W L Y H V W R P D N H E H Q F K P D U N F R Q V L V W H Q W H Y D O X D – tions were added in experiment 1 , they eliminated mood congruency bias in the low, but not the high, information load condition, reflecting that information load and evaluators’ skills may influence the effectiveness of financial incentives as a correction tool. Experiment 2 introduced an inter- mediate level of information load in which performance evaluations were based on a reduced BSC that comprised eight measures. Financial incen- tives for benchmark-consistent evaluations were offered in experiment 2 and they eliminated mood congruency bias. This result suggests that, to en- able financial incentives to reduce mood congruency biases, the number of measures included in a BSC must be reduced to the capacity of working memory (Miller [1956]yf . 2. Theory and Hypotheses We first review in this section prior literature in psychology, accounting, and behavioral economics/finance on the mood congruency effect, then develop our first hypothesis, in which such an effect is expected when in- dividuals perform the task of evaluations without financial incentives. In section 2.1, we discuss mood de-biasing mechanisms proposed in prior re- search, and effects of financial incentives in accounting, economics, and organizational contexts. The second hypothesis on the correcting role of This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1227 incentives follows from this discussion. In section 2.2, we develop a research question regarding the role of information load in mood congruency bias correction. Mood congruency bias has been well documented in psychology litera- ture (e.g., Forgas and George [2001] yf E X W D I I H F W U H V H D U F K L Q D F F R X Q W L Q J K D s been devoted primarily to biases caused by emotions in capital budgeting and investment decisions (e.g., Kida, Moreno, and Smith [2001], Moreno, Kida, and Smith [2002], Sawers [2005], Kaplan, Petersen, and Samuels [2007]yf $ Q R W D E O H H [ F H S W L R Q L V & K X Q J & R K H Q D Q G 0 R Q U R H > @ Z K o document a mood congruency bias among auditing professionals and stu- dents.1 Emotional reactions occur in accounting contexts, but mood states are much more common and constitute the underlying affective context in which judgments are made (Forgas and George [2001], Chung, Cohen, and Monroe [2008]yf 7 K H P R U D O H L Q I L U P V D U H V X O W R I I D F W R U V V X F K D V P H U J – ers, expansion, good or bad leadership, success, and failure, probably cre- ates moods that employees bring to their tasks, and those who evaluate the performance of others may be especially prone to affective influences. Moods influence judgment and decision-making when individuals heuristically process information (Schwarz and Clore [1983], Forgas [1995], Forgas and George [2001]yf $ I I H F W D V L Q I R U P D W L R Q K H X U L V W L F V D U e found in both psychology and accounting literature (Clore, Schwarz, and Conway [1994], Schwarz and Clore [1983, 2003], Kadous [2001]yf L Q W K H V e heuristics, affect itself is a source of information. For example, in an au- diting litigation setting, jurors may feel really bad when they learn about negative audit outcomes, and may use their negative feelings as relevant information to blame auditors (Kadous [2001]yf . D G R X V V W X G L H G H P R W L R Q V , but recent research examining the behavior of investors also shows that stock returns are significantly affected by investors’ moods arising from avi- ation disasters (e.g., Kaplanski and Levy [2010]yf V R F F H U J D P H O R V V H V H J , Edmans, Garcia, and Norli [2007] yf D Q G Z H D W K H U + L U V K O H L I H U D Q G 6 K X P Z D y [2003]yf L Q D P R R G F R Q J U X H Q W Z D 7 K H U H I R U H W K H D I I H F W D V L Q I R U P D W L R n heuristic is related to both moods and emotions. Wilson and Brekke [1994, p. 128] argue that people tend to adopt heuristics when processing infor- mation in order to reduce effort; they are not aware that they use such heuristics, and thus the influence of irrelevant information in particular is difficult to correct (Wilson, Centerbar, and Brekke [2002]yf $ V . D G R X s [2001, p. 429] argues, the affect-as-information heuristic could be imple- mented when individuals make complex social judgments and difficult and complex evaluations. The first hypothesis applies the affect-as-information heuristic literature to performance evaluations based on accounting infor- mation, predicting that individuals may heuristically conduct performance 1 Our examination of mood effects is different from Chung, Cohen, and Monroe [2008]. First, we focus on the application of the BSC to performance evaluations, while they investi- gated auditor judgments. Second, more importantly, we focus on correction of mood congru- ency bias, while they did not. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1228 S. DING AND P. BEAULIEU evaluations, a complex task, when there is no financial incentive in place. It aims to replicate the mood congruency bias in this setting, and serves as a necessary baseline against which we examine the effects of financial incen- tives. We assert that HI holds regardless of the degree of information load, and defer a discussion of the role of information load in bias correction to section 2.2. HI: When financial incentives are not in place, performance evalua- tions will be higher (loweryf Z K H Q S R V L W L Y H Q H J D W L Y H f moods are present. 2.1 FINANCIAL INCENTIVES AND MOOD CONGRUENCY CORRECTION Financial incentives have rarely been discussed in prior research on bias correction and performance evaluation. This section reviews the limited research in these areas relevant to our second hypothesis and extends the literature review to the field of economics. We pay particular attention to Rickman and Witt [2008] and Salvemini, Reilly, and Smither [1993]; both examine the effects of financial incentives on correcting biases. Drawing upon these ideas, we predict the effect of financial incentives in mood cor- rection in H2. Performance-contingent financial rewards are a conventional means of motivating improved performance in organizations (Awasthi and Pratt [1990], Drake, Haka, and Ravenscroft [1999], Bonner et al. [2000], Bonner and Sprinkle [2002] yf % R Q Q H U D Q G 6 S U L Q N O H > @ S R L Q W R X W W K D W a monetary incentive works first by improving the incentive-effort link, then by enhancing the effort-performance relation. Improved performance re- quires success in both links. In general, affect correction research in psychology is uninformed by accounting research on cognitive effects of monetary incentives. The pri- mary method of correcting affect-induced biases in the psychology litera- ture is acknowledgment/attribution, in which decision-makers are directed to evaluate their affective states or attribute their feelings to other sources before making their judgments (McFarland, White, and Newth [2003] , Schwarz and Clore [1983]yf $ F N Q R Z O H G J P H Q W D W W U L E X W L R Q K D V D O V R E H H n studied as a correction mechanism in auditing research (Kadous [2001]yf . However, affect acknowledgment has not always been effective in correct- ing biases. Wilson and Brekke [1994, p. 126] attributed mixed results to the fact that people “underestimate their own susceptibility to bias, and they overestimate the extent to which they can control their judgments and feelings.” We propose that financial rewards can create motivation pow- erful enough to correct a mood congruency bias without requiring mood acknowledgment.2 2 Some may argue that the effect of financial incentives on mood congruency correc- tion is not due to the motivation induced, but because moods could be changed by the in- centives. Empirical evidence in psychology and accounting did not find that bias-correction This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1229 We now turn to the fields of economics and organizational behavior to further review the effect of financial incentives. The economics paper most relevant to our second hypothesis is that by Rickman and Witt [2008], in which a financial incentive eliminated unconscious bias. The bias was a fa- voritism in English soccer, in which referees awarded more injury (extrayf time when the home team was behind by one goal, and less time when it was ahead by one goal. In the 2001-2002 season, for the first time, the En- glish Premier League employed truly professional referees and paid them salaries. Rickman and Witt found that favoritism that had existed before that season was eliminated, and, after controlling for effects like changes in referee quality, concluded that incentives were responsible. In H2 we pre- dict that incentives can eliminate mood congruency, another unconscious bias. Before we review the particularly relevant study in performance eval- uation involving financial incentives, we first establish the practicality of incentivizing performance evaluations. The quality of performance evaluation and how to motivate managers to make effective evaluations concern both academics and managers. Ac- cording to Grensing-Pophal [2010], a Senior Professional in Human Re- sources (SPHRyf L W L V F R P P R Q S U D F W L F H W R U D W H P D Q D J H U V R Q W K H W L P H O L Q H V s and quality of their performance evaluations. Human resources (HRyf H [ – perts claim that managers should be held accountable for the quality of performance evaluation and such quality should be tied to managers’ com- pensation (Grensing-Pophal [2001, p. 47]yf / H D G L Q J V F K R O D U V L Q W K H K X P D n relations field (Murphy and Cleveland [1995] yf D Q G + 5 P D Q D J H U V 6 W 2 Q J e et al. [2009]yf D O V R U H F R P P H Q G W K D W W K H D F F X U D F D Q G T X D O L W R I S H U I R U – mance evaluations should be financially rewarded in order to provide suf- ficient incentives. Our study thus reflects both actual and recommended performance evaluation practices. Few judgment and decision-making studies have addressed the prac- tice of incentivizing performance evaluations; the studies by Salvemini and his coauthors are exceptions. Salvemini [1988] and Salvemini, Reilly, and Smither [1993] offered evaluators financial incentives to be accurate; they were motivated to give more accurate appraisals to customer sales repre- sentatives after watching videotapes in which such representatives were per- forming their tasks. In Salvemini, Reilly, and Smither [1993], a 3 x 3 fac- torial design was adopted, with financial incentives and prior performance information being independent variables. Financial incentives were either mechanisms changed participants’ experience of moods. In Schwarz and Clore’s [1983] clas- sic study, for example, participants receiving attribution manipulation no longer rely on their moods to assess their life satisfaction, but retain either positive or negative moods after the manipulation. Kadous [2001, p. 439] explicitly indicates that attribution instruc- tions/manipulations are “not expected to change the experience of affect,” and the empirical evidence presented in her experiment is consistent with her arguments. As discussed later, we did not measure mood states, but prior studies suggest that bias-correction schemes alone do not change moods. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1230 S. DING AND P. BEAULIEU present or absent; when they were present, raters were informed about such rewards either prior to viewing the tapes or after they viewed the tapes. Similarly, raters in the positive (negativeyf S U L R U S H U I R U P D Q F H L Q I R U P D W L R n condition were informed that ratees had received above (belowyf D Y H U D J e ratings for their prior work; the third group did not receive any information on prior performance. Salvemini, Reilly, and Smither [1993] manipulated financial incentives in a way quite similar to ours, which is discussed later in the section on experimental design. More specifically, they informed the raters that the true performance scores of ratees were provided by a group of experts, and raters would be rewarded cash depending on the extent to which their evaluations came close to expert ratings. Those who provided the most accurate evaluations, that is, closest to expert ratings, would re- ceive $200. Consistent with their hypotheses, when financial incentives were absent, prior performance information led to biased appraisals of the current pe- riod such that raters receiving positive (negativeyf S U L R U S H U I R U P D Q F H L Q – formation gave more (lessyf I D Y R U D E O H U D W L Q J V W K D Q W K H L U F R X Q W H U S D U W V Z L W K – out this information; that is, the lack of motivation resulting from the lack of financial incentives led to an assimilation effect. Furthermore, raters who were provided with prior performance information, either positive or negative, evaluated ratees less accurately compared to those with no such information. When monetary incentives were offered, as predicted, prior performance information failed to influence either the average rating or accuracy. Salvenimi et al. further found that the timing to offer incentives did matter; raters who were provided with the incentives before viewing the tapes of ratees’ performance gave evaluations of the highest quality. Financial incentives offered in these studies enabled participants to cor- rect for prior information bias without being made aware of it. Our proposi- tion differs significantly from Salvemini, Reilly, and Smither [1993] because we address mood congruency biases and correction, whereas Salvemini et al. were interested strictly in decision-making accuracy; as noted before, mood congruency bias is understudied in accounting, and using financial incentives to correct for such an effect has not been examined in account- ing and psychology. More importantly, we examine the application of the BSC, a popular yet complex performance evaluation tool, and consider the possible impact arising from information load when financial incentives are employed to debias moods. The widespread application of the BSC and the well-documented concerns arising from its application indicate that more work is needed to examine the design of this popular tool; our in- vestigation of BSC in the performance evaluation setting in which moods could be an important contextual factor sheds new light on this manage- ment accounting innovation. Evaluators in Salvemini et al. were required to evaluate customer sales representatives in just three dimensions, but the BSC employed by our study involves four perspectives, with each per- spective involving multiple measures, as discussed below. The evaluation task thus is much more complex in our study, but Salvemini et al. does This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1231 provide us with a precedent for experimental use of financial incentives in performance evaluation tasks. H2 proposes using incentives to eliminate an unconscious bias, similar to the result of Rickman and Witt (2008yf E X t in a controlled, rather than natural, experiment. We examine two levels of information load in the context of performance evaluation, but H2 does not predict whether incentives will be effective at only one or at both lev- els of information load. H2 reflects that individuals would be motivated to exert greater effort when financial incentives are present, but defers the role that information load may play in influencing the effectiveness of such incentives to section 2.2. H2: When financial incentives are in place, moods will not influence performance evaluations. 