EC 7

Question 1

Cambell’s Law

Answer 1

The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt
the social processes it is intended to monitor.

Stated differently: if you start to measure relatively inaccessible strategic constructs then
people will overly focus on the measure and forget the strategy.

Question 2

Law of measure mangement

Answer 2

Measure management arises when performance measures capture strategic constructs with
error, the people being evaluated are aware of this fact, and people have discretion to distort
either operations or reporting

Question 3

Measurment error

Answer 3

The performance measure is an imperfect proxy for the underlying strategic construct

Question 4

Motivation

Answer 4

People are aware of the performance measures by which they are being evaluated and care about the evaluation

Question 5

Discretion

Answer 5

People have the ability to distort:
- The operations that generate the raw data used to
compute the performance measure (operational
measure management)
- How raw data are transformed into the performance
measure (opportunistic reporting)

Question 6

Surrogation

Answer 6

is the tendency of managers to lose sight of the strategic construct a performance measure is
intended to represent and
subsequently act as the measure is the construct of interest.

Question 7

Conditions to engage in surrogation:

Answer 7

1; the target attibute must be relativiely inaccessible
2; the heuristic attribute must be highly accessible
3; the substitution of the target attribute with the heuristic attribute must not be consciously rejected

Question 8

Incentivizing on the PM

Answer 8

Increases the accessibility of the compensated performance measure as a good substitute for the strategic construct of
interest (condition 3 of the framework becomes stronger)

Question 9

Incentivizing on one versus multiple PM

Answer 9

Highlights the limitations of any one performance measure as
a representation of a strategic construct of interest
(condition 3 of the framework becomes weaker)

Question 10

Information effect

Answer 10

When employees are involved in the strategy selection, they acquire information that helps them to better understand the strategy

Question 11

Motivation effect

Answer 11

Involvement in the strategy selection gives
employees a sense of ownership and increases the identification with the
organizational objectives

Question 12

Do we see more surrogation when employees are incentivized on a (or more) proxy
measures compared to when they receive a fixed compensation?

Answer 12

Yes

Question 13

Do we see less surrogation when employees are involved in the selection of the
strategy (and incentivized) compared to when they are not involved (and incentivized)?

Answer 13

Yes

Question 14

Do we see less surrogation when employees are asked to deliberate about the selected strategy (and
incentivized) compared to when they are involved in the selection of the strategy(and incentivized)?

Answer 14

No

Question 15

Narrative reporting

Answer 15

A narrative report is a supplement to objective
performance information in which employees explain
and justify the decisions they have taken in the past

Question 16

Economic Theory

Answer 16

A narrative report is ‘cheap talk’ and not credible. Employees will use the narrative report to justify their opportunistic behavior, they will only disclose the positive dimensions of performance or they will even falsify the performance

Question 17

Behavioral Theory

Answer 17

Employees are considerably more honest than economic
theory predicts and people are often unwilling to provide
false statements and withhold damning evidence.

Question 18

Material count

Answer 18

how much a
participants’ bets are biased
by material count, after
controlling for engine score
(the higher material count,
the higher the bias)

Question 19

How to adress measure management?

Answer 19

▪ Based on the Law of Measure Management
▪ Improving the performance measure
▪ Installing appropriate internal controls
▪ Increasing strategic saliency
▪ Using multiple performance measures
▪ Involving employees in strategy development
▪ Narrative reporting

Question 20

Compensation Effect

Answer 20

As the value of the
employee’s unit-specific
information is lower under
rotation, principals will pay
less for reported information about bias under rotation,

Question 21

Reporting Effect:

Answer 21

Because rotation increases the relative importance of the principal’s welfare
for the employee’s reporting decision, employees will report more under rotation.

Question 22

Cardinaels (2022)

Answer 22

• Improving performance measures through reducing the bias in performance measures
• Employees have the best information regarding the bias in the performance measure
• Because a lot of money is at stake for the employee, employees are often reluctant to report
  about the bias in their performance measures
• Rotating employees across business units has two beneficial effects:
• Compensation effect: rotation reduces the compensation owners provide for reported
  information (grounded in the reduced value of the unit-specific information)
• Reporting effect: rotation increases the information employees report about bias in their
  performance measures (grounded in other-regarding preference models)

Question 23

What does controlling focus on?

Answer 23

1. What can we do to obtain accounting information
   that better reflects reality? Let’s get the data right!
2. Supporting decisions that are taken based on
   accounting information.
3. Ensuring compliance with internal and external
   reporting rules

Question 24

McNamara fallacy

Answer 24

: If you can’t measure what is important, what you can measure becomes important.

Question 25

Campbell’s Law

Answer 25

The more any quantitative social indicator is used for social decision-making, the more subject it will be to
corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.