BEHAVIORAL RESEARCH IN ACCOUNTING

Volume 20, Number 2, 2008

pp. 5571

Behavioral Effects of Nonfinancial

Performance Measures: The Role
of Procedural Fairness
Chong M. Lau
The University of Western Australia
Antony Moser
The University of Western Australia
ABSTRACT: Recent suggestions that nonfinancial measures are essential to overcome
the inadequacies of traditional financial measures have led to the widespread adoption
of such measures. It is, however, unclear how employees react to these new measures.
This study hypothesizes that favorable employee behaviors will only occur if employees
perceive performance evaluation criteria as fair. It is therefore important to ascertain if
the use of nonfinancial measures as performance criteria is procedurally fair. Based on
a sample of 149 managers from the United Kingdom, the results indicate that the use
of nonfinancial performance measures was perceived as procedurally fair. We also find
that such perceptions are associated with higher organizational commitment which, in
turn, enhances employee job performance.
Keywords: nonfinancial measures; procedural fairness; commitment; performance.
Data Availability: Data are available upon request from the principal author, Chong M.
Lau.

INTRODUCTION

R
ecent developments in performance evaluation systems have advocated the use of
nonfinancial performance measures to overcome the inadequacies of traditional fi-
nancial measures (Kaplan and Norton 2001; Kaplan and Atkinson 1998). Financial
measures have been criticized as too late, too aggregate, and too one-dimensional in nature
to be useful (Kaplan 1984; Lynch and Cross 1991; Ittner and Larcker 1998). In contrast,
nonfinancial measures are considered broader, forward-looking, and useful for developing
and sustaining long-term competitive advantages (Kaplan 1983; Kaplan and Atkinson
1998).
This study seeks to explain how nonfinancial performance measures affect employee
behaviors. Specifically, it investigates if and how the use of nonfinancial measures affects
employee procedural fairness perceptions and how such perceptions translate into favorable
outcomes like high employee organizational commitment and job performance. Employee
performance appraisals are important to employees. Not only are their compensation pack-
ages, such as their remuneration, rewards, and promotions, closely linked to their perform-
ance appraisals, such appraisals are also a reflection of their success or failure. They affect

We are grateful to Rona Duthie for her assistance with the data collection. We thank the editor and two anonymous
referees for helpful comments and suggestions.

55
56 Lau and Moser

employees intrinsic values, such as their self-esteem and self-confidence (Kaplan and
Atkinson 1998). It should therefore not be surprising that employees are sensitive to their
performance appraisals including the type of the performance measures, such as financial
or nonfinancial, used to arrive at these appraisals (Kaplan 1984; Lipe and Salterio 2000;
Banker et al. 2004; Libby et al. 2004). Anthony and Govindarajan (1995, 567) note that
senior management can create the desired long-term versus short-term profit orientation
on the part of business unit managers ... by a judicious choice of financial and nonfinancial
criteria. Hence, the evaluation process, especially the evaluation criteria used, are likely
to have a significant effect on employees attitudes towards their organizations and their
jobs.
In this regard, the fairness of the evaluation system is likely to be a major determinant
of employee behaviors where a fair evaluation process is expected to result in favorable
employee commitment and performance (Lind and Tyler 1988; Lau and Lim 2002). Over
the past few decades, the passing of antidiscrimination legislation in many countries has
resulted in an entrenchment of justice. Employees are now more conscious of fairness and
equity on the job. They hold their superiors and their organizations accountable and re-
sponsible for their wellbeing, especially with regard to the provision of fair treatment for
their effort and performance. Kaplan and Atkinson (1998, 682) underscore the importance
of fairness in performance evaluation systems as follows: There are important behavioral
considerations that the performance measurement system must reflect. First and above
all, the individual must believe that the system is fair ... Absent this belief, the motiva-
tional potential of incentive compensation will be lost (emphasis added). Anthony and
Govindarajan (1995, 556) similarly suggest that top management should be aware that
objectives, goals and standards are likely to provide strong incentives only if the manager
perceives them as fair (emphasis added).Procedural fairness refers to the fairness of the
process or procedures used to determine these outcomes (Leventhal et al. 1980). In their
study on procedural fairness, Lind and Tyler (1988, 141) conclude that:
Wherever research has examined procedural justice it has been found that people
care about the fairness of procedures. People may give different weights to
various concerns as they decide in different situations what constitutes proce-
dural justice, but they appear always to make procedural justice judgments and
these judgments are always important to them. (emphasis added)
Because fairness in performance evaluation is a critical aspect of employee wellbeing
and the attainment of organizational objectives, it is useful to examine how employees who
are used to being evaluated by traditional financial measures react to nonfinancial measures,
particularly with regard to their perceptions of procedural fairness of nonfinancial perform-
ance measures.
Several issues are addressed in this study. First, would employees evaluated by nonfi-
nancial measures perceive such measures as procedurally fair or unfair? If they perceived
them as fair, would such fairness perceptions affect their relationships with their organi-
zations and, importantly, their job performance? Do nonfinancial measures affect employee
job performance directly or are their effects indirect through higher employees perceptions
of procedural fairness and higher level of employee organizational commitment? The next
section of the paper discusses the theoretical justification for the hypotheses developed to
address these issues. This is followed by a description of the method used and the presen-
tation of the results. The final section provides the conclusions and the limitations of the
study.

