Organizational Architecture,Employee Performance Evaluation And Relational Contract

It is commonly accepted that middle managers,who are linkages between top managers and rank-and-file employees,are very important in hierarchical organizations.For example,they can coordinate the relationship between firm-level interests and department local interests,and carry out the incentive schemes which target on lower-level employees.Unfortunately,it is difficult or costly for companies to write a perfect handbook ex ante which can stipulate how middle managers and employees to cope with unexpected situations,hence,companies often delegate various discretions.For example,marketing managers can subjectively adjust the promoting tactics based on external environment.Manufacture managers can change production planning based on the change of raw material prices.Because of the limitation of datasets and research methodology,studies in management accounting field mainly focus on top managers,we little know about how middle managers behave.In contrast,the theory of organizational architecture insists that the design of organizational architecture needs to systematically consider three elements: the allocation of decision rights,the system of performance evaluation,and accounting information system.The development of information technology and business model drives organizational architecture to shift from pyramid-shaped to flat and multi-level structure,which in turn raises the importance of middle managers in allocating decision rights,evaluating employee performance,and transferring accounting information.Some scholars therefore suggest that researchers should pay more attention on middle managers in hierarchical organizations and understand how middle managers involve into and influence management practices(Feng,2000;Baiman,2014)?Our study experimentally explores the role of middle managers in hierarchical organizations.Specifically,we run two lab experiments to study how middle managers exercise their discretion for the purpose of accurately evaluating employee performance.Our experimental studies show the following findings.First,in the setting where employee actual contribution cannot be observed directly from accounting information system,i.e.,team-based works,middle managers can extract additional information via informal communication with employees,which helps managers to better evaluate employee individual performance.However,managers need to consider two factors when designing the polic of informal communication,information type and the timing.Prior to employees' effort decisions(Ex ante condition),managers should stipulate employees that they will communicate input-based information rather than output-based information.In contrast,after employees have started their jobs(Ex post condition),managers should stipulate employees they will communicate output-based information rather than input-based information.Mechanism level tests suggest that information type and the timing interactively influence employees' uncertainty concern about the criteria of performance evaluation,which in turn affects employees to expend effort..Second,middle managers can build relational contracts with employees which help managers to incentivize employees more efficiently.Specifically,in our lab experiment in which managers cannot fully rely on formal contracts to incentivize employees,and employee input cannot be observed directly from accounting information system.Repeated interactions allow managers and employees to understand each other's expectations and behaviors.That is,managers incur personal costs to acquire information about employee effort for the purpose of accurately allocating bonus to employees,employees reciprocate fair bonus with more effort.In this process,managers and employees can build relational contracts.Third,our study shows that the policies companies use to incentivize lower-level employees can hinder middle managers to build relational contracts,which in turn make companies' policies backfire.Specifically,after companies raise base salaries of employees,manages are unwilling to incur personal costs to acquire additional information and less likely to reward employees fairly,which in turn demotivates employees to increase their effort.Mechanism level tests show that the policy,raising employee base pay,changes the mutual expectation between managers and employees,which subsequently hinders the relational contracting.That is,after raising base pay,managers expect that employees less likely care about bonus allocation,therefore,managers reduce the tendency to acquire costly information about employee effort.In the same vein,employees expect that managers less likely to acquire additional information about employee input,therefore,it is less likely for employees to be rewarded fairly.Such expectation makes employees hesitate to work harder.In sum,we find that when companies raise base salaries for lower-level employees,such policy may backfire if companies ignore the unexpected intervention effect on relational contacting.Taken together,my study shows that middle managers play important roles in managing and incentivizing employees.This study implies that practitioners should take middle-level managers into account when designing organizational architecture,i.e.,the allocation of decision rights,performance evaluation system,and accounting information system.