2.2 THE EFFECT OF INFORMATION LOAD Complexity of accounting measurement is an important consideration because, as information complexity increases, individuals are required to have higher skill levels to improve task performance (Bonner et al. [2000], Bonner and Sprinkle [2002]yf $ P R Q J W K H H [ S H U L P H Q W V U H Y L H Z H G E y Bonner et al. [2000] , financial incentives are found to lead to improved per- formance only in 50yb R I W K H H [ S H U L P H Q W V L Q I R U P D W L R Q F R P S O H [ L W D P R Q g other things, is blamed for the failure of financial incentives to improve per- formance in almost half of the experiments. According to these authors, when information becomes cognitively complex, it increases the gap be- tween requirements of the task of interest and individuals’ knowledge and skill, thus eliminating the effect of monetary incentives. In experiment 1 , we include two information load conditions. The popu- larity of the BSC has attracted many firms to use it as a performance evalu- ation tool, with multiple perspectives and many measures, while others do not use the BSC framework and adopt only a few traditional financial mea- sures. The BSC serves as a proxy for the high information load condition, while the latter is used for the low information load condition. More specifically, the high information load condition bases perfor- mance evaluations on 16 BSC measures in four perspectives. The devel- opers of the BSC have indicated that it should be used for strategic plan- ning and management (Kaplan and Norton [1996a, 1996b, 2001a, 2001b]yf rather than as a performance evaluation tool. Nevertheless, the BSC is used for control purposes, such as performance evaluations, as evidenced by many accounting studies (e.g., Banker, Chang, and Pizzini [2004], Ittner and Larcker [1998], Lipe and Salterio [2000, 2002]yf . HI predicts that the absence of financial incentives will lead to a mood congruency effect, even for the evaluation based on two financial mea- sures only. This seems a plausible prediction because the task of perfor- mance evaluation itself is a complex one. According to Bonner et al. [2000] , performance evaluations should be classified as problem-solving tasks, the most difficult and cognitively challenging among the five types of tasks This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1232 S. DING AND P. BEAULIEU they reviewed. Problem-solving tasks, according to them, generally can be completed in numerous ways, and the existence of multiple options further increases the complexity of these tasks. Therefore, when it comes to perfor- mance evaluations, even with traditional financial measures only, individu- als may still find the task complex and effortful; when financial incentives are not in place, they may therefore use what they were feeling to make a shortcut to complete the evaluation task, that is, the affect-as-information heuristic. The mood congruency effect may arise due to the adoption of such heuristics. Bonner et al. [2000] suggest that complexity plays a significant role in determining whether incentives will affect performance. However, their re- view also indicates that, in any specific study, the precise point at which in- creasing information load eliminates incentive effects is an empirical ques- tion. When financial incentives are provided, a greater level of effort is expected, but whether an increased level of effort leads to improved per- formance and/or higher quality of decision-making depends on the in- formation load and the skills/ abilities of individuals performing the task. Consequently, we examine the impact of information load in the following research question. RQ1: At what level of information load will financial incentives elimi- nate the mood congruency bias? 3. Method and Results 3.1 experiment 1 The dependent variable in experiment 1 was performance ratings on a 101-point scale. There were three independent variables, each having two levels: mood (positive and negativeyf I L Q D Q F L D O L Q F H Q W L Y H D E V H Q W D Q d presentyf D Q G L Q I R U P D W L R Q O R D G W Z R D F F R X Q W L Q J P H D V X U H V D Q G % 6 C measuresyf . 3.1.1. Participants. One hundred and four MBA students participated in three sessions, one in the no-incentive conditions and two in the incentive conditions.3 There were 52 subjects in each mood condition, and 37 (67yf subjects were in the no-incentive (incentiveyf F R Q G L W L R Q 7 K H P H D Q D J H R f subjects was 33.4 years and they had been in business for 9.6 years on av- erage (median = 8yf 7 K H U H Z H U H P D O H byf D Q G I H P D O H byf students. Among 104 participants, the majority (75, 72.1yb f had experience of evaluating others, and 34 (32.7yb f of them had used the BSC as a perfor- mance evaluation tool. On average, participants had been evaluating others in their organizations for 4 years (median = 3yf . 3 Three sessions were available and it was necessary to designate each as either no-incentive or incentive. The no-incentive condition replicates prior congruency bias research, and we accordingly introduced HI as a “baseline.” The third session was designated incentive because this condition is the focal point of the paper. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1233 3.1.2. Procedure. Students were invited to participate in a study designed to improve our understanding of performance evaluations involving the BSC. They were informed that the study included two tasks. The first task was called “visual imagery style,” asking them to recall and describe a life event in order to show their visual imagery style, and the second task in- volved performance evaluations. Participants were informed that the re- searchers were interested in how their imagery style influences perfor- mance evaluations. Participants were paid $10 for their participation in a 40- or 50-minute session, depending on the condition (discussed belowyf and in addition to the participation fee, there was a lottery at the end of the session in which the winner would receive $400 cash. Participants listened to the experimenter explain the general instruc- tions; completed the first task, visual imagery; and read the evaluation case (the second taskyf W K H P V H O Y H V 7 K H I L U V W W D V N Y L V X D O L P D J H U Z D V X V H G W R L Q – duce moods. Participants were not asked between the two tasks to acknowl- edge their moods and no theory or instructions for mood correction were given. The case began with a passage containing background information illus- trating the evaluation systems used by two divisions. Included in the case information was a selection of performance data on two divisions of a firm that were being evaluated for annual review. Included also was the name of each division manager, the target market of each division, and the divisional strategies. In the case information, participants were informed that this was an initial evaluation for annual performance review, and they needed to try their best to give evaluations on each division manager given data limita- tions. They rated divisional managers’ performance based on a 101-point scale that has been used in prior studies (Lipe and Salterio [2000, 2002], Libby, Salterio, and Webb [2004] yf $ U D W L Q J R I L Q G L F D W H G H [ F H O O H Q W S H U – formance and 0 indicated extremely poor performance. Participants were then asked to indicate the extent to which they were happy with each di- visional manager’s performance and whether or not they would promote each manager based on the information given. After completing the case evaluation, they completed a demographic questionnaire. Before partici- pants left the session, a debriefing was conducted to remove the impact of the mood induction. 3.1.3. Manipulations. Moods were manipulated between subjects at two levels, positive and negative, by the first “visual imagery style” task. Par- ticipants were asked to recall and describe an event they experienced, a mood induction method that has been widely used by affective studies in psychology literature (e.g., DeSteno et al. [2000], McFarland, White, and Newth [2003], Ruder and Bless [2003], Rusting and DeHart [2000], Tamir and Robinson [2004]yf 3 D U W L F L S D Q W V Z H U H U H T X L U H G W R U H P H P E H U D S D U W L F X – larly positive and pleasant (negative and unpleasantyf H Y H Q W V X F K D V K H D U – ing some very good (badyf Q H Z V 7 K H Y L V X D O L ] H G H L W K H U S R V L W L Y H R U Q H J D W L Y e events that still made them have very positive or negative feelings for about This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1234 S. DING AND P. BEAULIEU 2 minutes, and then spent 10 minutes writing a description of them on sheets provided, in as much detail as they could as though these events were happening again. We did not include a manipulation check of moods in the experiments because Erber, Wegner, and Therriault [1996] and McFar- land, White, and Newth [2003] found that explicit questions about moods may enable participants to acknowledge their moods and correct biases. Incentives to give benchmark-consistent evaluations were manipulated as either present or absent. As noted before, offering financial incentives to evaluators was adopted in prior experimental research (e.g., Salvem- ini, Reilly, and Smither [1993], Roch [2005]yf D Q G L V D Q H P H U J L Q J E X V L – ness practice. When financial incentives were absent, participants were in- formed that their chances of winning the lottery did not depend on their performance evaluation answers; there would be one card containing their participant number (i.e., one chanceyf L Q W K H O R W W H U E R [ I R U H D F K R I W K H m regardless of their answers. This instruction clarified that the draw was a random result unrelated to performance. When financial incentives were in place, participants were also informed that a group of professionals had given a benchmark performance score for each divisional manager using the same evaluation scale, and that incentives would be determined by the degree of correspondence between their scores and the scores given by the professionals. Specifically, they were told that if both of their scores fell within the range of ±3 of the benchmark scores, they would have 10 cards containing their participant number placed in the lottery box; otherwise they had only 1. Thus, participants giving benchmark-consistent perfor- mance scores would be rewarded by having nine additional cards in the lottery box. This design follows Roch [2005] and Salvemini, Reilly, and Smither [1993], in which evaluators were given monetary incentives and those whose ratings came closest to the expert ratings would receive a cash reward. As was explained in section 2, information load may affect the ability of decision-makers to correct biases. Therefore, information load was manip- ulated within subjects at two levels: the task was based on two accounting measures (low information loadyf D Q G D F F R X Q W L Q J P H D V X U H V L Q D % 6 C (high information loadyf $ V L Q W K H / L S H D Q G 6 D O W H U L R > @ L Q V W U X – ment, participants were informed that RACK Incorporated is a firm that specializes in women’s apparel, and has two divisions: TeenWear and Work- Wear, with each having a different strategy. WorkWear Division specialized in business uniforms and focuses on its financial performance. Only two financial measures were provided for the division; this was the low informa- tion load condition. The measures, return on sales and revenues per sales visit, were indicated to be equally relevant and important to reaching Work- Wear Division’s strategic goal. One measure was above target, one measure was below target, and the percentage by which one measure exceeded the target was equal to the percentage by which the other measure fell short of the target. Return on sales is a common measure (used by both divi- sionsyf Z K L O H U H Y H Q X H V S H U V D O H V Y L V L W L V D P H D V X U H X Q L T X H W R : R U N : H D U 1 L Q e This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1235 faculty members in several business schools were asked to give a per- formance score, which indicated an approximately average performance (mean = 53.3yf . TeenWear Division was the high-information load condition. It special- ized in clothing for teenagers and had developed a BSC. It had four cate- gories: financial, customer-related, internal business processes, and learn- ing and growth, with each category having four measures. Within each category, two measures were above target, two measures were below target, and the percentage by which two measures exceeded targets was equal to the percentage by which another two measures fell short of targets (Bhat- tacharjee and Moreno [2005]yf , W Z D V I X U W K H U L Q G L F D W H G W K D W H D F K F D W H – gory and measure in TeenWear’s BSC was equally relevant and important to reaching its strategic goal. This design was employed in Bhattacharjee and Moreno [2005] in order to indicate an approximately average perfor- mance. A group of managers in Bhattacharjee and Moreno’s study (the control groupyf G L G U D W H S H U I R U P D Q F H D V D S S U R [ L P D W H O D Y H U D J H P H D Q = 58.3yf X V L Q J W K L V G H V L J Q D Q G W K H V D P H V F D O H H P S O R H G L Q W K L V V W X G D Q G W K L s mean score was used as the benchmark for the BSC division. The BSC in- formation given for TeenWear Division is presented in the appendix. With a total of 16 measures organized into four related BSC categories, TeenWear Division’s accounting information was more complex than Work- Wear Division’s two measures. Half of the participants evaluated Work- Wear Division first and TeenWear Division second, while the other half per- formed the task in a reverse order, to counterbalance order effects.4 3.1.4. Results. At the end of sessions in experiment 1, participants were asked to indicate the extent to which they agreed with two statements based on a seven-point scale, with one (sevenyf P H D Q L Q J V W U R Q J O G L V D J U H e (agreeyf 7 K H I L U V W V W D W H G V S H F L I L F D O O W K D W F K D Q F H V R I Z L Q Q L Q J W K H O R W W H U G H – pended on their performance evaluation answers, and the second stated that they had a financial incentive. For statement (1yf W K H P H D Q Y D O X H I R r participants in the nonincentive condition (incentive conditionyf Z D V 8 (4.91yf D V L J Q L I L F D Q W G L I I H U H Q F H ) S f. For statement (2yf , the mean response for participants in the nonincentive condition (incen- tive conditionyf Z D V f, also significant (F = 14.383, p < .001yf . These differences indicate that the manipulation of financial incentives was successful. As noted before, the mood manipulation was not checked.5 4 Order did not significantly affect performance evaluations as a main effect or interacting with the