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 57

HYPOTHESES DEVELOPMENT
Figure 1 depicts the model used to investigate the research issues of this study. It
proposes that the use of nonfinancial measures as employee performance evaluation criteria
is associated with both procedural fairness and organizational commitment. These two var-
iables, in turn, are likely to be associated with improvement in employee job performance.
These relationships suggest that the effect of nonfinancial measures on employee organi-
zational commitment is indirect through procedural fairness. Further, the effect of nonfi-
nancial measures on employee job performance is indirect through (1) employee perceptions
of procedural fairness, and (2) employee organizational commitment.

Nonfinancial Measures and Organizational Commitment (Link A)

The model in Figure 1 proposes that nonfinancial measure use is associated with or-
ganizational commitment. Organizational commitment is generally defined in terms of the
strength of an individuals identification with and involvement in a particular organization
(Porter et al. 1974; Mowday et al. 1979). Jaros et al. (1993) offer three possible concepts.
The first concept is continuance commitment, which suggests that employees remain with
their organization because they need to. With normative commitment, employees stay be-
cause they feel they are obligated to. The third concept is affective commitment. Employees
with strong affective commitment remain because they want to. Affective organizational
commitment is the most widely adopted concept (Cohen 1993) and is also the one adopted
by our study.
Employees who are evaluated by nonfinancial measures are likely to be highly com-
mitted to their organizations. Nonfinancial measures are much less closely tied to the fi-
nancial reporting cycles than financial measures. Consequently, the two categories of mea-
sures are likely to differ considerably. Because of the requirements to produce general
purpose statements, financial reports have traditionally focused on (1) what can be measured
objectively, (2) what can be quantified in financial terms, and (3) financial outcomes (Ittner

FIGURE 1
Relationship between Nonfinancial Performance Measure Use and Employee
Behavioral Outcomes

Procedural
fairness
D
B
C

A Organizational E
commitment
Nonfinancial Managerial
measure performance
use

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58 Lau and Moser

and Larcker 1998; Fisher 1992). With respect to time horizon, because of the need to
produce periodic financial reports, financial measures are generally short-term measures
corresponding to monthly, quarterly, or annual reporting periods (Kaplan 1984). Because
of these preoccupations with objectivity, financial outcomes, and short-term horizon, finan-
cial measures may generally be (1) too narrow, (2) too aggregate, and (3) too myopic to
capture comprehensively employee effort and performance in broader and longer-term set-
tings (Kaplan 1983, 1984; Kaplan and Norton 2001). Performance evaluations based on
such criteria may be problematic.
In contrast, nonfinancial measures are generally less closely tied to the annual financial
reporting cycle. Hence, there may be fewer constraints from accounting regulations and
less pressure on time horizon. Consequently, these measures may be (1) expressed in
broader (nonmonetary) terms, (2) measured over a longer time horizon, and (3) tailor-made
to reflect individualized situations (Fisher 1992; Ittner and Larcker 1998; Banker et al.
2004; Libby et al. 2004). Such a wide diversity of possible measures (e.g., setup time and
defect rate) facilitates a greater focus on the causes as opposed to the outcomes of mana-
gerial actions. Problems are highlighted so that managers know where to focus their atten-
tion. Managers evaluated by such measures are likely to harbor favorable organizational
attitudes, including their commitment to the organization which uses such measures. Ac-
cordingly, we suggest the following hypothesis:

H1: The use of nonfinancial measures as performance evaluation criteria is pos-

itively related to subordinates organizational commitment.

Nonfinancial Performance Measures and Procedural Fairness (Link B)

The use of nonfinancial measures as performance evaluation criteria is likely to affect
employees judgments of fairness. There are two forms of fairnessdistributive fairness1
and procedural fairness. Procedural fairness is the concept of interest in this study. It has
been referred to as the judgments about the fairness of the means (Folger and Konovsky
1989, 115; Tang and Sarsfield-Baldwin 1996, 25) or of the rules and processes
(Greenberg and Folger 1983, 236) that superiors use to make decisions.
Employee perceptions of the fairness of the procedures used by others to evaluate their
performance are critical to their judgments of how fairly they are being treated. What makes
procedures fair? The literature suggests several fairness criteria including (1) completeness
and accuracy of information, (2) adoption of a long-term perspective, (3) correctability of
incorrect decisions, (4) retention of control over decisions, (5) consideration of the interests
of all parties, and (6) the manner in which people are treated (Leventhal 1980; Lind and
Tyler 1988). In the context of performance evaluation, employees will judge performance
evaluation procedures as fair if such procedures (1) lead to performance appraisals that are
based on complete and accurate information, (2) reflect their long-term interests, (3) contain
some provisions to appeal against and rectify unfair appraisals, (4) reflect performance
within their control, (5) protect their interests, and (6) indicate polite and dignified treatment
of individuals. The following sections address why nonfinancial measures are likely
to satisfy these fairness criteria.

