The Relative Use of Formal and Informal Information in The
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THE RELATIVE USE OF FORMAL AND INFORMAL INFORMATION IN THE EVALUATION OF INDIVIDUAL PERFORMANCE by GENE H. JOHNSON, B.B.A., M.S. in Acct. A DISSERTATION IN BUSINESS ADMINISTRATION Submitted to the Graduate Faculty of Texas Tech University in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY December, 1986 • //^,;¥ (c) 1986 Gene H. Johnson ACKNOWLEDGMENTS Funding for this research project was provided by the National Association of Accountants, and was especially beneficial in that it allowed the author to complete the project in a timely manner. Subjects for the project were provided by the research entity which must, for the sake of anonymity, remain unnamed. Nonetheless, their partici pation is greatly appreciated. Early conceptual development of the project was facilitated by a number of individuals, including the doctoral students and Professors Don Clancy and Frank Collins of Texas Tech University. Also helpful were the experiences of Louis Johnson, John Johnson, Sam Nichols, Darrell Adams, and Del Shumate. The members of the committee provided valuable guidance and support throughout the project; and although not a member of the committee. Professor Roy Howell provided valuable assistance with data analysis. Finally, Professor Donald K. Clancy served not only as committee chairman but also as a role model/mentor for the author. His participation made the project interesting, educational, and enjoyable. 11 CONTENTS ACKNOWLEDGMENTS ii ABSTRACT vi LIST OF TABLES viii LIST OF FIGURES ix I. INTRODUCTION AND BACKGROUND 1 Formal and Informal Information 2 Performance Evaluation 4 Purpose, Objectives, and Significance . 6 Organization 7 II. PREVIOUS STUDIES OF INFORMATION FOR PERFORMANCE EVALUATION 8 Goals and Goal-Directed Behavior 9 Early Studies on Performance Measures . 11 Budget-Based Studies 17 Contingency Theory 19 Agency Theory 21 Markets and Hierarchies 22 Managerial Performance Appraisal 25 Informal Information 30 Summary 3 3 111 III. DISCUSSION OF VARIABLES AND RELATIONSHIPS: MODEL DEVELOPMENT 36 Theoretical Perspective 36 Potential Explanatory Variables 41 Research Perspective 42 The Relative Use of Formal and Informal Information 44 Attitudes Toward Formal and Informal Information 45 Locus of Control 49 Role Stress 51 Leadership Style 54 Other Relationships Among Explanatory Variables 57 Variables of Interest: Summary 58 Hypotheses 59 The Research Model 61 IV. RESEARCH METHODOLOGY 64 A Two-Phase Field Study 64 Phase One: Development of the Instrument . 66 Phase Two: A Single-Entity Sample .... 73 Statistical Analysis - LISREL 78 V. EMPIRICAL RESULTS 86 Verification of the Research Constructs . 86 Demographics and Other Potential Explanatory Variables 100 iv Testing Hypotheses with LISREL 103 Tests of Hypotheses 105 Stress as an Endogenous Variable: A Fitted Model 109 VI. SUMMARY AND CONCLUSIONS 114 Summary of Findings 114 Implications of the Use of Informal Information 119 Implications of the Relationships Among the Variables 120 Policy Implications 121 Limitations of the Study 123 Suggestions for Future Research 124 REFERENCES 127 APPENDICES A. INTERVIEW SCHEDULE 138 B. QUESTIONNAIRE 140 C. ANALYSIS OF DEMOGRAPHIC VARIABLES 147 D. THE NULL MODEL 150 E. THE ATTITUDES MODEL 153 F. THE FITTED MODEL 156 V ABSTRACT Individual performance evaluation is a critical managerial function. Judgments of individual performance are evident in certain managerial decisions, such as those regarding the pay, promotion, and termination of subordinates. While much has been written about the measurement of performance and about performance-appraisal techniques, little is known about the information managers use in evaluating individual performance. Accordingly, this study was conducted for two reasons: 1) to study the extent to which informal information (unofficial, or "non-sanctioned") is used in individual performance evaluation, and 2) to examine the relationships among a number of explanatory variables and the relative use of formal and informal information. ' A questionnaire was used to measure the relative use of formal and informal information in performance-related decision making (the dependent variable), attitudes toward the information used (ATTITUDES), role stress, two dimensions of superior's leadership style (structure and consideration), and one personality variable (locus of control). The responses indicate that informal information \ vi is used relatively more than formal information in the | evaluation of individual performance. Further, the managers perceived the informal information easier to use and understand, more qualitative, and more confidential than the formal information. Covariance structural equations modeling (LISREL) was