independent variables. Before participants left the session, they were asked to indicate the extent to which they were feeling good or bad, with seven (oneyf G H Q R W L Q J Y H U J R R G E D G f . They were also asked a second question about whether they felt positive or negative, using a similar scale where seven (oneyf L Q G L F D W H G Y H U S R V L W L Y H Q H J D W L Y H f . The purpose of these questions was to obtain some information about how subjects were feeling, so that the debriefing process that followed could be more targeted and effective. To some extent, the questions may help in assessing the This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1236 S. DING AND P. BEAULIEU TABLE 1 Evaluation Scores by Financial Incentive, Moods, and Information Load* Positive Negative Difference No financial BSC (16-measureyf E fc [19]d 52.78 (12.53yf > @ 4 incentive Traditional (2-measureyf f [19] 46.67 (13.28yf > @ 8 Financial BSC (16-measureyf f [33] 53.18 (13.04yf > @ 9 incentive Traditional (2-measureyf f [33] 56.47 (13.88yf > @ 2 Evaluations were made using a 101-point scale adapted from Lipe and Salterio [2000]. bMean evaluation scores. c Standard deviation. d Cell size. Performance evaluation scores given by participants are presented in table 1, and will be discussed further below for each condition of the experi- ment. First, a 2 x 2 x 2 Repeated Measures ANCOVA was conducted on the complete data set, including experience as a covariate. Both general work- ing experience and experience of evaluating others were employed in the tests. The sample sizes of experimental groups in this study were not equal and this inequality might affect the F tests performed. However, Boneau [1960, 1961] found that the combination of heterogeneity of variance and different sample sizes could be the only situation in which significance tests will be adversely affected. Levene’s test was conducted to test whether the error variance of the dependent variable was equal across groups. The P- values were .353 and .561, respectively, failing to reject the null hypothesis of equal error variance. Therefore, the inequality of sample sizes should not adversely affect the significance tests. The ANCOVA results are presented in table 2, with general working ex- perience as the covariate. Table 2 indicates that moods significantly affected evaluation judgments (p = .005yf 7 K H L Q W H U D F W L Y H H I I H F W R I L Q I R U P D W L R Q O R D d (the BSC vs. traditional financial measuresyf D Q G P R R G V Z D V D O V R V L J Q L I L – cant (p = .041yf V X J J H V W L Q J W K D W P R R G V G L I I H U H Q W L D O O D I I H F W H G S H U I R U P D Q F e evaluations, depending on the information load employed. The difference in mean evaluation scores between positive and negative moods with tra- ditional measures (incentive and no-incentive conditions combinedyf Z D s 1.94, but with BSC measures was 10.27 (un tabulatedyf 7 K H P R R G V [ L Q – formation load x incentive interaction is marginally statistically significant (p=.O96yf . We then examine the effect of mood congruency under the no-incentive and incentive conditions, respectively. When no incentives are in place, as can be seen from table 1, performance evaluations were lower in the effectiveness of the mood manipulation. For a combined variable in which responses to the questions are summed, the mean response of participants who were instructed to visualize negative and unpleasant events was 8.00, whereas those who visualized positive and pleasant events had a mean response of 9.47. This difference is consistent with our expectations (F = 3.466, p = .071yf 6 W D W L V W L F D O U H V X O W V D U H F R Q V L V W H Q W I R U H D F K T X H V W L R Q F R Q V L G H U H G V H S D U D W H O . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1237 TABLE 2 Results of Repeated Measures ANCOVA of Performance Evaluations: Business Working Experience as a Covariate Variables Between subjects: Moods 1 2,481.04 2,481.04 8.210 .005 Incentive 1 78.16 78.16 .259 .612 Business working experience 1 .318 .318 .001 .974 Moods x incentive 1 684.78 684.78 2.266 .135 Error 99 29,919.28 302.22 Within subjects Information load 1 2.36 2.36 .018 .894 Information load x moods 1 571.16 571.16 4.305 .041 Information load x incentive 1 378.51 378.51 2.853 .094 Information load x moods x incentive 1 375.66 375.66 2.831 .096 Error TABLE 3 Experiment 1: Simple Effects Tests Holding Financial Incentives Absent Adjusted Mean Positive Moods Negative Moods F Value P Value BSC (16-measureyf 4 Traditional (2-measureyf negative mood condition than in the positive mood condition in both lev- els of information load; the difference was 10.38 with two measures and 11.64 with 16 measures. Table 3 presents simple effects tests by holding fi- nancial incentives constant at the absent level; the main effect of moods is significant for both levels of information load (p = .014 for the BSC condi- tion and p = .043 for the two-measure conditionyf V X S S R U W L Q J P R R G F R Q – gruency as predicted in HI; the result is also presented in figure 1. The FIG. 1 – Experiment 1 : performance evaluations when financial incentives are absent. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1238 S. DING AND P. BEAULIEU Fig. 2 – Experiment 1: performance evaluations when financial incentives are present. finding suggests that even with two financial measures evaluators may still consider performance evaluation a complex and difficult task and thus rely on their moods to make a shortcut; they may have used the well- documented affect-as-information heuristic when evaluating the perfor- mance of divisional managers, affirming the impression based on figure 1 that the mood effect was equally strong with respect to the two financial measure and 16-measure BSC conditions.6 ‘ears of business experience is included as a covariate in the simple effects tests.7 When financial incentives are provided, results are as presented in fig- ure 2. Mood congruency was completely eliminated with two measures; the (rawyf P H D Q L Q W K H Q H J D W L Y H S R V L W L Y H f mood condition was 56.47 (53.85, t = -0.742yf 0 R R G F R Q J U X H Q F S H U V L V W H G L Q W K H P H D V X U H % 6 & F R Q G L – tion, where mean evaluation scores were 62.67 and 53.18 in the positive and negative mood conditions. The difference in these scores, 9.49, is simi- lar to the difference in the nonincentive condition, 11.64. Table 4 presents simple effects tests by holding financial incentives constant at the present level. The main effect of moods was not significant (p = .450yf I R U W K e two-measure condition, but was highly significant for the BSC condition 6 As previously mentioned, in addition to performance evaluation scores, we employed two supplemental measures: participants’ happiness with managers’ performance and their will- ingness to promote managers. Simple effects tests were also conducted for these two measures by holding financial incentives constant at the absent level. For participants’ happiness with managers’ performance, the results of the simple effects tests remain unchanged; the main effect of mood was significant for the two-measure condition (p – .022yf D Q G I R U W K H % 6 & F R Q – dition (p = .058yf ) R U S D U W L F L S D Q W V Z L O O L Q J Q H V V W R S U R P R W H P D Q D J H U V W K H P D L Q H I I H F W R I P R R G s was significant (p = .040yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q R Q O W K H P D L Q H I I H F W R I P R R G V I R r the BSC condition was not significant at the conventional level (p = .190yf . 7 When years of evaluating others was used as the covariate, the results remain unchanged. The main effect of moods was significant for the two-measure condition (p = .042yf D Q G I R r the BSC condition as well (p = .015yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1239 TABLE 4 Experiment 1: Simple Effects Tests Holding Financial Incentives Present Adjusted Mean Positive Moods Negative Moods F Value P Value BSC (16-measureyf 6 Traditional (2- measureyf (p = .006yf < H D U V R I E X V L Q H V V L V L Q F O X G H G D V W K H F R Y D U L D W H L Q W K H V L P S O e effects tests.9 These results support H2 with respect to the two-measure condition, where mood congruency bias was eliminated, but suggest that decision-makers have difficulty eliminating mood congruency when a 16- measure BSC is used. The finding that mood congruency bias persisted in the BSC environment when financial incentives were in place partially answers our research question; a conventional BSC, with four perspectives and 16 measures, could be too complex for financial incentives to elimi- nate mood congruency biases. Having clearly obtained mood correction in the two-measure condition but not with a 16-measure BSC, we designed a second experiment to see whether less complex BSC-based performance evaluations would respond to financial incentives. 3.2 EXPERIMENT 2 A total of eight measures were included in experiment 2, two in each of four BSC perspectives. Eight measures fall within Miller’s [1956] boundary condition regarding the capacity of working memory of seven items plus or minus two. Regardless of how participants consider items from different perspectives, with a grand total of eight it is unlikely that working mem- ory would be overloaded, and financial incentives may be able to eliminate mood congruency bias. The inclusion of only two measures under one per- spective is found in practice; for example, the BSC examined by Campbell [2008] is used by a major fast-food retailer, and only two measures are in- cluded under the perspective of “people.” In experiment 2, the dependent variable is performance ratings, the same as in experiment 1. However, mood is the only independent variable, 8 Consistent with our previous analyses, we further conducted simple effects tests using par- ticipants’ happiness with managers’ performance and their willingness to promote managers, respectively, with years of business experience as the covariate; financial incentives were held constant at the present level. The results remain unchanged. When participants’ happiness with managers’ performance was used, the main effect of moods was not significant (p = .099yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q E X W Z D V V L J Q L I L F D Q W I R U W K H % 6 & F R Q G L W L R Q S f . Re- garding participants’ willingness to promote managers, again the main effect of moods was not significant (p = .473yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q E X W Z D V V L J Q L I L F D Q W I R U W K H % 6 & F R Q G L W L R n (A =.011yf . 9 When years of evaluating others was used as the covariate, the results remain unchanged. The main effect of moods was not significant for the two-measure condition (p = .426yf E X t was highly significant for the BSC condition (p = .008yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1240 S. DING AND P. BEAULIEU again at two levels (positive and negativeyf $ I L Q D Q F L D O L Q F H Q W L Y H L V S U R Y L G H d and an eight-measure BSC is the only level of information load. 3.2.1. Participants. Thirty-two MBA students participated; 16 were ran- domly assigned to each mood condition, positive and negative. They also had business experience (mean years = 4.2yf D Q G H [ S H U L H Q F H L Q H Y D O X D W L Q g others (mean years = 2.8yf . 3.2.2. Procedure. The same procedure and materials were used as in ex- periment 1 except that only eight measures were presented, two in each of the same four BSC perspectives, and there was no manipulation of incen- tives (incentives were always present in experiment 2yf 7 K H V H H L J K W P H D – sures were a subset of the 16 measures used in experiment 1. Consistent with its design, within each perspective one measure was above target, one measure was below target, and the percentage by which they exceeded or fell short of targets was equal. The same group of faculty members that provided performance scores for the low information load (two financial measuresyf F R Q G L W L R Q L Q H [ S H U L P H Q W J D Y H V F R U H V I R U W K L V Y H U V L R Q R I W K H L Q – strument. They indicated an approximately average performance (mean = 53.0yf . 3.2.3. Results. The same financial incentive manipulation check ques- tions were asked in experiment 2. Recall that participants were asked to indicate their agreement with two statements on a seven-point scale, with one (sevenyf P H D Q L Q J V W U R Q J O G L V D J U H H D J U H H f. For the statement about chances of winning the lottery depending on performance evaluation an- swers, the mean response in experiment 2 was 5.62. Recall that the mean re- sponses in experiments 1 were 1.68 for the nonincentive condition and 4.91 for the incentive condition, respectively. For the statement about having a financial incentive, the mean response was 5.19 (3.11 and 4.76 for the non- incentive and incentive conditions in experiment 1, respectivelyyf 7 Z R R Q H – way ANOVAs (un tabulatedyf Z H U H F R Q G X F W H G I R U W K H W Z R H [ S H U L P H Q W V R Q e for each manipulation check question, and both models were significant (F = 57.111 and 10.288, respectively, and both Rvalues < .001yf 3 R V W K R c multiple comparisons were also conducted; for chances of winning lottery depending on performance, the mean response score for the no-financial incentives condition in experiment 1 is significantly lower than that in the incentive condition in experiment 1 and in experiment 2 (Bonferroni and Scheffe tests were consistent, Rvalues <. 