1
Concepts of distributive fairness are based on the principle of equity. The allocation of benefits and costs within
a group should be proportional to the contributions of group members.

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 59

Because of the loose link with the financial reporting cycles, nonfinancial measures are
broad, long-term, and cause-focused. Such characteristics allow a broader spectrum of per-
formance to be measured. Financial measures are limited to what can be measured objec-
tively in financial terms, which tends to exclude or delay the effects of intangible invest-
ments (Kaplan and Norton 2001). The benefits of managers efforts expended to improve
intangible assets (e.g., investments in improving employees skills and customer relation-
ships) are generally excluded by financial measures. Nonfinancial measures provide the
means to overcome such inaccuracies by measuring intangible assets in nonmonetary terms.
This allows the intangible to be valued and ensures that managers efforts are more accu-
rately reflected.
Nonfinancial measures may also be more accurate in measuring performance that is
spread over several years. The benefits arising from operating managers efforts to enhance
organizational long-term viability in areas such as investment in innovation, future tech-
nologies and capabilities are generally not realizable within the annual financial reporting
cycle (Shank and Govindarajan 1994). Because financial measures may be constrained by
the annual financial reporting cycle, their use here may be problematic. In contrast, nonfi-
nancial measures are unconstrained by time considerations. They may therefore measure
employee long-term performance more accurately. Since accuracy and completeness of
information are fundamental fairness criteria (Leventhal 1980), employees may perceive
the use of such measures as fair procedurally.
Employee procedural fairness judgments may also be influenced by time period con-
siderations. The Self-Interest Theory of procedural fairness suggests that people are fun-
damentally concerned with self-interests (Lind and Tyler 1988). However, because they
may gain more in the long term if they engage in social interactions, the long-term effects
of group procedures may matter more to them than any possible short-term losses. This
suggests that procedural fairness judgment is influenced by long-term considerations. Be-
cause nonfinancial measures are unconstrained by time considerations, they are more useful
as a means for communicating long-term organizational goals, expectations, and results.
This allows employees to understand how their association with their organizations will be
paid off in the long term. They may therefore view long-term nonfinancial measures as fair
procedurally.
Procedural fairness judgments may also be enhanced if there are provisions for unfair
decisions to be rectified (Leventhal 1980; Lind and Tyler 1988). Because nonfinancial
measures are measured in nonmonetary terms, they may be interpreted in a more flexible
and subjective manner. Additionally, nonfinancial measures such as setup time and customer
satisfaction rates may be easier to understand than aggregate financial measures such as
efficiency variances (Johnson 1988; Fisher 1992). Given that (1) subordinates are likely to
have a better understanding of the appraisal criteria, and (2) the appraisals are subject
to flexible interpretations, the subordinates may be in a better position to seek explanations
about their performance appraisals and to submit alternative interpretations. This increases
the likelihood for unfair appraisals to be properly discussed, explained, and rectified.
The use of nonfinancial measures as evaluation criteria may provide employees with a
better sense of control over their performance appraisals and a means to protect their self-
interest. Leventhal (1980, 44) considered control an essential fairness criterion. Hence, even
though people have surrendered the final decision making to others, they still need to have
some control to protect their interests (Thibaut and Walker 1975). With financial measures,
employees may find it difficult to see the connection between their actions and financial
outcomes such as variances, which may have several causes, not all directly controllable

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60 Lau and Moser

by specific individuals. In contrast, because of the variety of nonfinancial measures which

may be created in nonmonetary terms, it is generally easier to develop measures that are
better reflections of the individualized situations of subordinates. Consequently, they may
have a better sense of control over what needs to be done to obtain favorable performance
appraisals.
Subordinates may regard the development of individualized measures as benevolent
action by superiors who care about their interests. The Group Value theory suggests that
procedural fairness judgments may be strongly influenced by the manner in which people
are treated (Lind and Tyler 1988). Procedures that enhance their importance in the group are
perceived as fairer than procedures that demean their importance. In the context of per-
formance evaluation, financial measure use may be perceived as too impersonal and seen
as a reflection of a mentality to assume that employees are not unique and can be evaluated
indiscriminately by inflexible numbers (Harrison 1993). In contrast, because nonfinancial
measures can be tailor-made to reflect their individualized situations, employees evaluated
by such measures may feel that they are treated with dignity as unique individuals by their
superiors. Consequently, they may perceive higher procedural fairness in nonfinancial mea-
sures use. Based on the above discussion, we suggest the following hypothesis:

H2: The use of nonfinancial measures as performance evaluation criteria is

positively related to subordinates perceptions (judgments) of procedural
fairness.

