003-Baird 2012 Performance Management System Effectiveness in Australian Local Government - 2

Pacific Accounting Review
Performance management system effectiveness in Australian local government

Kevin Baird Herbert Schoch Qi (James) Chen
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Kevin Baird Herbert Schoch Qi (James) Chen, (2012),"Performance management system effectiveness in
Australian local government", Pacific Accounting Review, Vol. 24 Iss 2 pp. 161 - 185
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PMS
Performance management system effectiveness
effectiveness in Australian local
government
161
Kevin Baird, Herbert Schoch and Qi (James) Chen
Department of Accounting and Corporate Governance,
Macquarie University, Sydney, Australia
Abstract
Purpose The purpose of this paper is to examine the association between three organizational
factors (the use of multi-dimensional performance measures, link to rewards, and training) and three
organizational culture dimensions (innovation, outcome orientation, and teamwork) with the
effectiveness of performance management systems (PMSs).
Design/methodology/approach Data were collected by survey questionnaire from a random
sample of 450 Australian local governments.
Findings The performance management systems of Australian local councils are only moderately
effective in relation to performance related outcomes, and less effective in relation to the achievement
of staff related outcomes. The results indicate a significant relationship between the use of
multidimensional performance measures, link of performance to rewards, training and two
organizational culture factors (team work/respect for people and outcome orientation) with the
effectiveness of PMSs. Different factors were found to influence the effectiveness of PMSs for large and
small sized councils.
Practical implications The findings imply that there is a need for the managers of local
government councils to improve the effectiveness of their PMS.
Originality/value The study provides an initial empirical examination of the effectiveness of
performance management systems and the influential factors in the Australian local government
context. The study assists local government managers in effectively managing their employees and
operations.
Keywords Performance management system, Multi-dimensional performance measures,
Local government, Culture dimensions, Organizational dimensions, Performance management, Australia
Paper type Research paper
1. Introduction
A performance management system (PMS) enables organizations to plan, measure and
control their performance, so that decisions, resources and activities can be better
aligned with strategies to achieve desired results (Bento and Bento, 2006). The PMS
also provides a means of recognizing and rewarding good performance and managing
poor performance (Australian Public Service, 2001). By incorporating explicit
standards and measures of performance, a PMS facilitates an enhanced focus on
outcomes and avoids goal conflict and ambiguity (Brunetto and Farr-Wharton, 2005;
Hood, 1991).
An effective PMS is one which successfully achieves these and other objectives Pacific Accounting Review
Vol. 24 No. 2, 2012
identified in the literature. There is evidence that an effective PMS can lead to pp. 161-185
improved organizational performance (Bevan and Thompson, 1991) and contribute to q Emerald Group Publishing Limited
0114-0582
other important outcomes such as improved employee involvement, commitment and DOI 10.1108/01140581211258461
PAR motivation (Taylor and Pierce, 1999). An effective PMS can also assist with
24,2 restructuring organizations (Weiss and Hartle, 1997), and enhancing their ability to
recruit, deploy, develop and retain employees (Fletcher and Williams, 1992).
Given the importance of PMSs (McAdam et al., 2005), this study is motivated to
examine the factors related to the effectiveness of a PMS. Specifically, the study
attempts to ascertain the organizational and cultural factors that are conducive to
162 enhancing the effectiveness of PMSs, by examining the association between three
organizational factors (use of multi-dimensional performance measures, link of
performance to rewards, and training) and three aspects of organization culture
(innovation, outcome orientation, and teamwork) with the effectiveness of PMSs.
These associations are explored in the context of the Australian local government.
The local government in Australia has expanded significantly in the last few decades.
For instance, the annual expenditure by local government in Australia is about
$24 billion, allowing it to provide a wider range of services and to take on a greater role
than ever before in economic and social development and environmental management
(Australian Local Government Association, 2006). The focus on the Australian local
government is also considered appropriate given the significant reforms undertaken as
policy makers attempt to enhance the efficiency of municipal service delivery (Dollery
and Johnson, 2005).
This Australian local government based study is mirrored by a number of
performance management related studies in other countries, thus giving credence to the
importance of examining PMSs in the public sector on an international scale. For
example, Walker and Boyne (2006) and Andrews et al. (2005) undertook studies of
English local government that examined the impact of public management reform
variables on organizational performance; in a USA context, Melkers and Willoughby
(2005) examined models of performance measurement use in a cross section of local
governments. Sanderson (2001) suggests that public sector reforms are taking place
throughout OECD member states, with a strong emphasis on performance management.
Brignall and Modell (2000) use the context of the new public sector. which calls for
greater efficiency and effectiveness in the UK and Scandinavian public sectors, to
examine implementation of multi-dimensional performance measurement and
management. Finally, in a Norwegian context, Johnsen (1999) explored the
implementation success of performance measurement in local government in that
country. The level of international interest in public sector reform, PMSs and their
effectiveness, further highlights the importance of ascertaining the factors that
contribute to PMS effectiveness.
This study has two objectives:
(1) To examine the association between specific organizational and cultural factors
with the effectiveness of PMSs.
(2) To evaluate the effectiveness of PMSs in Australian local governments.
The remainder of the paper is structured as follows. Section 2 reviews the existing
literature on PMSs, discusses the association between the organizational and cultural
factors and the effectiveness of PMS, and develops the relevant hypotheses. Section 3
discusses the research method used and describes the measurement of the variables,
and Section 4 provides the results. Finally, Section 5 provides the conclusions,
limitations and the suggestions for future research.
2. Literature review PMS
2.1 Performance management systems effectiveness
A PMS is a system that covers all aspects of performance that are relevant for the
existence of an organization as a whole. The PMS should provide management with an
insight into how well the organization is performing its tasks and to what extent the
organizational objectives are achieved (Flapper et al., 1996, p. 27). This can involve
motivating, monitoring, controlling, and rewarding employees for attaining desired 163
outcomes (Lawler, 2003). The PMS is aimed towards enhancing the performance of
individuals and units, with the ultimate purpose of improving organizational
effectiveness (Biron et al., 2011, p. 1294). It contributes to aligning the interests of
employees and management by providing a clear indication of the strategic direction of
the organization (Becker et al., 2011, p. 255).
A PMS is broader than a performance measurement system in that performance
management precedes and follows performance measurement in a virtuous spiral and