001yf 7 K H G L I I H U H Q F H E H W Z H H Q W K e incentive condition of experiment 1 and experiment 2 (financial incentives were in place in bothyf L V Q R W V L J Q L I L F D Q W S f. Regarding individuals’ incentives, the mean response score in the nonincentive condition in ex- periment 1 is significantly lower than that in the incentive condition in experiment 1 (p = .001yf D Q G L Q H [ S H U L P H Q W S f. No difference is found between the incentive condition of experiment 1 and experiment 2 (¿=.633yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1241 TABLE 5 Results of One-Way ANCOVA of Performance Evaluations: Experiment 2 Business working experience as a covariate Moods 1 .070 .070 .000 .987 Business working experience 1 58.267 58.267 .220 .642 Error 29 7,667.671 264.402 Experience of evaluating others as a covariate Moods 1 1.191 1.191 .004 .947 Experience of evaluating others 1 21.631 21.631 .081 .777 Error Evaluation scores in experiment 2 were almost identical in the positive mood condition (mean = 56.50, std. dev. = 16.95yf D Q G Q H J D W L Y H F R Q G L W L R n (mean = 56.44, std. dev. = 15.09yf $ V S U H V H Q W H G L Q W D E O H W K H P D L Q H I I H F t of moods on performance evaluations was not significant in one-way AN- COVA using either business working experience or experience of evaluat- ing others as a covariate (main effect F < .005 in both modelsyf 7 K H U H V X O W s of experiment 2 indicate that, in the case of a four-perspective scorecard with eight measures in total, financial incentives were able to eliminate the mood congruency bias. Therefore, an eight-measure BSC seems to reflect an appropriate level of information load that enables financial incentives to correct for mood congruency bias. Given that participants in experiment 2 are less experienced than the participants in experiment 1, it is necessary to rule out the possibility that it is the difference in experience, rather than information load, that led to our findings in experiment 2. We combined data from experiment 1 (high information load condition with incentivesyf D Q G H [ S H U L P H Q W L Q – termediate information load conditionyf W R U X Q D [ $ 1 & 2 9 $ 7 K H I L U V t between-subject factor is information load, and the second is moods; evalu- ation scores for the BSC-based division are used as the dependent variable. The ANCOVA was run twice, once each with business experience and ex- perience of evaluating others as a covariate. The interaction of information load and moods was significant at the 5yb O H Y H O Z L W K E R W K F R Y D U L D W H V L Q G L – cating that results reported in table 5 cannot be attributed to differences in experience. Business experience and experience of evaluating others were not significant covariates. Although experiment 2 was conducted after experiment 1 (incentive conditionyf Z L W K D G L I I H U H Q W V D P S O H R I 0 % $ V W X G H Q W V W K H V H F R P E L Q H G U H V X O W s suggest that the rule of seven measures plus or minus two (Miller [1956]yf could be an important complexity factor. However, given that participants were not randomly assigned between experiment 1 (incentive conditionyf and experiment 2, a more conservative interpretation is that it remains for future research to establish whether incentives can eliminate the bias when four-perspective scorecards having more than eight total measures are employed. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1242 S. DING AND P. BEAULIEU 4. Conclusions Field and experimental accounting studies on the application of the BSC to performance evaluation provide evidence regarding its limitations, in- cluding: the common-measure bias (Lipe and Salterio [2000]yf W K H J U R X S – ing effect (Lipe and Salterio [2002]yf W K H R Y H U U H O L D Q F H R Q I L Q D Q F L D O P H D – sures (Ittner, Larcker, and Meyer [2003]yf D Q G W K H F R Q G L W L R Q D O X V H R f strategy-linked measures (Banker, Chang, and Pizzini [2004]yf 7 K L V V W U H D m of research indicates that effects of the BSC’s complex design on indi- viduals’ cognitive effort should be considered, especially in the perfor- mance evaluation context. Our study further examines this context by di- recting attention to another well-documented effect, the mood congruency bias. In experiment 1, we establish that mood congruent judgments are a re- liable phenomenon in an application of the BSC; this mood-congruency effect had been found in other decision-making research (Forgas [1995], Chung, Cohen, and Monroe [2008] yf D V Z H O O : H W K H Q H [ S O R U H Z K H W K H U a conventional element of MCS, monetary incentives, enables individuals to correct for mood congruency bias, and find that evaluation judgments us- ing a 16-measure BSC are susceptible to affective influences even in the presence of incentives to make benchmark-consistent judgments. In ex- periment 2, we show that financial incentives successfully eliminate mood congruency bias when a simplified BSC with only eight measures, but re- taining four perspectives, is employed. This result suggests that the critical aspect of information load is the upper limit of individuals’ processing ca- pacity (Miller [1956]yf 2 X U I L Q G L Q J L Q H [ S H U L P H Q W W K D W P R R G F R Q J U X H Q F y bias occurs even when only two financial measures are used for evaluation purposes also provides supporting evidence that information load is an im- portant issue to consider in the context of performance evaluations, as the evaluation task itself is complex and cognitively difficult. The results are also consistent with the existence of a boundary con- dition between autonomie responses in regions of the brain not subject to conscious control (described in Critchley [2005], Kerfoot, Chattillion, and Williams [2008]yf D Q G F R Q V F L R X V M X G J P H Q W L Q G H F L V L R Q P D N L Q J Z K H n anticipating gain. It may be that incentive response and mood correction were autonomie processes in the two- and eight-measure conditions, but at the level of complexity with 16 measures, correction cannot be autonomie. This is speculation now, but future judgment and decision-making research aided by advances in neural science may explore the boundaries between autonomie and deliberate bias correction. Future avenues may be explored to solve the information load problem associated with BSC applications. A limitation of this study is that it does not directly address judgment accuracy. Incentives to make judgments consis- tent with organizational benchmarks Were offered, as in Roch [2005] , but consistency is not equivalent to accuracy, which is difficult to determine This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1243 in performance evaluation contexts. Evaluation accuracy is sometimes judged in practice by correlating assessments with future performance of evaluatees (DeNisi and Pritchard [2006]yf E X W Z H F R X O G Q R W U H S O L F D W e this extended time frame in our experiment. Like Salvemini, Reilly, and Smither [1993] and Roch [2005], we employed “expert” ratings in our experiments as a benchmark, but we acknowledge that our panel of fac- ulty may not be experts at this task and it could be difficult to know the benchmark for performance evaluations in practice. Finally, we acknowl- edge that using financial incentives in performance evaluations could be a challenge. The experimental task excluded many performance evaluation duties, such as interactions with evaluation committees and those being evaluated. To the extent that feedback and complaints by the latter may deter evalua- tors from judging performance with bias, and that the performance review may involve interactions among members of the evaluation committee, the role of moods in influencing performance evaluations could be exagger- ated. To the best of our knowledge, the role of group decision processes in correcting mood congruency biases has not been studied. Beyond the topic of mood congruency bias in performance evaluation applications of the BSC, we make an original theoretical contribution to af- fect correction research by inserting the concept of MCS. We propose that one component of MCS, financial incentives, may provide enough moti- vation for decision-makers to overcome mood congruency bias without re- quiring them to acknowledge their moods, when information load is not too high. This represents a significant departure from extant research, in- cluding studies of affect in accounting and auditing. Financial incentives are just one component of MCS; other components, including budgets and organizational hierarchies, might also correct bias without requiring decision-makers to acknowledge their moods. Budgets and hierarchies impose accountability on decision-makers, and account- ability has been shown to affect social judgment (Tetlock and Kim [1987]yf , although its ability to attenuate the effects of emotions is complex and equivocal (Lerner and Gonzalez [2005]yf + R Z H Y H U D F F R X Q W D E L O L W K D V F R U – rected judgment biases involving accounting information (Dezoort, Harri- son, and Taylor [2006], Libby, Salterio, and Webb [2004], Webb [2002]yf . Financial incentives are one of the most frequently used and effective management control techniques (Bonner and Sprinkle [2002], Sprinkle [2003] yf E X W L W P D E H W K D W R W K H U R U J D Q L ] D W L R Q D O F R Q W U R O V F R U U H F W P R R G F R Q – gruency biases more effectively and efficiently. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1244 S. DING AND P. BEAULIEU APPENDIX The Balanced Scorecardfor the TeenWear Division* Measure Target Actual Financial 1. Return on sales* 15 yb b 2. Sales growth 10yb b 3. New store sales 25yb b 4. Market share relative to retail space $80 $73.6 Customer-related 1. Repeat sales 30yb b 2. Customer satisfaction rating (1-1 00yf 7 3. Mystery shopper program rating (1-100yf 3 4. Returns by customer as yb R I V D O H V b 9.69yb Internal business processes 1 . Average major brand names/store 34 35 2. Returns to suppliers** 5yb b 3. Sales from new market leaders 25 yb b 4. Average markdowns** (average yb P D U N G R Z Q b 10.4yb from original retail priceyf Learning and growth 1. Hours of employee training/ employ ее 20 17.5 2. Average tenure of sales personnel (in monthsyf 2 3. Employee suggestions/ employee 8 9 4. 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Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scor
The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases Author(s): SHUJUN DING and PHILIP BEAULIEU Source: Journal of Accounting Research , DECEMBER 2011 , Vol. 49, No. 5 (DECEMBER 2011), pp. 1223-1247 Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: https://www.jstor.org/stable/41328957 JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Wiley is collaborating with JSTOR to digitize, preserve and extend access to Journal of Accounting Research This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms DOI: 10.1111/J.1475-679X.2011.00421.X CHICAGO BOOTHS Journal of Accounting Research Vol. 49 No. 5 December 2011 Printed in U.S.A. The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations: Correcting Mood Congruency Biases SHUJUN DING* AND PHILIP BEAULIEU* Received 14 September 2010; accepted 9 June 2011 ABSTRACT Moods are low-intensity affective states that individuals bring to a decision, and may be especially important when the balanced scorecard (BSCyf L s used for performance evaluation purposes. We propose that financial incen- tives can motivate decision-makers to correct mood congruency biases, in which judgments and decisions are consistent with moods. In experiment 1, participants rated the performance of one division manager based on two * University of Ottawa; ^ University of Calgary. An earlier version of this paper was presented at the 2008 AAA Midwest Regional Meeting, the 2008 AAA Annual Meeting, the 2008 CAAA Annual Meeting, and the 2009 ABO conference. It is based on the PhD dissertation (University of Calgaryyf R I W K H I L U V W D X W K R U V X S H U Y L V H G E W K H V H F R Q G D X W K R U 7 K H D X W K R U V Z R X O G O L N H W o thank the members of the committee, Cynthia Simmons, Kate White, and Michael Wright, and external examiners, Teresa Kline and Alan Webb. We also thank Douglas Skinner (the editoryf D Q G D Q D Q R Q P R X V U H I H U H H D Q G D F N Q R Z O H G J H W K H K H O S I X O F R P P H Q W V R I ) R G L O $ G M D R X G , Cam Graham, Linda Grensing-Pophal, Susan Haka, Irene Herremans, Steven Kaplan, Joanne Leek, Tim Miller, Cam Morrill, Janet Monili, Sean Peffer, Steve Salterio, Parbudyal Singh, and Gary Spraakman, and the comments of workshop participants at Brock University, Concordia University, University of Lethbridge, University of Manitoba, University of Ottawa, and York University. Financial support was provided by the University of Calgary to the first author. We thank Kate White for sharing her mood induction instrument. 1223 Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2011 This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1224 S. DING AND P. BEAULIEU accounting measures and another manager based on a 16-measure BSC; there were mood congruency biases at both levels of information load. Fi- nancial incentives to make benchmark-consistent judgments eliminated bias in the former condition but not in the BSC condition. In experiment 2, in- centives were offered and performance evaluations were based on an eight- measure BSC; mood congruency bias was eliminated. Results suggest that management control systems, specifically financial incentives, should be in- cluded in future affect correction research. 1. Introduction Many claim that the balanced scorecard (BSCyf L V R Q H R I W K H P R V W L P S R U W D Q t management accounting innovations in the last two decades, and surveys consistently list it as one of the most popular management tools around the world (Rigby and Bilodeau [2009]yf $ F F R X Q W L Q J U H V H D U F K H U V K R Z H Y H U , have documented several biases and problems associated with its applica- tion (e.g., Lipe and Salterio [2000], Banker, Chang, and Pizzini [2004], Ittner, Larcker, and Meyer [2003]yf 7 K H F R P S O H [ L W R I W K H % 6 & L V E H O L H Y H d to result in information overloading, which, in turn, compromises decision quality when using the BSC for performance evaluation, as is commonly found in practice. We test whether the BSC’s complexity leaves it vulnera- ble to the well-documented mood congruency bias, and whether this bias is affected by financial incentives, another element of management control systems (MCSyf 2 X U V W X G O L Q N V % 6 & U H O D W H G E L D V H V D I I H F W D Q G 0 & 6 O L W H U D – ture. The term “affect” refers to feelings, including both moods and emotions. Moods are defined as low-intensity affective states that individuals bring to the decision context, while emotions are defined as more-intensive affective states with a definite cause and clear cognitive content related to decisions (Forgas [1992] , Edda, Moreno, and Smith [2001] , Moreno, Kida, and Smith [2002]yf 7 K H P R R G V D Q G H P R W L R Q V R I G H F L V L R Q P D N H U V D U H F U L W L F D O O L P S R U – tant because individuals rarely make decisions devoid of feeling. Forgas and George [2001, p. 5] commented that moods are especially important in examining individuals’ behaviors and play a crucial role in organizational settings, because: Moods thus provide the underlying affective context for most of our on- going thought processes and behaviors. Enduring mood states may be triggered by such fleeting cues as a passing smile, the weather, a pleasant room, a tone of voice, or a nonverbal gesture. Indeed, mild, nonspecific moods often have a more subtle and insidious influence on organizational behavior precisely because they lack elaborate cognitive content and thus often escape conscious scrutiny. The distinction between emotions and moods is very important in judg- ment and decision-making research. Emotions may or may not be useful in organizational settings; sometimes they provide content that is irrelevant to This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1225 decisions, but positive emotions resulting from being treated fairly by team members increase willingness to cooperate with them in a common task (Cremer and Hiel [2006] yf % G H I L Q L W L R Q W K R X J K P R R G V D U H X Q H T X L Y R F D O O y irrelevant to decision-making contexts. It is crucial, therefore, to improve our understanding of how, when, and why mood will influence decision- makers’ thinking and behavior (Forgas [2001a, 2001b]yf . Numerous studies have demonstrated that mood states impact decision- makers’ behavior, resulting in mood-congruent judgments (Fiedler [2001], Schwarz and Clore [1983] yf ) R U H [ D P S O H D P D Q D J H U P D U H D G D Q H Z V S D S H r story about poor prospects for recovery from a global recession, and be in a