used to study the relationships among the research variables. As hypothesized, attitudes toward the information are strongly related to the relative use of formal and informal information. The hypothesized relationship between the research variable ATTITUDES and role stress, and the influences of leadership style and locus of control on stress are also supported. Not supported by the data, however, are the hypothesized relationships among the relative use of formal and informal information and role stress, leadership style, and locus of control, and the hypothesized relationships among ATTITUDES, leadership style, and locus of control. The findings suggest a discrepancy between the formally agreed upon rules of governance in organizations and the true system of rewards. Contractual disputes and other dysfunctional consequences are implied. However, another plausible explanation is that the informal information is necessary in order to compensate for the inadequacies of the formal information. Thus, the formal and informal information may be complementary. vii LIST OF TABLES 4.1: Non-Response Bias Test Results 77 5.1: Responses to RUFI Items 87 5.2: Tests For Differences in RUFI Responses .... 89 5.3: Correlations Among RUFI Responses 90 5.4: Responses to ATTITUDES items 93 5.5: Tests for Differences in ATTITUDES Responses . 95 5.6: Initial Factor Loadings: ATTITUDES 97 5.7: Promax Rotated Factor Loadings: ATTITUDES ... 98 5.8: Tests for Differences by Department 101 5.9: Tests for Differences by Faction 102 5.10: Tests of Direct Hypotheses 106 5.11: Preliminary Tests of Indirect Hypotheses . 108 5.12: Sequential Tests of Indirect Hypotheses .... 110 5.13: Total Effects: The Fitted Model 112 Vlll LIST OF FIGURES 3.1: Preliminary Theoretical Model 37 3.2: Theoretical Model 39 3.3: Research Model 63 4.1: The LISREL Model 81 4.2: LISREL Notation 83 4.3: LISREL Equations 85 5.1: The Fitted Model 113 6.1: The Research Model in Context 117 IX CHAPTER I INTRODUCTION AND BACKGROUND Individual performance evaluation is a critical managerial function. Many business decisions are influenced by evaluations of individuals' past performance and expectations of individuals' future performance. Generally, the accounting role in the performance evaluation process is through the use of accounting reports as measures of performance. However, the task of performance measurement is situational and decisions are made by individuals. Accordingly, the type of information obtained by an evaluator, and the extent to which each type of information is used in arriving at a decision vary from situation to situation and from individual to individual. Many organizations have attempted to structure the performance evaluation process (or related decisions such as pay, promotion, termination, etc.) by adopting policies, procedures, guidelines, and standards. These "formal" systems are designed to produce a performance report and are intended to support personnel decisions. However, the individuals who make the decisions are subject to a variety of influences such as additional information and the opinions of others. It is naive to assume that individuals rely strictly on the output of formal information systems when making performance related judgments and decisions. This study addresses the relative use of formal and informal (other) information in the evaluation of individual performance and the relationships among relative reliance on informal information and a number of potential explanatory variables. Formal and Informal Information Information can be classified in a variety of ways. In studying organizations it may be useful to classify information according to function (operations support, external reporting, decision support, etc.). It may also be useful to classify information as either formal or informal [Banbury and Nahapiet, 1979; Clancy and Collins, 1979; Dirsmith and Covaleski, 1985; Jiambalvo, Watson, and Baumler, 1983]. Formal information systems can be thought of as those "sanctioned" by senior management, the output of which becomes a part of "organizational awareness" [Clancy and Collins, 1979]. Formal systems are characterized by policies, procedures, and other documentation. A formal performance evaluation information system would frequently involve accounting and/or personnel department participation with performance represented numerically. Suggestions or guidelines as to the factors to be considered and the "weight" to be assigned to each factor when making performance judgments would often be included. The output of formal systems can be referred to as formal information. Accordingly, any other data relevant to a decision is informal information. Informal information systems need not be documented, sanctioned, or otherwise "official" in order to be relied upon.