How incentives and subjectivity can undermine the use of balanced scorecard performance measures: An experimental investigation

Many companies strive to improve performance by adopting balanced scorecards (BSC) and rewarding employees for good performance on BSC measures. However, when Ittner, Larker, and Meyer (2003) analyzed an organization that ultimately abandoned its BSC initiative, they found that supervisors often underemphasized BSC measures when subjectivity was used to evaluate and reward their subordinates' performance. Understanding whether and how incentives and subjectivity might undermine BSC systems can prevent other organizations from facing the same fate. Using a 2x2 experimental design, I examine how performance measure commonality (common, unique) and alignment (aligned, misaligned) can lead both supervisors and their subordinates to underemphasize some BSC measures when incentives and subjectivity are used. Fifty-four graduate students were randomly assigned to roles as subordinates or supervisors with the respective tasks of allocating effort or evaluating subordinate performance. The results of a six-period interactive experiment suggest that supervisors emphasize those subordinate performance measures that are also assigned to the supervisor (i.e., aligned measures) a finding which is consistent with "the contagion effect" (e.g., Hopwood 1974 Ittner et al. 2003). The results also suggest that supervisors emphasize unique aligned measures over common aligned measures when there is a monetary benefit to so doing. While this finding is a function of the experimental design, it has real world implications and applicability. Specifically, the results suggest that that subjectivity in BSC management control systems might lead supervisors to engage in gaming behavior, a problem subjectivity was previously thought to fix (e.g., Ittner et al 2003). Moreover, this finding occurred despite the potential moderating effect of common measure bias (e.g., Lipe and Salterio 2000). As a practical implication of this study's findings, companies with failing BSC systems might be able to address performance measure misalignment and aggregation problems instead of abandoning the BSC initiative.