pessimistic mood later that day when rating a subordinate’s performance as below expectations. The cause of the mood, speculation about the future course of the economy, is unrelated to the judgment of past performance, and the manager is unaware of its influence. Mood congruency, also known as affect infusion, has been found in a variety of contexts and is a reliable everyday phenomenon (Forgas [2001a, 2001b]yf , W K D V D O V R E H H Q V W X G L H d in behavioral economics, including the role played by moods in investors’ decision-making (e.g., Saunders [1993], Hirshleifer and Shumway [2003], Kamstra, Kramer, and Levi [2003], Edmans, Garcia, and Norli [2007], Kaplanski and Levy [2010]yf . Research on correcting for mood congruency biases (McFarland and Buehler [1998], McFarland, White, and Newth [2003], Schwarz and Clore [1988], Tice and Bratslavsky [2000]yf K D V I R F X V H G R Q D W W H Q G L Q J W R D Q G D F – knowledging moods. Mood acknowledgment is based on the assumptions that people can correct for biasing influences better if they have a theory to explain them and they are motivated to correct their judgments (Wil- son and Brekke [1994], Wegener and Petty [1995]yf + R Z H Y H U P R R G D F – knowledgment strategies have not always been effective in prior research (Detweiler-Bedell and Salovey [2003], Gohm [2003], Showers and Kling [1996], Smith and Petty [1995]yf . We contribute to the affect literature by proposing that MCS, which have not been considered in bias correction models, provide an alternative mo- tivation to correct mood congruency biases. Conversely, we contribute to the MCS literature by suggesting a benefit that has been neglected: reduc- tion of mood congruency biases in judgment and decision-making. Prior re- search in accounting and auditing has drawn upon the affect literature and employed acknowledgment to reduce congruency biases (Kadous [2001]yf , but has not discussed or tested the ability of conventional MCS components to perform the same function, especially in the environment of the BSC, a popular and complex evaluation tool. In other words, mood congruency biases have not been as fully incorporated into accounting contexts as we attempt. Given that moods constitute the underlying context of organiza- tional behavior (Forgas and George [2001]yf D Q G W K D W 0 & 6 D U H L Q S O D F H L n most, if not all, organizations, the coexistence of moods and MCS in orga- nizations presents an interesting setting to understand the role MCS play in correcting for congruency bias. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1226 S. DING AND P. BEAULIEU We design two experiments to examine our research questions. Our experiments tie monetary rewards to performance evaluations, an ar- rangement that is documented in both research and practice (Salvem- ini, Reilly, and Smither [1993], Murphy and Cleveland [1995], Grensing- Pophal [2001], Roch [2005], St-Onge et al. [2009]yf & R Q V L V W H Q W Z L W K S U L R r literature (e.g., Lipe and Salterio [2000, 2002], Libby, Salterio, and Webb [2004] , Banker, Chang, and Pizzini [2004] yf S D U W L F L S D Q W V L Q R X U V W X G P D N e subjective performance evaluations. Although the use of subjectivity in a BSC-based evaluation context may raise concerns, as some firms apply a formula-based approach to BSC evaluations (e.g., Malina and Selto [2001]yf W K H L Q Y R O Y H P H Q W R I V X E M H F W L Y L W L Q S H U I R U P D Q F H H Y D O X D W L R Q V L V Z H O l documented (Gibbs et al. [2004], Bol [2008], Ittner, Larcker, and Meyer [2003]yf . In experiment 1 , we establish a mood congruency bias affecting perfor- mance evaluation judgments in the absence of financial incentives; partici- pants who were induced to feel good (badyf J D Y H K L J K H U O R Z H U f evaluation scores to divisional managers. The bias appeared at a low level of infor- mation load, in which evaluations were based on two financial measures, and at a high level, where evaluations were based on a BSC including 16 measures. Our finding of mood congruency bias at both levels thus sug- gests that performance evaluation itself is a complex task that motivates evaluators to adopt an heuristic approach to complete it; the finding is also consistent with a recent affect study in which auditors feeling good (badyf made a higher (loweryf Y D O X D W L R Q R I L Q Y H Q W R U & K X Q J & R K H Q D Q G 0 R Q U R e [2008]yf : K H Q I L Q D Q F L D O L Q F H Q W L Y H V W R P D N H E H Q F K P D U N F R Q V L V W H Q W H Y D O X D – tions were added in experiment 1 , they eliminated mood congruency bias in the low, but not the high, information load condition, reflecting that information load and evaluators’ skills may influence the effectiveness of financial incentives as a correction tool. Experiment 2 introduced an inter- mediate level of information load in which performance evaluations were based on a reduced BSC that comprised eight measures. Financial incen- tives for benchmark-consistent evaluations were offered in experiment 2 and they eliminated mood congruency bias. This result suggests that, to en- able financial incentives to reduce mood congruency biases, the number of measures included in a BSC must be reduced to the capacity of working memory (Miller [1956]yf . 2. Theory and Hypotheses We first review in this section prior literature in psychology, accounting, and behavioral economics/finance on the mood congruency effect, then develop our first hypothesis, in which such an effect is expected when in- dividuals perform the task of evaluations without financial incentives. In section 2.1, we discuss mood de-biasing mechanisms proposed in prior re- search, and effects of financial incentives in accounting, economics, and organizational contexts. The second hypothesis on the correcting role of This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1227 incentives follows from this discussion. In section 2.2, we develop a research question regarding the role of information load in mood congruency bias correction. Mood congruency bias has been well documented in psychology litera- ture (e.g., Forgas and George [2001] yf E X W D I I H F W U H V H D U F K L Q D F F R X Q W L Q J K D s been devoted primarily to biases caused by emotions in capital budgeting and investment decisions (e.g., Kida, Moreno, and Smith [2001], Moreno, Kida, and Smith [2002], Sawers [2005], Kaplan, Petersen, and Samuels [2007]yf $ Q R W D E O H H [ F H S W L R Q L V & K X Q J & R K H Q D Q G 0 R Q U R H > @ Z K o document a mood congruency bias among auditing professionals and stu- dents.1 Emotional reactions occur in accounting contexts, but mood states are much more common and constitute the underlying affective context in which judgments are made (Forgas and George [2001], Chung, Cohen, and Monroe [2008]yf 7 K H P R U D O H L Q I L U P V D U H V X O W R I I D F W R U V V X F K D V P H U J – ers, expansion, good or bad leadership, success, and failure, probably cre- ates moods that employees bring to their tasks, and those who evaluate the performance of others may be especially prone to affective influences. Moods influence judgment and decision-making when individuals heuristically process information (Schwarz and Clore [1983], Forgas [1995], Forgas and George [2001]yf $ I I H F W D V L Q I R U P D W L R Q K H X U L V W L F V D U e found in both psychology and accounting literature (Clore, Schwarz, and Conway [1994], Schwarz and Clore [1983, 2003], Kadous [2001]yf L Q W K H V e heuristics, affect itself is a source of information. For example, in an au- diting litigation setting, jurors may feel really bad when they learn about negative audit outcomes, and may use their negative feelings as relevant information to blame auditors (Kadous [2001]yf . D G R X V V W X G L H G H P R W L R Q V , but recent research examining the behavior of investors also shows that stock returns are significantly affected by investors’ moods arising from avi- ation disasters (e.g., Kaplanski and Levy [2010]yf V R F F H U J D P H O R V V H V H J , Edmans, Garcia, and Norli [2007] yf D Q G Z H D W K H U + L U V K O H L I H U D Q G 6 K X P Z D y [2003]yf L Q D P R R G F R Q J U X H Q W Z D 7 K H U H I R U H W K H D I I H F W D V L Q I R U P D W L R n heuristic is related to both moods and emotions. Wilson and Brekke [1994, p. 128] argue that people tend to adopt heuristics when processing infor- mation in order to reduce effort; they are not aware that they use such heuristics, and thus the influence of irrelevant information in particular is difficult to correct (Wilson, Centerbar, and Brekke [2002]yf $ V . D G R X s [2001, p. 429] argues, the affect-as-information heuristic could be imple- mented when individuals make complex social judgments and difficult and complex evaluations. The first hypothesis applies the affect-as-information heuristic literature to performance evaluations based on accounting infor- mation, predicting that individuals may heuristically conduct performance 1 Our examination of mood effects is different from Chung, Cohen, and Monroe [2008]. First, we focus on the application of the BSC to performance evaluations, while they investi- gated auditor judgments. Second, more importantly, we focus on correction of mood congru- ency bias, while they did not. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1228 S. DING AND P. BEAULIEU evaluations, a complex task, when there is no financial incentive in place. It aims to replicate the mood congruency bias in this setting, and serves as a necessary baseline against which we examine the effects of financial incen- tives. We assert that HI holds regardless of the degree of information load, and defer a discussion of the role of information load in bias correction to section 2.2. HI: When financial incentives are not in place, performance evalua- tions will be higher (loweryf Z K H Q S R V L W L Y H Q H J D W L Y H f moods are present. 2.1 FINANCIAL INCENTIVES AND MOOD CONGRUENCY CORRECTION Financial incentives have rarely been discussed in prior research on bias correction and performance evaluation. This section reviews the limited research in these areas relevant to our second hypothesis and extends the literature review to the field of economics. We pay particular attention to Rickman and Witt [2008] and Salvemini, Reilly, and Smither [1993]; both examine the effects of financial incentives on correcting biases. Drawing upon these ideas, we predict the effect of financial incentives in mood cor- rection in H2. Performance-contingent financial rewards are a conventional means of motivating improved performance in organizations (Awasthi and Pratt [1990], Drake, Haka, and Ravenscroft [1999], Bonner et al. [2000], Bonner and Sprinkle [2002] yf % R Q Q H U D Q G 6 S U L Q N O H > @ S R L Q W R X W W K D W a monetary incentive works first by improving the incentive-effort link, then by enhancing the effort-performance relation. Improved performance re- quires success in both links. In general, affect correction research in psychology is uninformed by accounting research on cognitive effects of monetary incentives. The pri- mary method of correcting affect-induced biases in the psychology litera- ture is acknowledgment/attribution, in which decision-makers are directed to evaluate their affective states or attribute their feelings to other sources before making their judgments (McFarland, White, and Newth [2003] , Schwarz and Clore [1983]yf $ F N Q R Z O H G J P H Q W D W W U L E X W L R Q K D V D O V R E H H n studied as a correction mechanism in auditing research (Kadous [2001]yf . However, affect acknowledgment has not always been effective in correct- ing biases. Wilson and Brekke [1994, p. 126] attributed mixed results to the fact that people “underestimate their own susceptibility to bias, and they overestimate the extent to which they can control their judgments and feelings.” We propose that financial rewards can create motivation pow- erful enough to correct a mood congruency bias without requiring mood acknowledgment.2 2 Some may argue that the effect of financial incentives on mood congruency correc- tion is not due to the motivation induced, but because moods could be changed by the in- centives. Empirical evidence in psychology and accounting did not find that bias-correction This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1229 We now turn to the fields of economics and organizational behavior to further review the effect of financial incentives. The economics paper most relevant to our second hypothesis is that by Rickman and Witt [2008], in which a financial incentive eliminated unconscious bias. The bias was a fa- voritism in English soccer, in which referees awarded more injury (extrayf time when the home team was behind by one goal, and less time when it was ahead by one goal. In the 2001-2002 season, for the first time, the En- glish Premier League employed truly professional referees and paid them salaries. Rickman and Witt found that favoritism that had existed before that season was eliminated, and, after controlling for effects like changes in referee quality, concluded that incentives were responsible. In H2 we pre- dict that incentives can eliminate mood congruency, another unconscious bias. Before we review the particularly relevant study in performance eval- uation involving financial incentives, we first establish the practicality of incentivizing performance evaluations. The quality of performance evaluation and how to motivate managers to make effective evaluations concern both academics and managers. Ac- cording to Grensing-Pophal [2010], a Senior Professional in Human Re- sources (SPHRyf L W L V F R P P R Q S U D F W L F H W R U D W H P D Q D J H U V R Q W K H W L P H O L Q H V s and quality of their performance evaluations. Human resources (HRyf H [ – perts claim that managers should be held accountable for the quality of performance evaluation and such quality should be tied to managers’ com- pensation (Grensing-Pophal [2001, p. 47]yf / H D G L Q J V F K R O D U V L Q W K H K X P D n relations field (Murphy and Cleveland [1995] yf D Q G + 5 P D Q D J H U V 6 W 2 Q J e et al. [2009]yf D O V R U H F R P P H Q G W K D W W K H D F F X U D F D Q G T X D O L W R I S H U I R U – mance evaluations should be financially rewarded in order to provide suf- ficient incentives. Our study thus reflects both actual and recommended performance evaluation practices. Few judgment and decision-making studies have addressed the prac- tice of incentivizing performance evaluations; the studies by Salvemini and his coauthors are exceptions. Salvemini [1988] and Salvemini, Reilly, and Smither [1993] offered evaluators financial incentives to be accurate; they were motivated to give more accurate appraisals to customer sales repre- sentatives after watching videotapes in which such representatives were per- forming their tasks. In Salvemini, Reilly, and Smither [1993], a 3 x 3 fac- torial design was adopted, with financial incentives and prior performance information being independent variables. Financial incentives were either mechanisms changed participants’ experience of moods. In Schwarz and Clore’s [1983] clas- sic study, for example, participants receiving attribution manipulation no longer rely on their moods to assess their life satisfaction, but retain either positive or negative moods after the manipulation. Kadous [2001, p. 439] explicitly indicates that attribution instruc- tions/manipulations are “not expected to change the experience of affect,” and the empirical evidence presented in her experiment is consistent with her arguments. As discussed later, we did not measure mood states, but prior studies suggest that bias-correction schemes alone do not change moods. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1230 S. DING AND P. BEAULIEU present or absent; when they were present, raters were informed about such rewards either prior to viewing the tapes or after they viewed the tapes. Similarly, raters in the positive (negativeyf S U L R U S H U I R U P D Q F H L Q I R U P D W L R n condition were informed that ratees had received above (belowyf D Y H U D J e ratings for their prior work; the third group did not receive any information on prior performance. Salvemini, Reilly, and Smither [1993] manipulated financial incentives in a way quite similar to ours, which is discussed later in the section on experimental design. More specifically, they informed the raters that the true performance scores of ratees were provided by a group of experts, and raters would be rewarded cash depending on the extent to which their evaluations came close to expert ratings. Those who provided the most accurate evaluations, that is, closest to expert ratings, would re- ceive $200. Consistent with their hypotheses, when financial incentives were absent, prior performance information led to biased appraisals of the current pe- riod such that raters receiving positive (negativeyf S U L R U S H U I R U P D Q F H L Q – formation gave more (lessyf I D Y R U D E O H U D W L Q J V W K D Q W K H L U F R X Q W H U S D U W V Z L W K – out this information; that is, the lack of motivation resulting from the lack of financial incentives led to an assimilation effect. Furthermore, raters who were provided with prior performance information, either positive or negative, evaluated ratees less accurately compared to those with no such information. When monetary incentives were offered, as predicted, prior performance information failed to influence either the average rating or accuracy. Salvenimi et al. further found that the timing to offer incentives did matter; raters who were provided with the incentives before viewing the tapes of ratees’ performance gave evaluations of the highest quality. Financial incentives offered in these studies enabled participants to cor- rect for prior information bias without being made aware of it. Our proposi- tion differs significantly from Salvemini, Reilly, and Smither [1993] because we address mood congruency biases and correction, whereas Salvemini et al. were interested strictly in decision-making accuracy; as noted before, mood congruency bias is understudied in accounting, and using financial incentives to correct for such an effect has not been examined in account- ing and psychology. More importantly, we examine the application of the BSC, a popular yet complex performance evaluation tool, and consider the possible impact arising from information load when financial incentives are employed to debias moods. The widespread application of the BSC and the well-documented concerns arising from its application indicate that more work is needed to examine the design of this popular tool; our in- vestigation of BSC in the performance evaluation setting in which moods could be an important contextual factor sheds new light on this manage- ment accounting innovation. Evaluators in Salvemini et al. were required to evaluate customer sales representatives in just three dimensions, but the BSC employed by our study involves four perspectives, with each per- spective involving multiple measures, as discussed below. The evaluation task thus is much more complex in our study, but Salvemini et al. does This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1231 provide us with a precedent for experimental use of financial incentives in performance evaluation tasks. H2 proposes using incentives to eliminate an unconscious bias, similar to the result of Rickman and Witt (2008yf E X t in a controlled, rather than natural, experiment. We examine two levels of information load in the context of performance evaluation, but H2 does not predict whether incentives will be effective at only one or at both lev- els of information load. H2 reflects that individuals would be motivated to exert greater effort when financial incentives are present, but defers the role that information load may play in influencing the effectiveness of such incentives to section 2.2. H2: When financial incentives are in place, moods will not influence performance evaluations. 2.2 THE EFFECT OF INFORMATION LOAD Complexity of accounting measurement is an important consideration because, as information complexity increases, individuals are required to have higher skill levels to improve task performance (Bonner et al. [2000], Bonner and Sprinkle [2002]yf $ P R Q J W K H H [ S H U L P H Q W V U H Y L H Z H G E y Bonner et al. [2000] , financial incentives are found to lead to improved per- formance only in 50yb R I W K H H [ S H U L P H Q W V L Q I R U P D W L R Q F R P S O H [ L W D P R Q g other things, is blamed for the failure of financial incentives to improve per- formance in almost half of the experiments. According to these authors, when information becomes cognitively complex, it increases the gap be- tween requirements of the task of interest and individuals’ knowledge and skill, thus eliminating the effect of monetary incentives. In experiment 1 , we include two information load conditions. The popu- larity of the BSC has attracted many firms to use it as a performance evalu- ation tool, with multiple perspectives and many measures, while others do not use the BSC framework and adopt only a few traditional financial mea- sures. The BSC serves as a proxy for the high information load condition, while the latter is used for the low information load condition. More specifically, the high information load condition bases perfor- mance evaluations on 16 BSC measures in four perspectives. The devel- opers of the BSC have indicated that it should be used for strategic plan- ning and management (Kaplan and Norton [1996a, 1996b, 2001a, 2001b]yf rather than as a performance evaluation tool. Nevertheless, the BSC is used for control purposes, such as performance evaluations, as evidenced by many accounting studies (e.g., Banker, Chang, and Pizzini [2004], Ittner and Larcker [1998], Lipe and Salterio [2000, 2002]yf . HI predicts that the absence of financial incentives will lead to a mood congruency effect, even for the evaluation based on two financial mea- sures only. This seems a plausible prediction because the task of perfor- mance evaluation itself is a complex one. According to Bonner et al. [2000] , performance evaluations should be classified as problem-solving tasks, the most difficult and cognitively challenging among the five types of tasks This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1232 S. DING AND P. BEAULIEU they reviewed. Problem-solving tasks, according to them, generally can be completed in numerous ways, and the existence of multiple options further increases the complexity of these tasks. Therefore, when it comes to perfor- mance evaluations, even with traditional financial measures only, individu- als may still find the task complex and effortful; when financial incentives are not in place, they may therefore use what they were feeling to make a shortcut to complete the evaluation task, that is, the affect-as-information heuristic. The mood congruency effect may arise due to the adoption of such heuristics. Bonner et al. [2000] suggest that complexity plays a significant role in determining whether incentives will affect performance. However, their re- view also indicates that, in any specific study, the precise point at which in- creasing information load eliminates incentive effects is an empirical ques- tion. When financial incentives are provided, a greater level of effort is expected, but whether an increased level of effort leads to improved per- formance and/or higher quality of decision-making depends on the in- formation load and the skills/ abilities of individuals performing the task. Consequently, we examine the impact of information load in the following research question. RQ1: At what level of information load will financial incentives elimi- nate the mood congruency bias? 3. Method and Results 3.1 experiment 1 The dependent variable in experiment 1 was performance ratings on a 101-point scale. There were three independent variables, each having two levels: mood (positive and negativeyf I L Q D Q F L D O L Q F H Q W L Y H D E V H Q W D Q d presentyf D Q G L Q I R U P D W L R Q O R D G W Z R D F F R X Q W L Q J P H D V X U H V D Q G % 6 C measuresyf . 3.1.1. Participants. One hundred and four MBA students participated in three sessions, one in the no-incentive conditions and two in the incentive conditions.3 There were 52 subjects in each mood condition, and 37 (67yf subjects were in the no-incentive (incentiveyf F R Q G L W L R Q 7 K H P H D Q D J H R f subjects was 33.4 years and they had been in business for 9.6 years on av- erage (median = 8yf 7 K H U H Z H U H P D O H byf D Q G I H P D O H byf students. Among 104 participants, the majority (75, 72.1yb f had experience of evaluating others, and 34 (32.7yb f of them had used the BSC as a perfor- mance evaluation tool. On average, participants had been evaluating others in their organizations for 4 years (median = 3yf . 3 Three sessions were available and it was necessary to designate each as either no-incentive or incentive. The no-incentive condition replicates prior congruency bias research, and we accordingly introduced HI as a “baseline.” The third session was designated incentive because this condition is the focal point of the paper. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1233 3.1.2. Procedure. Students were invited to participate in a study designed to improve our understanding of performance evaluations involving the BSC. They were informed that the study included two tasks. The first task was called “visual imagery style,” asking them to recall and describe a life event in order to show their visual imagery style, and the second task in- volved performance evaluations. Participants were informed that the re- searchers were interested in how their imagery style influences perfor- mance evaluations. Participants were paid $10 for their participation in a 40- or 50-minute session, depending on the condition (discussed belowyf and in addition to the participation fee, there was a lottery at the end of the session in which the winner would receive $400 cash. Participants listened to the experimenter explain the general instruc- tions; completed the first task, visual imagery; and read the evaluation case (the second taskyf W K H P V H O Y H V 7 K H I L U V W W D V N Y L V X D O L P D J H U Z D V X V H G W R L Q – duce moods. Participants were not asked between the two tasks to acknowl- edge their moods and no theory or instructions for mood correction were given. The case began with a passage containing background information illus- trating the evaluation systems used by two divisions. Included in the case information was a selection of performance data on two divisions of a firm that were being evaluated for annual review. Included also was the name of each division manager, the target market of each division, and the divisional strategies. In the case information, participants were informed that this was an initial evaluation for annual performance review, and they needed to try their best to give evaluations on each division manager given data limita- tions. They rated divisional managers’ performance based on a 101-point scale that has been used in prior studies (Lipe and Salterio [2000, 2002], Libby, Salterio, and Webb [2004] yf $ U D W L Q J R I L Q G L F D W H G H [ F H O O H Q W S H U – formance and 0 indicated extremely poor performance. Participants were then asked to indicate the extent to which they were happy with each di- visional manager’s performance and whether or not they would promote each manager based on the information given. After completing the case evaluation, they completed a demographic questionnaire. Before partici- pants left the session, a debriefing was conducted to remove the impact of the mood induction. 3.1.3. Manipulations. Moods were manipulated between subjects at two levels, positive and negative, by the first “visual imagery style” task. Par- ticipants were asked to recall and describe an event they experienced, a mood induction method that has been widely used by affective studies in psychology literature (e.g., DeSteno et al. [2000], McFarland, White, and Newth [2003], Ruder and Bless [2003], Rusting and DeHart [2000], Tamir and Robinson [2004]yf 3 D U W L F L S D Q W V Z H U H U H T X L U H G W R U H P H P E H U D S D U W L F X – larly positive and pleasant (negative and unpleasantyf H Y H Q W V X F K D V K H D U – ing some very good (badyf Q H Z V 7 K H Y L V X D O L ] H G H L W K H U S R V L W L Y H R U Q H J D W L Y e events that still made them have very positive or negative feelings for about This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1234 S. DING AND P. BEAULIEU 2 minutes, and then spent 10 minutes writing a description of them on sheets provided, in as much detail as they could as though these events were happening again. We did not include a manipulation check of moods in the experiments because Erber, Wegner, and Therriault [1996] and McFar- land, White, and Newth [2003] found that explicit questions about moods may enable participants to acknowledge their moods and correct biases. Incentives to give benchmark-consistent evaluations were manipulated as either present or absent. As noted before, offering financial incentives to evaluators was adopted in prior experimental research (e.g., Salvem- ini, Reilly, and Smither [1993], Roch [2005]yf D Q G L V D Q H P H U J L Q J E X V L – ness practice. When financial incentives were absent, participants were in- formed that their chances of winning the lottery did not depend on their performance evaluation answers; there would be one card containing their participant number (i.e., one chanceyf L Q W K H O R W W H U E R [ I R U H D F K R I W K H m regardless of their answers. This instruction clarified that the draw was a random result unrelated to performance. When financial incentives were in place, participants were also informed that a group of professionals had given a benchmark performance score for each divisional manager using the same evaluation scale, and that incentives would be determined by the degree of correspondence between their scores and the scores given by the professionals. Specifically, they were told that if both of their scores fell within the range of ±3 of the benchmark scores, they would have 10 cards containing their participant number placed in the lottery box; otherwise they had only 1. Thus, participants giving benchmark-consistent perfor- mance scores would be rewarded by