Common Measure Bias in the Balanced Scorecard: an Experiment with Undergraduate Students

In the early 1990s, the balanced scorecard (BSC) was introduced as a new tool for performance evaluation that complements the traditional financial performance measures with three other categories of performance measures (customer relations, internal business, and learning and growth). In this study, I explore how the cognitive limitations of decision makers’ may prevent an organization to full benefit from the BSC. Observable characteristics of the BSC are examined (measures common to multiple divisions vs. measures unique to a particular division) that may limit decision makers in fully use the information provided by the BSC. This is tested using undergraduate students who were asked to compare two divisions of an organization on the basis of a BSC. These two divisions have different divisional strategies, and therefore the BSCs of these two divisions are different. Multiple BSCs with eight common measures and eight unique measures are used to compare the performance of the two divisional managers. In the experiment, the design of these BSCs is manipulated to test whether common measure bias is present. Previous research has found that decision makers tend to overweight the common measures of a BSC, which are used in the balanced scorecards of multiple divisions of an organization. Thus, these decision makers tend to ignore the unique measures of a BSC, which are the measures tailored to the strategy of that specific division. Overweighting the common measures and ignoring the unique measures instead, is called common measure bias. Over the last decade, much research has been conducted on eliminating common measure bias in the BSC. In the literature review eight studies that have examined common measure bias in the BSC were explored. The comparison of these studies has led to the identification of five factors that could attenuate common measure bias in the BSC. This study contributes to prior literature of common measure bias because in the previous studies almost all experimental participants (most often M.B.A. students) have full-time work experience, which could influence the perception about performance measures. The purpose of this study is to examine whether common measure bias as found in prior research holds in an experiment with undergraduate students to test whether they can be used for future research in managerial accounting. Based upon the literature review, three hypotheses are formulated. These three hypotheses are tested by means of an experiment with 207 undergraduate students with a mixed interest in management accounting. These students are trained in the use and design of the BSC, and could therefore be typified as knowledgeable decision makers with a theoretical understanding of the BSC. The experimental design of this study is based upon that of prior studies and asks students to evaluate the performance of two divisional managers from two separate divisions of the same organization. The balanced scorecards are manipulated to test whether performance on common and/or unique measures affect the overall judgment of decision makers. Furthermore, performance evaluation was linked to compensation decisions since it was aimed to test whether compensation decisions were affected by performance evaluations. This study provides evidence that decision makers with a theoretical understanding of the BSC and relatively less full-time work experience, also incorporate unique measures in their performance evaluation. Significant interaction effects are found for as well the common performance measures as the unique performance measures, which means that both the performance measures affect the evaluations of divisional managers. Furthermore, it is found that disaggregation of performance evaluation will attenuate common measure bias in the BSC. Also, it was found that compensation decisions (e.g. bonus allocations and promotion decisions) are affected by performance evaluation scores of divisional managers. Thus, this study complements in several ways to the existing literature: - No common measure bias was found for knowledgeable decision makers. - Disaggregation of the BSC will lead to more attention for measures unique to one division. - The BSC is particularly useful to link performance evaluation to compensation decisions. - Undergraduate students were found to be useful in managerial accounting studies. Practical implications are that when the decision makers are knowledgeable, the BSC is a useful tool for linking performance evaluation to compensation decisions. This thesis paves the way for researchers to use undergraduate students in future research on managerial accounting. They were found to be particularly useful, since they only have a theoretical understanding of problems in managerial accounting and do not have that much relevant work experience.