Investigating the Determinants of Perceived Procedural Fairness in ...

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JAMAR Vol. 11 · No. 1 2013subordinates’ perception of fairness ofperformance evaluation processes. In doing so,he constructed three categories of performanceevaluation style: Budget Constrained (BC)style (budgetary information is used in a rigidmanner), Profit Conscious (PC) style(budgetary information is used in a moreflexible manner, and Non-accounting (NA)style (budgetary information is seen as beingof secondary importance). His resultsindicated that BC style is perceived as less fairthan the other styles. Otley (1978) replicatedHopwood’s (1972) study and found, contraryto Hopwood’s study, that supervisoryevaluative style is not significantly associatedwith perception of fairness of performanceevaluation processes.Lau and Moser (2008) examined the effect ofnonfinancial performance measures onsubordinates’ perception of proceduralfairness, arguing that their use may lead tohigher perceptions of fairness in performanceevaluation processes (procedural fairness).They also argue that nonfinancial measures aremore consistent with the procedural fairnessrules/criteria proposed by Leventhal (1980).Their findings show a positive associationbetween nonfinancial measure usage andprocedural fairness.Lau and Sholihin (2005) contended and foundthat both nonfinancial and financial measuresare positively associated with proceduralfairness, although the effect of financialmeasures on fairness was higher compared tothat of nonfinancial measures. This is incontrast with Hopwood’s (1972) finding thatthe effect of Non-Accounting style on fairnessis significantly higher than that of the Budget-Constrained style.A more recent study by Hartman et al. (2009)argues that the use of subjective performancemeasures is positively associated withprocedural fairness. However, their findingsdo not support this argument. Indeed,procedural fairness is associated with the useof objective performance measures.Hartmann and Slapnicar (2009) argue thatprocedural fairness is not affected byperformance measures or metrics used toevaluate subordinates’ performance but isaffected by the degree of formality in the useof the performance evaluation system. Theirempirical findings, however, show nosignificant association between formality andprocedural fairness.The foregoing summary of relevant priorstudies present a confusing, evencontradictory, picture of the antecedents ofprocedural fairness in PMERS. Given theimportance of this variable, as identifiedearlier by Anthony and Govindarajan (1998)and Kaplan and Atkinson (1998), the desire toclarify and better understand the determinantsof perceived procedural fairness providesstrong motivation for this study. In this paper,we investigate the determinants, orantecedents, of procedural fairness perceptionin performance measurement, evaluation andreward systems.This study is different from previous studies,particularly Sholihin and Pike (2009), in thefollowing ways. First, whilst Sholihin and Pike(2009) investigates the consequences ofprocedural fairness, this study investigates thedeterminants of procedural fairness. Second,the variables examined by Sholihin and Pike(2009) are procedural fairness, distributivefairness, trust, organisational commitment, jobsatisfaction, and managerial performance. Thevariables examined in this study areprocedural fairness, participation in targetsetting, transparency of the goal-attainmentrewardlink, goal specificity, financialmeasures, and nonfinancial measures. Third,whilst Sholihin and Pike (2009) employsorganisational justice theory, in this study weuse organisational justice and goal-settingtheories.Drawing on organisational justice literature(e.g. Lind and Tyler, 1988; Leventhal, 1980)and goal-setting theory (Locke and Latham,1990), this study argues that a manager’sperception of procedural fairness is influencedby goal-related variables in the form ofparticipation in setting performance targets,the goal-attainment-reward link, and thespecificity of goals to be achieved bymanagers; but is not affected by the form ofperformance measures used to evaluateperformance, whether financial (objective) ornonfinancial (subjective) measures, as arguedby Lau and Sholihin (2005), Lau and Moser(2008), and Hartmann et al., (2009).The proposition that procedural fairness isdetermined by the degree of participation intarget setting draws on the literature on30
JAMAR Vol. 11 · No. 1 2013procedural justice, which has consistentlyfound that disputants perceive the procedure asfair if they have process control (i.e. sufficientopportunity to present their case), oftenreferred to as ‘voice’ (Thibaut and Walker,1975; Folger, 1977; Lind and Tyler, 1988). Inaddition, participation is consistent withLeventhal’s (1980) procedural fairness rules.The goal-attainment-reward link is proposedas an antecedent of procedural fairnessbecause clarity and transparency are outlinedby Leventhal (1980) as important componentsof procedural fairness rules. In relation to goalspecificity, Lau and Sholihin (2005) argue thatthe adoption of specific performancemeasures, are more likely to give rise tospecific goals and targets for employees topursue, than where there are no specificperformance measures for performanceevaluation. The existence of specific goals andtargets, in turn, is likely to affect employeebehaviour because the specificity of goalsenhances the direction and clarity of tasks tobe performed and the roles of the subordinates.The rest of the paper is organised as follows.Section two will discuss literature review andhypotheses development. Section three,describes the research method employed inthis study. Section four will present findingsand discussions. This paper will be closed byconclusions, limitation and suggestion forfuture research in section five.Literature Review and HypothesesDevelopmentParticipation and Procedural FairnessIn this study, participation is conceptualised asparticipation in setting performance goals ortargets, which include financial andnonfinancial targets. This is a departure frommost previous accounting studies whichconceptualise participation more narrowly asbudgetary participation.Procedural fairness can be conceptualised asthe judgments on the fairness of social normswhich deal with how decisions are made andhow individuals are treated by authorities andother parties (Lind and Tyler, 1988). However,since this study specifically deals with theperformance measurement, evaluation andreward system, Folger and Konovsky’s (1989)definition of procedural fairness is adopted,namely, the perceived fairness of the meansand procedures used to determine the amountof reward or compensation employees receive,i.e. the fairness of all aspects of theorganisation’s procedures that are used by thesuperior to evaluate a subordinate’sperformance, to communicate performancefeedback and to determine the subordinate’srewards such as promotion and pay increases.Leventhal (1980) contended that theperception of procedural fairness will beaffected by six rules: consistency, biassuppression, accuracy, correctability,representativeness, and ethicality of theprocedures. The consistency rule states that tobe fair a procedure must be appliedconsistently across persons and across time.This implies that all parties have the samerights under the procedures and are treatedsimilarly, and that the procedure is enacted thesame way each time it is used. The biassuppressionrule stipulates that procedures arefair if the decision maker does not have avested interest in any specific decision, and ifthe decision maker is not influenced by priorbeliefs. The accuracy rule states that to be fairprocedures should be based on as much goodqualityinformation and informed opinion aspossible, while the correctability rule statesthat opportunities must exist to modify andreverse decisions made. Therepresentativeness rule stipulates that “allphases of the allocative process must reflectthe basic concerns, values, and outlooks ofimportant subgroups in the population ofindividuals affected by the allocative process”(Leventhal, 1980, pp.44-45). This rule isclosely related to power sharing andparticipatory decision making. Finally, theethicality rule states that to be fair, proceduresmust be compatible with fundamental moraland ethical values.Most of the above requirements for proceduralfairness can be promoted through participationin target setting. For example, participation isconsistent with the characteristics ofrepresentativeness, correctability, accuracy,bias-suppression and ethicality in that itpermits subordinates to reflect their concernsand values, gives opportunity to modifydecisions, can be used as a way of sharinginformation, provides opportunity forsubordinate managers to correct anyinappropriate prior beliefs held by theirsuperiors, and is consistent with the moralvalue that individuals should have the31
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