Procedural Fairness, Organizational Commitment, and Job Performance (Links C,

D, and E)
Procedural fairness is likely to engender favorable employee reactions including im-
proved organizational commitment and job performance (see C and D in Figure 1). There
are two theoretical explanations for this contention. First, Instrumental Theory (Thibaut and
Walker 1975) suggests that people are concerned mainly with receiving desired outcomes
(e.g., good appraisals, better remuneration, and promotions). They prefer fair procedures
because they are more likely to produce fair outcomes. The Self-Interest Theory proposed
by Lind and Tyler (1988) emphasizes such instrumental effects. This theory suggests that
people, motivated by self-interest, engage in social interaction to gain more in the long
term. However, with such social interactions, they may need to compromise their short-
term interest. In order to ensure that such sacrifices will pay off in the long term, they rely
on fair procedures. Fair group procedures simplify decision making by eliminating the need
to negotiate complex allocations to provide fair outcomes. This averts group conflicts and
tensions, promotes harmonious group relations, and hence prevents the break-up of the
group. Consequently, organizations that employ fair procedures are likely to enjoy a high
extent of loyalty, commitment, and good performance from their employees.
The second explanation is based on the noninstrumental effects of procedural fairness.
The Group Value Theory maintains that people value their relations with social entities, be
they individuals, groups, or organizations (Lind and Tyler 1988). They do so not merely
for economic but also for social and psychological reasons. The employment of fair pro-
cedures is akin to being dealt with in a dignified and respectful way, thereby bolstering
sense of self-worth within the group. Employees are therefore more loyal to groups that
employ fair procedures. In contrast, Lind and Tyler (1988, 239) note that with violations
of procedural fairness ... viewed as violations of basic group or individual values, we would

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 61

expect procedural injustice to be a potent source of anger and dislike with respect to
whoever is seen as producing the injustice.
Empirically, several studies document a positive association between procedural fairness
and organizational commitment (Cropanzano and Folger 1991; Kim and Mauborgne 1993).
Some studies also found an association between procedural fairness and job performance
(Cornelius 1985; Earley and Lind 1987). In a management accounting context, Libby (1999)
found high procedural fairness (combination of voice and explanation) to be positively
associated with performance improvements. Wentzel (2002) similarly found fairness per-
ception to be positively associated with performance through goal commitment. Hence,
both the instrumental and noninstrumental theories suggest that high procedural fairness
promotes organizational commitment and job performance. We therefore propose the
following:

H3: Perception of procedural fairness is positively related to organizational

commitment.
H4: Perception of procedural fairness is positively related to job performance.

Organizational commitment in turn may be associated with job performance (Link E).
Jaros et al. (1993) suggest that unlike continuance commitment that reflects a cold calcu-
lation of costs and benefits, affective commitment involves the formation of an emotional
bond. Employees who perceive procedural fairness in their organizations procedures are
likely to remain in their organization because they want to and not because they have to
or are obligated to. If employees choose to stay because they want to, they are likely to do
so because of their emotional attachment and loyalty to the organization. This implies a
strong belief and acceptance of their organizations goals and values and hence the will-
ingness to exert effort to achieve these goals to help the organization to be successful.
Hence, apart from a desire to maintain organizational membership, Porter et al. (1974, 604)
suggest that affective organizational commitment is characterized by a willingness to exert
considerable effort on behalf of the organization. Affective organizational commitment is
therefore likely to be positively associated with employee job performance. Several studies
have found such positive relationships (e.g., Mowday et al. 1979; Ferris and Larcker 1983;
Meyer et al. 1989). Based on the above discussion, we suggest the following hypothesis:

H5: Organizational commitment is positively related to subordinates job

performance.

The Indirect Effects through Procedural Fairness and Organizational Commitment

The discussion in the preceding few sections suggests the following. First, nonfinancial
measures may be related to employee organizational commitment (A in Figure 1). Second,
nonfinancial measures may be related to procedural fairness (B) which in turn may be
associated with employee organizational commitment and job performance (C and D).
Third, organizational commitment may affect employee job performance (E). These rela-
tionships suggest two important hypotheses. The effects of nonfinancial measures on em-
ployee organizational commitment may be indirect via procedural fairness. In addition, the
effects of nonfinancial measures on employee job performance may be indirect via proce-
dural fairness and organizational commitment. Thus:

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62 Lau and Moser

H6: The relationship between the use of nonfinancial measures as performance

evaluation criteria and subordinates organizational commitment is indirect
through procedural fairness.
H7: The relationship between the use of nonfinancial measures as performance
evaluation criteria and subordinates job performance is indirect through pro-
cedural fairness and organizational commitment.