having nine additional cards in the lottery box. This design follows Roch [2005] and Salvemini, Reilly, and Smither [1993], in which evaluators were given monetary incentives and those whose ratings came closest to the expert ratings would receive a cash reward. As was explained in section 2, information load may affect the ability of decision-makers to correct biases. Therefore, information load was manip- ulated within subjects at two levels: the task was based on two accounting measures (low information loadyf D Q G D F F R X Q W L Q J P H D V X U H V L Q D % 6 C (high information loadyf $ V L Q W K H / L S H D Q G 6 D O W H U L R > @ L Q V W U X – ment, participants were informed that RACK Incorporated is a firm that specializes in women’s apparel, and has two divisions: TeenWear and Work- Wear, with each having a different strategy. WorkWear Division specialized in business uniforms and focuses on its financial performance. Only two financial measures were provided for the division; this was the low informa- tion load condition. The measures, return on sales and revenues per sales visit, were indicated to be equally relevant and important to reaching Work- Wear Division’s strategic goal. One measure was above target, one measure was below target, and the percentage by which one measure exceeded the target was equal to the percentage by which the other measure fell short of the target. Return on sales is a common measure (used by both divi- sionsyf Z K L O H U H Y H Q X H V S H U V D O H V Y L V L W L V D P H D V X U H X Q L T X H W R : R U N : H D U 1 L Q e This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1235 faculty members in several business schools were asked to give a per- formance score, which indicated an approximately average performance (mean = 53.3yf . TeenWear Division was the high-information load condition. It special- ized in clothing for teenagers and had developed a BSC. It had four cate- gories: financial, customer-related, internal business processes, and learn- ing and growth, with each category having four measures. Within each category, two measures were above target, two measures were below target, and the percentage by which two measures exceeded targets was equal to the percentage by which another two measures fell short of targets (Bhat- tacharjee and Moreno [2005]yf , W Z D V I X U W K H U L Q G L F D W H G W K D W H D F K F D W H – gory and measure in TeenWear’s BSC was equally relevant and important to reaching its strategic goal. This design was employed in Bhattacharjee and Moreno [2005] in order to indicate an approximately average perfor- mance. A group of managers in Bhattacharjee and Moreno’s study (the control groupyf G L G U D W H S H U I R U P D Q F H D V D S S U R [ L P D W H O D Y H U D J H P H D Q = 58.3yf X V L Q J W K L V G H V L J Q D Q G W K H V D P H V F D O H H P S O R H G L Q W K L V V W X G D Q G W K L s mean score was used as the benchmark for the BSC division. The BSC in- formation given for TeenWear Division is presented in the appendix. With a total of 16 measures organized into four related BSC categories, TeenWear Division’s accounting information was more complex than Work- Wear Division’s two measures. Half of the participants evaluated Work- Wear Division first and TeenWear Division second, while the other half per- formed the task in a reverse order, to counterbalance order effects.4 3.1.4. Results. At the end of sessions in experiment 1, participants were asked to indicate the extent to which they agreed with two statements based on a seven-point scale, with one (sevenyf P H D Q L Q J V W U R Q J O G L V D J U H e (agreeyf 7 K H I L U V W V W D W H G V S H F L I L F D O O W K D W F K D Q F H V R I Z L Q Q L Q J W K H O R W W H U G H – pended on their performance evaluation answers, and the second stated that they had a financial incentive. For statement (1yf W K H P H D Q Y D O X H I R r participants in the nonincentive condition (incentive conditionyf Z D V 8 (4.91yf D V L J Q L I L F D Q W G L I I H U H Q F H ) S f. For statement (2yf , the mean response for participants in the nonincentive condition (incen- tive conditionyf Z D V f, also significant (F = 14.383, p < .001yf . These differences indicate that the manipulation of financial incentives was successful. As noted before, the mood manipulation was not checked.5 4 Order did not significantly affect performance evaluations as a main effect or interacting with the independent variables. Before participants left the session, they were asked to indicate the extent to which they were feeling good or bad, with seven (oneyf G H Q R W L Q J Y H U J R R G E D G f . They were also asked a second question about whether they felt positive or negative, using a similar scale where seven (oneyf L Q G L F D W H G Y H U S R V L W L Y H Q H J D W L Y H f . The purpose of these questions was to obtain some information about how subjects were feeling, so that the debriefing process that followed could be more targeted and effective. To some extent, the questions may help in assessing the This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1236 S. DING AND P. BEAULIEU TABLE 1 Evaluation Scores by Financial Incentive, Moods, and Information Load* Positive Negative Difference No financial BSC (16-measureyf E fc [19]d 52.78 (12.53yf > @ 4 incentive Traditional (2-measureyf f [19] 46.67 (13.28yf > @ 8 Financial BSC (16-measureyf f [33] 53.18 (13.04yf > @ 9 incentive Traditional (2-measureyf f [33] 56.47 (13.88yf > @ 2 Evaluations were made using a 101-point scale adapted from Lipe and Salterio [2000]. bMean evaluation scores. c Standard deviation. d Cell size. Performance evaluation scores given by participants are presented in table 1, and will be discussed further below for each condition of the experi- ment. First, a 2 x 2 x 2 Repeated Measures ANCOVA was conducted on the complete data set, including experience as a covariate. Both general work- ing experience and experience of evaluating others were employed in the tests. The sample sizes of experimental groups in this study were not equal and this inequality might affect the F tests performed. However, Boneau [1960, 1961] found that the combination of heterogeneity of variance and different sample sizes could be the only situation in which significance tests will be adversely affected. Levene’s test was conducted to test whether the error variance of the dependent variable was equal across groups. The P- values were .353 and .561, respectively, failing to reject the null hypothesis of equal error variance. Therefore, the inequality of sample sizes should not adversely affect the significance tests. The ANCOVA results are presented in table 2, with general working ex- perience as the covariate. Table 2 indicates that moods significantly affected evaluation judgments (p = .005yf 7 K H L Q W H U D F W L Y H H I I H F W R I L Q I R U P D W L R Q O R D d (the BSC vs. traditional financial measuresyf D Q G P R R G V Z D V D O V R V L J Q L I L – cant (p = .041yf V X J J H V W L Q J W K D W P R R G V G L I I H U H Q W L D O O D I I H F W H G S H U I R U P D Q F e evaluations, depending on the information load employed. The difference in mean evaluation scores between positive and negative moods with tra- ditional measures (incentive and no-incentive conditions combinedyf Z D s 1.94, but with BSC measures was 10.27 (un tabulatedyf 7 K H P R R G V [ L Q – formation load x incentive interaction is marginally statistically significant (p=.O96yf . We then examine the effect of mood congruency under the no-incentive and incentive conditions, respectively. When no incentives are in place, as can be seen from table 1, performance evaluations were lower in the effectiveness of the mood manipulation. For a combined variable in which responses to the questions are summed, the mean response of participants who were instructed to visualize negative and unpleasant events was 8.00, whereas those who visualized positive and pleasant events had a mean response of 9.47. This difference is consistent with our expectations (F = 3.466, p = .071yf 6 W D W L V W L F D O U H V X O W V D U H F R Q V L V W H Q W I R U H D F K T X H V W L R Q F R Q V L G H U H G V H S D U D W H O . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1237 TABLE 2 Results of Repeated Measures ANCOVA of Performance Evaluations: Business Working Experience as a Covariate Variables Between subjects: Moods 1 2,481.04 2,481.04 8.210 .005 Incentive 1 78.16 78.16 .259 .612 Business working experience 1 .318 .318 .001 .974 Moods x incentive 1 684.78 684.78 2.266 .135 Error 99 29,919.28 302.22 Within subjects Information load 1 2.36 2.36 .018 .894 Information load x moods 1 571.16 571.16 4.305 .041 Information load x incentive 1 378.51 378.51 2.853 .094 Information load x moods x incentive 1 375.66 375.66 2.831 .096 Error TABLE 3 Experiment 1: Simple Effects Tests Holding Financial Incentives Absent Adjusted Mean Positive Moods Negative Moods F Value P Value BSC (16-measureyf 4 Traditional (2-measureyf negative mood condition than in the positive mood condition in both lev- els of information load; the difference was 10.38 with two measures and 11.64 with 16 measures. Table 3 presents simple effects tests by holding fi- nancial incentives constant at the absent level; the main effect of moods is significant for both levels of information load (p = .014 for the BSC condi- tion and p = .043 for the two-measure conditionyf V X S S R U W L Q J P R R G F R Q – gruency as predicted in HI; the result is also presented in figure 1. The FIG. 1 – Experiment 1 : performance evaluations when financial incentives are absent. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1238 S. DING AND P. BEAULIEU Fig. 2 – Experiment 1: performance evaluations when financial incentives are present. finding suggests that even with two financial measures evaluators may still consider performance evaluation a complex and difficult task and thus rely on their moods to make a shortcut; they may have used the well- documented affect-as-information heuristic when evaluating the perfor- mance of divisional managers, affirming the impression based on figure 1 that the mood effect was equally strong with respect to the two financial measure and 16-measure BSC conditions.6 ‘ears of business experience is included as a covariate in the simple effects tests.7 When financial incentives are provided, results are as presented in fig- ure 2. Mood congruency was completely eliminated with two measures; the (rawyf P H D Q L Q W K H Q H J D W L Y H S R V L W L Y H f mood condition was 56.47 (53.85, t = -0.742yf 0 R R G F R Q J U X H Q F S H U V L V W H G L Q W K H P H D V X U H % 6 & F R Q G L – tion, where mean evaluation scores were 62.67 and 53.18 in the positive and negative mood conditions. The difference in these scores, 9.49, is simi- lar to the difference in the nonincentive condition, 11.64. Table 4 presents simple effects tests by holding financial incentives constant at the present level. The main effect of moods was not significant (p = .450yf I R U W K e two-measure condition, but was highly significant for the BSC condition 6 As previously mentioned, in addition to performance evaluation scores, we employed two supplemental measures: participants’ happiness with managers’ performance and their will- ingness to promote managers. Simple effects tests were also conducted for these two measures by holding financial incentives constant at the absent level. For participants’ happiness with managers’ performance, the results of the simple effects tests remain unchanged; the main effect of mood was significant for the two-measure condition (p – .022yf D Q G I R U W K H % 6 & F R Q – dition (p = .058yf ) R U S D U W L F L S D Q W V Z L O O L Q J Q H V V W R S U R P R W H P D Q D J H U V W K H P D L Q H I I H F W R I P R R G s was significant (p = .040yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q R Q O W K H P D L Q H I I H F W R I P R R G V I R r the BSC condition was not significant at the conventional level (p = .190yf . 7 When years of evaluating others was used as the covariate, the results remain unchanged. The main effect of moods was significant for the two-measure condition (p = .042yf D Q G I R r the BSC condition as well (p = .015yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1239 TABLE 4 Experiment 1: Simple Effects Tests Holding Financial Incentives Present Adjusted Mean Positive Moods Negative Moods F Value P Value BSC (16-measureyf 6 Traditional (2- measureyf (p = .006yf < H D U V R I E X V L Q H V V L V L Q F O X G H G D V W K H F R Y D U L D W H L Q W K H V L P S O e effects tests.9 These results support H2 with respect to the two-measure condition, where mood congruency bias was eliminated, but suggest that decision-makers have difficulty eliminating mood congruency when a 16- measure BSC is used. The finding that mood congruency bias persisted in the BSC environment when financial incentives were in place partially answers our research question; a conventional BSC, with four perspectives and 16 measures, could be too complex for financial incentives to elimi- nate mood congruency biases. Having clearly obtained mood correction in the two-measure condition but not with a 16-measure BSC, we designed a second experiment to see whether less complex BSC-based performance evaluations would respond to financial incentives. 3.2 EXPERIMENT 2 A total of eight measures were included in experiment 2, two in each of four BSC perspectives. Eight measures fall within Miller’s [1956] boundary condition regarding the capacity of working memory of seven items plus or minus two. Regardless of how participants consider items from different perspectives, with a grand total of eight it is unlikely that working mem- ory would be overloaded, and financial incentives may be able to eliminate mood congruency bias. The inclusion of only two measures under one per- spective is found in practice; for example, the BSC examined by Campbell [2008] is used by a major fast-food retailer, and only two measures are in- cluded under the perspective of “people.” In experiment 2, the dependent variable is performance ratings, the same as in experiment 1. However, mood is the only independent variable, 8 Consistent with our previous analyses, we further conducted simple effects tests using par- ticipants’ happiness with managers’ performance and their willingness to promote managers, respectively, with years of business experience as the covariate; financial incentives were held constant at the present level. The results remain unchanged. When participants’ happiness with managers’ performance was used, the main effect of moods was not significant (p = .099yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q E X W Z D V V L J Q L I L F D Q W I R U W K H % 6 & F R Q G L W L R Q S f . Re- garding participants’ willingness to promote managers, again the main effect of moods was not significant (p = .473yf I R U W K H W Z R P H D V X U H F R Q G L W L R Q E X W Z D V V L J Q L I L F D Q W I R U W K H % 6 & F R Q G L W L R n (A =.011yf . 