METHOD
We collect survey data from a sample of organizations from Kompass, the United
Kingdom online database. We include only manufacturing organizations with more than
100 employees and an annual turnover of more than U.K. 75 million pounds. The selection
of manufacturing organizations provided some degree of control for industry. We select
relatively large-size organizations because accounting and control procedures tend to be-
come more sophisticated and specialized with increasing firm size. The development and
implementation of nonfinancial measures by themselves or in conjunction with financial
measures may be a relatively complex and time-consuming process. For this reason, it is
probable that only large organizations with significant managerial expertise and resources
will have the need and means to implement such systems. In order to avoid a potential bias
that could result from different levels of management, we target functional department
heads.
The selection criteria were met by 142 organizations, which we contacted to obtain the
names of their departmental heads to send the questionnaires. Six companies could not be
contacted and 33 were not willing to participate because their policies prohibited the dis-
closure of their managers names. Contact with the remaining 103 resulted in a list of 296
functional heads. In order to avoid a company bias, we select no more than four managers
from each organization. Consistent with previous studies, the selection of participants from
different functional areas allows the results to be generalized to different functional areas
(e.g., Hopwood 1972; Brownell 1982).
A questionnaire, together with a cover letter explaining the purpose of the study and
assuring confidentiality of responses, was mailed to each of the 296 selected managers. A
total of 158 responses were returned, which constitutes a response rate of 53.5 percent.
Seven of the responses were substantially incomplete and two were completed incorrectly,
which we excluded from the study, thus leaving 149 usable responses. To check for non-
response bias, we split the sample in half based on the response dates. Mean comparisons
for the variables used in the study indicate that there are no significant differences between
early and late responses (Oppenheim 1992).
The average functional head in our sample is about 45 years of age, has spent nine
years in the current job, and has 125 employees in their unit. These data suggest that the
respondents are generally high level and experienced managers in their organizations. The
mean score of the use of nonfinancial measures as performance criteria is 4.57 out of a
maximum of 7. One hundred and nine out of the 149 respondents reported nonfinancial
measures use scores in excess of the scale midpoint of 4. Selecting the highest mean score
from among the three nonfinancial perspectives (customer, internal business, and learning
and growth) for each respondent resulted in a much higher mean score of 5.53 for non-
financial measures use. These results indicate that the use of nonfinancial measures
for employee performance evaluation was prevalent in the organizations selected for our
study.

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 63

Measurement Instrument
Nonfinancial Measures Use
Because our study is designed to investigate the behavioral responses of individual
employees to nonfinancial measures use, we employ an instrument that measures the eval-
uation of individual employee performance rather the organizational or business unit per-
formance. Hopwoods (1972) instrument asks respondents: When your superior is evalu-
ating your performance, how much importance do you think he or she attaches to the
following items? (emphasis added). As this reflects individual rather than organizational
performance, we adopt this wording for our study.
The nonfinancial measures items are based on the performance measures of a Balanced
Scorecard. The Balanced Scorecard nonfinancial perspectives are customer, internal busi-
ness, and learning and growth. We employ 15 nonfinancial performance items based on the
generic measures suggested by Kaplan and Atkinson (1998). The five learning and growth
measures are employee satisfaction rate, number of employees trained, employee turnover
rate, number of innovations developed, and the adoption of new technology. The five in-
ternal business perspective measures are quality of output, defect rates, setup time, manu-
facturing cycle, and inventory level. The five customer perspective measures are number of
new customers acquired, response time to customers, number of customer complaints, num-
ber of overdue deliveries, and customer satisfaction rate. We use a seven-point scale for
each item.
Table 1 contains the results of a factor analysis with varimax rotation indicating that
the 15 items load on three factors, each with an eigenvalue greater than 1. The three factors

TABLE 1
Nonfinancial Measures: Factor Analysis Results and Cronbach Alphas

Internal Learning
Items Processes Customer and Growth
Rotated factor loadings:
Employee satisfaction rate 0.721
Number of employees trained 0.694
Employee turnover rate 0.840
Number of innovations 0.729
Adoption of new technology 0.789
Quality of manufacturing output 0.872
Defect rates 0.852
Setup times 0.890
Manufacturing cycle time 0.900
Inventory level 0.691
Number of new customers acquired 0.662
Response time to customers 0.828
Number of customer complaints 0.847
Number of overdue deliveries 0.742
Customer satisfaction rate 0.855
Eigenvalue 4.12 3.54 3.18
Variance explained 27.4% 23.6% 21.2%
Cronbach alpha 0.927 0.899 0.847

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64 Lau and Moser

correspond with the three different perspectives of the Balanced Scorecard. All items load
satisfactorily onto their respective perspectives, with loadings ranging from 0.662 to 0.900.
The Cronbach alpha for the 15 items is 0.910. These results support the internal consistency
of the instrument.
We calculate the mean for each perspective to obtain an overall nonfinancial measure
score per perspective, which are then averaged to obtain an overall mean. Table 2 presents
the descriptive statistics of this overall mean of nonfinancial measure use. The standard
deviation is 1.21 and the mean is 4.57, which is reasonably close to the scale midpoint of
4. The actual range of between 1.07 and 6.87 is close to the scale endpoints (i.e., 1 to 7).

Procedural Fairness in Performance Evaluation

We use McFarlin and Sweeneys (1992) instrument to measure the managers percep-
tions of procedural fairness. There are four items for which managers indicate on a five-
point Likert scale the fairness of the procedures used to evaluate performance, communicate
feedback, and determine pay raises and promotions. The overall procedural fairness score
derives from summing these four items. The factor analysis results in Table 3 on the four
items of this variable combined with the nine items from the organizational commitment in-
strument support the unidimensional nature of the four items for the procedural fairness
instrument. The rotated factor loadings for these four items range from 0.781 to 0.829 and
load on a single factor with an eigenvalue of 3.23 that explains 25 percent of the variance.
The four-item scale has a Cronbach alpha of 0.858. The mean score is 13.75 and the
standard deviation is 2.91.

Organizational Commitment
We measure this variable using Mowday et al.s (1974) instrument that comprises nine
items measured on a seven-point Likert scale. This instrument has been tested extensively
and used widely in both management accounting studies and other disciplines. Respondents
are asked to rate statements such as the following: I find that my values and this orga-
nizations values are very similar, I am proud to tell others that I am part of this orga-
nization, and I really care about this organization. Combining the nine items of this
variable with the four items from procedural fairness above, the factor analysis results in
Table 3 support the unidimensional nature of the nine items for the organizational com-
mitment instrument. All nine items load on one factor with an eigenvalue of 5.18 and
explain 40 percent of the variance. Only one item loads at 0.473, which is close to the 0.5
benchmark. The remaining item loadings range from 0.674 to 0.853. The scales Cronbach
alpha is 0.913. The mean is 44.65 and the standard deviation is 9.2.

TABLE 2
Descriptive Statistics

Theoretical
Range Actual Range
Variable Mean Std. Dev. Min Max Min Max
Nonfinancial measure use 4.57 1.21 1 7 1.07 6.87
Procedural fairness 13.75 2.91 4 20 6 20
Organization commitment 44.65 9.20 9 63 19 63
Managerial performance 5.60 0.73 1 7 4 7

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 65

TABLE 3
Factor Analysis Results for Procedural Fairness and Organizational Commitment

Organizational Procedural
Items Commitment Fairness
Rotated factor loadingsa:
OC1 0.693
OC2 0.722
OC3 0.473
OC4 0.674
OC5 0.853
OC6 0.829
OC7 0.825
OC8 0.782
OC9 0.781
PF1 0.808
PF2 0.829
PF3 0.814
PF4 0.781

Eigenvalue 5.18 3.23

Variance explained 40% 25%
a
OC Organizational Commitment item, PF Procedural Fairness item.

Managerial Performance
We use the Mahoney et al. (1963) instrument to measure managers performance. This
instrument requires managers to rate nine dimensions of performance: planning, coordi-
nating, evaluating, investigating, supervising, staffing, negotiating, representing, and overall
performance. According to Brownell (1982), this instrument is able to capture the multi-
dimensional nature of performance without introducing excessive dimensionality. We base
the performance score for our study on the overall performance of the respondents. This
approach is consistent with previous studies (e.g., Brownell 1982; Kren 1992; Lau. et al.
1995). In order to ensure that the overall performance score is a reflection of the subdi-
mension scores, we regress the eight dimensions of performance on the overall performance
score. The results indicate that the eight dimensions account for 57.7 percent of the vari-
ations in overall performance, which is slightly higher than the 55 percent benchmark
suggested by Mahoney et al. (1963). Accordingly, we use the overall performance scores
to test the hypotheses pertaining to managerial performance.

RESULTS
This study investigates whether the relationships between nonfinancial performance
measures use and employee organizational commitment is indirect through procedural fair-
ness. It also examines if procedural fairness and organizational commitment mediate the
relationship between nonfinancial measures use and managerial performance. Structural
equation modeling is the appropriate technique to analyze these hypothesized relationships.
We use AMOS for the structural equation analysis.