9 When years of evaluating others was used as the covariate, the results remain unchanged. The main effect of moods was not significant for the two-measure condition (p = .426yf E X t was highly significant for the BSC condition (p = .008yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1240 S. DING AND P. BEAULIEU again at two levels (positive and negativeyf $ I L Q D Q F L D O L Q F H Q W L Y H L V S U R Y L G H d and an eight-measure BSC is the only level of information load. 3.2.1. Participants. Thirty-two MBA students participated; 16 were ran- domly assigned to each mood condition, positive and negative. They also had business experience (mean years = 4.2yf D Q G H [ S H U L H Q F H L Q H Y D O X D W L Q g others (mean years = 2.8yf . 3.2.2. Procedure. The same procedure and materials were used as in ex- periment 1 except that only eight measures were presented, two in each of the same four BSC perspectives, and there was no manipulation of incen- tives (incentives were always present in experiment 2yf 7 K H V H H L J K W P H D – sures were a subset of the 16 measures used in experiment 1. Consistent with its design, within each perspective one measure was above target, one measure was below target, and the percentage by which they exceeded or fell short of targets was equal. The same group of faculty members that provided performance scores for the low information load (two financial measuresyf F R Q G L W L R Q L Q H [ S H U L P H Q W J D Y H V F R U H V I R U W K L V Y H U V L R Q R I W K H L Q – strument. They indicated an approximately average performance (mean = 53.0yf . 3.2.3. Results. The same financial incentive manipulation check ques- tions were asked in experiment 2. Recall that participants were asked to indicate their agreement with two statements on a seven-point scale, with one (sevenyf P H D Q L Q J V W U R Q J O G L V D J U H H D J U H H f. For the statement about chances of winning the lottery depending on performance evaluation an- swers, the mean response in experiment 2 was 5.62. Recall that the mean re- sponses in experiments 1 were 1.68 for the nonincentive condition and 4.91 for the incentive condition, respectively. For the statement about having a financial incentive, the mean response was 5.19 (3.11 and 4.76 for the non- incentive and incentive conditions in experiment 1, respectivelyyf 7 Z R R Q H – way ANOVAs (un tabulatedyf Z H U H F R Q G X F W H G I R U W K H W Z R H [ S H U L P H Q W V R Q e for each manipulation check question, and both models were significant (F = 57.111 and 10.288, respectively, and both Rvalues < .001yf 3 R V W K R c multiple comparisons were also conducted; for chances of winning lottery depending on performance, the mean response score for the no-financial incentives condition in experiment 1 is significantly lower than that in the incentive condition in experiment 1 and in experiment 2 (Bonferroni and Scheffe tests were consistent, Rvalues <. 001yf 7 K H G L I I H U H Q F H E H W Z H H Q W K e incentive condition of experiment 1 and experiment 2 (financial incentives were in place in bothyf L V Q R W V L J Q L I L F D Q W S f. Regarding individuals’ incentives, the mean response score in the nonincentive condition in ex- periment 1 is significantly lower than that in the incentive condition in experiment 1 (p = .001yf D Q G L Q H [ S H U L P H Q W S f. No difference is found between the incentive condition of experiment 1 and experiment 2 (¿=.633yf . This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1241 TABLE 5 Results of One-Way ANCOVA of Performance Evaluations: Experiment 2 Business working experience as a covariate Moods 1 .070 .070 .000 .987 Business working experience 1 58.267 58.267 .220 .642 Error 29 7,667.671 264.402 Experience of evaluating others as a covariate Moods 1 1.191 1.191 .004 .947 Experience of evaluating others 1 21.631 21.631 .081 .777 Error Evaluation scores in experiment 2 were almost identical in the positive mood condition (mean = 56.50, std. dev. = 16.95yf D Q G Q H J D W L Y H F R Q G L W L R n (mean = 56.44, std. dev. = 15.09yf $ V S U H V H Q W H G L Q W D E O H W K H P D L Q H I I H F t of moods on performance evaluations was not significant in one-way AN- COVA using either business working experience or experience of evaluat- ing others as a covariate (main effect F < .005 in both modelsyf 7 K H U H V X O W s of experiment 2 indicate that, in the case of a four-perspective scorecard with eight measures in total, financial incentives were able to eliminate the mood congruency bias. Therefore, an eight-measure BSC seems to reflect an appropriate level of information load that enables financial incentives to correct for mood congruency bias. Given that participants in experiment 2 are less experienced than the participants in experiment 1, it is necessary to rule out the possibility that it is the difference in experience, rather than information load, that led to our findings in experiment 2. We combined data from experiment 1 (high information load condition with incentivesyf D Q G H [ S H U L P H Q W L Q – termediate information load conditionyf W R U X Q D [ $ 1 & 2 9 $ 7 K H I L U V t between-subject factor is information load, and the second is moods; evalu- ation scores for the BSC-based division are used as the dependent variable. The ANCOVA was run twice, once each with business experience and ex- perience of evaluating others as a covariate. The interaction of information load and moods was significant at the 5yb O H Y H O Z L W K E R W K F R Y D U L D W H V L Q G L – cating that results reported in table 5 cannot be attributed to differences in experience. Business experience and experience of evaluating others were not significant covariates. Although experiment 2 was conducted after experiment 1 (incentive conditionyf Z L W K D G L I I H U H Q W V D P S O H R I 0 % $ V W X G H Q W V W K H V H F R P E L Q H G U H V X O W s suggest that the rule of seven measures plus or minus two (Miller [1956]yf could be an important complexity factor. However, given that participants were not randomly assigned between experiment 1 (incentive conditionyf and experiment 2, a more conservative interpretation is that it remains for future research to establish whether incentives can eliminate the bias when four-perspective scorecards having more than eight total measures are employed. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1242 S. DING AND P. BEAULIEU 4. Conclusions Field and experimental accounting studies on the application of the BSC to performance evaluation provide evidence regarding its limitations, in- cluding: the common-measure bias (Lipe and Salterio [2000]yf W K H J U R X S – ing effect (Lipe and Salterio [2002]yf W K H R Y H U U H O L D Q F H R Q I L Q D Q F L D O P H D – sures (Ittner, Larcker, and Meyer [2003]yf D Q G W K H F R Q G L W L R Q D O X V H R f strategy-linked measures (Banker, Chang, and Pizzini [2004]yf 7 K L V V W U H D m of research indicates that effects of the BSC’s complex design on indi- viduals’ cognitive effort should be considered, especially in the perfor- mance evaluation context. Our study further examines this context by di- recting attention to another well-documented effect, the mood congruency bias. In experiment 1, we establish that mood congruent judgments are a re- liable phenomenon in an application of the BSC; this mood-congruency effect had been found in other decision-making research (Forgas [1995], Chung, Cohen, and Monroe [2008] yf D V Z H O O : H W K H Q H [ S O R U H Z K H W K H U a conventional element of MCS, monetary incentives, enables individuals to correct for mood congruency bias, and find that evaluation judgments us- ing a 16-measure BSC are susceptible to affective influences even in the presence of incentives to make benchmark-consistent judgments. In ex- periment 2, we show that financial incentives successfully eliminate mood congruency bias when a simplified BSC with only eight measures, but re- taining four perspectives, is employed. This result suggests that the critical aspect of information load is the upper limit of individuals’ processing ca- pacity (Miller [1956]yf 2 X U I L Q G L Q J L Q H [ S H U L P H Q W W K D W P R R G F R Q J U X H Q F y bias occurs even when only two financial measures are used for evaluation purposes also provides supporting evidence that information load is an im- portant issue to consider in the context of performance evaluations, as the evaluation task itself is complex and cognitively difficult. The results are also consistent with the existence of a boundary con- dition between autonomie responses in regions of the brain not subject to conscious control (described in Critchley [2005], Kerfoot, Chattillion, and Williams [2008]yf D Q G F R Q V F L R X V M X G J P H Q W L Q G H F L V L R Q P D N L Q J Z K H n anticipating gain. It may be that incentive response and mood correction were autonomie processes in the two- and eight-measure conditions, but at the level of complexity with 16 measures, correction cannot be autonomie. This is speculation now, but future judgment and decision-making research aided by advances in neural science may explore the boundaries between autonomie and deliberate bias correction. Future avenues may be explored to solve the information load problem associated with BSC applications. A limitation of this study is that it does not directly address judgment accuracy. Incentives to make judgments consis- tent with organizational benchmarks Were offered, as in Roch [2005] , but consistency is not equivalent to accuracy, which is difficult to determine This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms INCENTIVES IN BALANCED SCORECARD-BASED EVALUATIONS 1243 in performance evaluation contexts. Evaluation accuracy is sometimes judged in practice by correlating assessments with future performance of evaluatees (DeNisi and Pritchard [2006]yf E X W Z H F R X O G Q R W U H S O L F D W e this extended time frame in our experiment. Like Salvemini, Reilly, and Smither [1993] and Roch [2005], we employed “expert” ratings in our experiments as a benchmark, but we acknowledge that our panel of fac- ulty may not be experts at this task and it could be difficult to know the benchmark for performance evaluations in practice. Finally, we acknowl- edge that using financial incentives in performance evaluations could be a challenge. The experimental task excluded many performance evaluation duties, such as interactions with evaluation committees and those being evaluated. To the extent that feedback and complaints by the latter may deter evalua- tors from judging performance with bias, and that the performance review may involve interactions among members of the evaluation committee, the role of moods in influencing performance evaluations could be exagger- ated. To the best of our knowledge, the role of group decision processes in correcting mood congruency biases has not been studied. Beyond the topic of mood congruency bias in performance evaluation applications of the BSC, we make an original theoretical contribution to af- fect correction research by inserting the concept of MCS. We propose that one component of MCS, financial incentives, may provide enough moti- vation for decision-makers to overcome mood congruency bias without re- quiring them to acknowledge their moods, when information load is not too high. This represents a significant departure from extant research, in- cluding studies of affect in accounting and auditing. Financial incentives are just one component of MCS; other components, including budgets and organizational hierarchies, might also correct bias without requiring decision-makers to acknowledge their moods. Budgets and hierarchies impose accountability on decision-makers, and account- ability has been shown to affect social judgment (Tetlock and Kim [1987]yf , although its ability to attenuate the effects of emotions is complex and equivocal (Lerner and Gonzalez [2005]yf + R Z H Y H U D F F R X Q W D E L O L W K D V F R U – rected judgment biases involving accounting information (Dezoort, Harri- son, and Taylor [2006], Libby, Salterio, and Webb [2004], Webb [2002]yf . Financial incentives are one of the most frequently used and effective management control techniques (Bonner and Sprinkle [2002], Sprinkle [2003] yf E X W L W P D E H W K D W R W K H U R U J D Q L ] D W L R Q D O F R Q W U R O V F R U U H F W P R R G F R Q – gruency biases more effectively and efficiently. This content downloaded from 137.122.64.209 on Tue, 01 Nov 2022 23:08:28 UTC All use subject to https://about.jstor.org/terms 1244 S. DING AND P. BEAULIEU APPENDIX The Balanced Scorecardfor the TeenWear Division* Measure Target Actual Financial 1. Return on sales* 15 yb b 2. Sales growth 10yb b 3. New store sales 25yb b 4. Market share relative to retail space $80 $73.6 Customer-related 1. Repeat sales 30yb b 2. Customer satisfaction rating (1-1 00yf 7 3. Mystery shopper program rating (1-100yf 3 4. Returns by customer as yb R I V D O H V b 9.69yb Internal business processes 1 . Average major brand names/store 34 35 2. Returns to suppliers** 5yb b 3. Sales from new market leaders 25 yb b 4. Average markdowns** (average yb P D U N G R Z Q b 10.4yb from original retail priceyf Learning and growth 1. Hours of employee training/ employ ее 20 17.5 2. Average tenure of sales personnel (in monthsyf 2 3. Employee suggestions/ employee 8 9 4. 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Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scor
Each student will be responsible for preparing a summary and criticizing an academic article that deals with management control systems. Students MUST select the following study on the Balanced Scorecard. The article is attached called “The Role of Financial Incentives in Balanced Scorecard-Based Performance Evaluations- Correcting Mood Congruency Biases” Ding, S. and Beaulieu, P. 2011. The Role of Financial Incentives in Balanced Scorecard‐Based Performance Evaluations: Correcting Mood Congruency Biases, Journal of Accounting Research, 49(5), p.1223-1247. The article assignment is expected to: Provide the article’s title, source, and publication date. State the article’s major points [10 marks]. Explain the authors’ motivation for the article [10 marks]. Specify what major concepts from ADM4345 were discussed by the article [15 marks]. Comment whether or not the article provided you with additional understanding of these major concepts [10 marks]. Critically evaluate the application of the Balanced Scorecard (BSC) as a performance evaluation tool, using relevant theories, managerial practices, and/or your personal working experiences [40 marks]. Critically evaluate some extra studies on the BSC and discuss the implications of these studies on the application of this important MCS tool and their link to the final exam article. Extra studies on the BSC will be posted on Brightspace, but you may find additional articles by yourself through University of Ottawa’s library [10 marks]. You are not expected to comment on the article’s statistical analyses, if any. This article assignment should include a cover page and should be presented in size-12 font, 1.5 line spacing, with normal margins, and not more than 2,000 words plus no more than 2 appendices. The assignment is to be professionally written, using appropriate syntax, grammar, vocabulary, and spelling [5 marks]. Your signed Statement of Academic Integrity should be attached.