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66 Lau and Moser

Tests of compliance with the assumptions of multivariate analyses indicate that the data
are normal and homoscedastic and the residuals are randomly distributed. As different
managers completed the surveys, free of influence from one another although sometimes
within the same organization, the data are reasonably independent.
We assess the goodness of fit of the structural equation models by the comparative fit
index (CFI), which is 0.931, the IFI (delta2) which is 0.932 and the TLI (rho2) which is
0.916. These fit indices are all higher than the recommended 0.9 benchmark (Segars and
Grover 1993; Hartwick and Barki 1994; Bentler 1995), thus indicating acceptable model
fit. Consequently, we use the standardized direct effects (path coefficients), the standardized
indirect effects, and the standardized total effects generated by the structural equation for
hypotheses testing.
Tests of H1 to H5
Table 4 presents the correlations among the variables in Figure 1. It indicates that the
correlation coefficients of the relations between (1) nonfinancial measure use and organi-
zational commitment (H1, r 0.396, p 0.01), (2) nonfinancial measure use and proce-
dural fairness (H2, r 0.290, p 0.01), (3) procedural fairness and organizational com-
mitment (H3, r 0.537, p 0.01), (4) procedural fairness and job performance (H4, r
0.346, p 0.01), and (5) organizational commitment and job performance (H5,
r 0.370, p 0.01), are all significant and in the predicted direction. These results provide
support for H1 to H5. They also provide the justification for further analysis of the data to
test H6 and H7.
Tests of H6 and H7
According to H6, the relationship between nonfinancial measures use and subordinates
organizational commitment is indirect through procedural fairness. From H7, the relation-
ship between nonfinancial performance measures use and subordinates job performance is
indirect through procedural fairness and organizational commitment. In order to test for the
intervening effects of procedural fairness and organizational commitment, it is necessary to
ascertain the direct and indirect effects. We obtain the standardized direct effect (path
coefficients), standardized indirect effects, as well as the standardized total effects of
the various relationships in Figure 1 from the outputs of AMOS as shown in Table 5 and
Figure 2.
The results in Table 5 indicate that, first, nonfinancial measures use is positively and
significantly related to organizational commitment as indicated by the total standardized
effect of 0.385 (p 0.01). Of this total effect, the direct effect is 0.218 and the indirect ef-
fect through procedural fairness is 0.167. This also can be computed from the path coef-
ficients in Figure 2 as follows: nonfinancial measure use minus procedural fairness minus

TABLE 4
Correlation Matrix among Independent and Dependent Variables

Procedural Organizational Managerial

Fairness Commitment Performance
Nonfinancial measures use 0.290***a 0.396*** 0.276***
Procedural fairness 0.537*** 0.346***
Organizational commitment 0.370***
a
*** p 0.01 (two-tailed).

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 67

TABLE 5
Standardized Direct, Indirect, and Total Effectsa

Independent Dependent Standardized Standardized Standardized

Variable Variable Direct Effects Indirect Effects Total Effects
Nonfinancial Fairness 0.312 0.312
Nonfinancial Commitment 0.218 0.167 0.385
Fairness 0.536 0.536
Nonfinancial Performance 0.134 0.143 0.277
Fairness 0.221 0.103 0.324
Commitment 0.193 0.193
a
Based on AMOS Version 7.0 (Arbuckle 2006).

FIGURE 2
Standardized Direct Effectsa

Procedural
fairness

0.221**
0.312***
0.536***

0.218** Organizational
commitment 0.193**
Nonfinancial Managerial
measure performance
use

0.134

a
** = p < 0.05; *** = p < 0.01.

organizational commitment 0.312 0.536 0.167. According to Pedhazur (1982, 617)

and Bartol (1983, 809), an indirect effect in excess of a magnitude of 0.05 can be considered
meaningful. As the indirect effect through procedural fairness is well above this threshold,
it is considered meaningful. Hence, H6 is supported.
The results in Table 5 also indicate that the standardized total effect of nonfinancial
measures use on managerial performance comprises both direct and indirect effects. The
direct effect is 0.134 and the indirect effect is 0.143. Using the path coefficients from Figure
2, this indirect effect can be decomposed into the portion attributable to procedural fairness
and the portion attributed to organizational commitment as follows:

Behavioral Research in Accounting, Volume 20, Number 2, 2008

68 Lau and Moser

Path (1) NF PF MP 0.312 0.221 0.069

Path (2) NF PF OC MP 0.312 0.536 0.193 0.032
Path (3) NF OC MP 0.218 0.193 0.042 0.074
Indirect effect 0.143
Direct effect 0.134
Total effect 0.277

The results indicate that the indirect effect through procedural fairness is 0.069. The
indirect effect through organizational commitment is 0.074. As both again are above
the meaningful threshold of 0.05, they are presumed meaningful. Hence, H7 is supported.

DISCUSSION AND CONCLUSION

This study focuses on the process by which the use of nonfinancial measures as per-
formance evaluation criteria affect employees behaviors including their fairness judgments,
organizational commitment, and job performance. It also attempts to evaluate the role of
procedural fairness in these relationships. Specifically, it addresses the question of (1)
whether the effects of nonfinancial measure use on employee organizational commitment
is indirect through procedural fairness, and (2) whether the effects of nonfinancial measures
use on employee job performance is indirect through procedural fairness and organizational
commitment.
The results indicate that nonfinancial measures use is associated with improvement in
employee organizational commitment and job performance. The results also indicate that a
substantial portion of these effects is indirect through the enhancement of employee per-
ceptions of procedural fairness. This leads us to draw the following inferences.
First, the use of nonfinancial measures as employee performance evaluation criteria can
be beneficial, as it appears to enhance both employee organizational commitment and job
performance. Second, the use of nonfinancial measures as performance evaluation criteria
also appears to be perceived as procedurally fair by employees whose performances are
evaluated by such measures. This conclusion is based on the substantive indirect effects of
nonfinancial measure use through procedural fairness.
The effects of nonfinancial measures use on employee job performance appear to occur
through two distinct processes. First, nonfinancial measure use affects procedural fairness,
which then affects organizational commitment, which in turn affects managerial perform-
ance. This indicates that employees who are evaluated by nonfinancial measures perceive
the evaluation procedures as fair. Employees who perceive the evaluation procedures as fair
experience higher commitment with their organizations and, consequently, appear to per-
form better. These results suggest that the effects of procedural fairness on employee job
performance are dependent on the enhancement of employee organizational commitment.
The second process by which procedural fairness affects employee job performance is as
follows. Nonfinancial measures use affects procedural fairness, which in turn influences
employee job performance. Unlike the aforementioned effects, these effects are independent
of organizational commitment. These results underscore the importance of fairness in or-
ganizational procedures. The effects of nonfinancial measures use may be attributable to
the perception of higher procedural fairness of the organizations performance evaluation
procedures. The overall conclusion, then, is that the use of nonfinancial measures as per-
formance evaluation is beneficial.

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Behavioral Effects of Nonfinancial Performance Measures: The Role of Procedural Fairness 69

The studys findings have important practical and theoretical implications. First, the
results highlight the importance of maintaining fairness in the workplace, particularly with
respect to employee performance evaluations. Management accountants should ensure that
performance evaluation procedures are designed to be fair. This will help to promote fa-
vorable employee behaviors. From a theoretical perspective, the results support both the
self-interest and the group value theories of procedural fairness. Lind and Tyler (1988, 232)
suggest that because procedures are very important aspects of the perceptions of groups,
evaluation of procedures ... would be expected to have strong effects on group relevant
attitudes (emphasis added). Our results indicate that evaluation of institutions, as measured
by the level of employee commitment to the organization, is not only an important outcome
of procedural fairness judgments, but also serves as the intervening variable through which
procedural fairness affects job performance. Finally, our study highlights the role of non-
financial measures in promoting workplace fairness. While research on the consequences
of procedural fairness helps practitioners to appreciate the importance of procedural fair-
ness, research on the antecedents of procedural fairness is even more useful as it demon-
strates to practitioners how procedural fairness can be enhanced. In this regard, most prior
management accounting studies that investigate fairness issues have focused primarily on
how employee participation, particularly in the budget-setting context, enhances procedural
fairness (e.g., Libby 1999; Lindquist 1995; Wentzel 2002; Lau and Tan 2006). In contrast,
the role of nonfinancial measures in enhancing procedural fairness has generally been over-
looked. Hence, the results of our study may provide some insights into how these increas-
ingly popular measures can be used to enhance fairness in the workplace.
There are a number of limitations associated with this study. First, while care was taken
to obtain a representative sample, bias in the sample may still occur. For instance, there
may be a higher likelihood for those who generally have good experiences with their
performance measurement systems to respond than those with poor experiences. Second,
problems of error in measurement may occur because of our reliance on self-reported
performance measures. Finally, our study has focused only on fairness issues; namely,
perception of procedural fairness so that the role of fairness in the context of nonfinancial
measures can be better understood. It is likely that there are other variables that may have
important intervening effects. The existence of such intervening effects is evident from our
results. Note that while the magnitudes of the indirect effects found in our study are sub-
stantial, they are unable to account for all the effects of performance measure use on
employee behaviors. This is not surprising as employee behaviors are likely to be affected
by more than fairness considerations. Variables such as the business strategy employed and
the extent of employee involvement in the selection of performance measures may also
have intervening effects. As always, this leaves opportunities for further research in this
important and relevant area.

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