performance management creates the context for measurement (Lebas, 1995, p. 34).
PMSs are a means of executing organizational strategy by signaling to employees what
is really important in the organization, fixing accountability for behavior and results,
and helping to improve performance (Biron et al., 2011; Bae, 2006). PMSs have been
advocated as an important means of improving public services (through increased
efficiency and effectiveness in service delivery) and reinforcing accountability (Audit
Commission, 1999). Furthermore, PMSs can be used to improve employee involvement,
commitment and motivation (Bevan and Thompson, 1991), and act as a communication
tool to provide feedback on employees contributions to achieving organizational goals
(Cheng et al., 2007).
Following the introduction of the new public management reforms in the public
sector and the corresponding increased focus on efficiency, effectiveness, and
accountability, the PMS has become increasingly important (Melo et al., 2010).
In particular, Melo et al. (2010) refer to the increasing focus on PMSs in public sector
organizations throughout OECD countries.
2.2 The effectiveness of PMSs

This study is aimed at providing an empirical insight into PMS effectiveness, and
hence incorporates the approach used by Lawler (2003). Specifically, PMS effectiveness
is assessed in respect to the extent to which 17 specific objectives of performance
management are achieved (Appendix) with Lawlers (2003) items adjusted to reflect
the local government environment. Hence, an effective PMS is defined in terms of the
achievement of the PMS objectives identified in the literature.
While many studies have provided definitions of a PMS (Armstrong and Baron, 1998;
Storey and Sisson, 1993), few studies have examined the effectiveness of PMSs
(Biron et al., 2011; Padovani et al., 2010; Lawler, 2003). While the first two of these studies
adopted a case study approach, Lawler used a survey to examine the association
between the link between performance appraisal and salary and forced employee
performance ranking systems, with PMS effectiveness. Lawler (2003) surveyed
Fortune 500 companies and found that the link to rewards (forced distribution) had a
positive (negative) impact on PMS effectiveness.
The study examines the factors that influence the effectiveness of a PMS including
the use of multi-dimensional performance measures, the link of performance to rewards,
PAR the level of training and organizational cultural factors. The nature of each of these
24,2 relationships is discussed in the following sections.
2.2.1 Multi-dimensional performance measures. While traditional performance
measures are useful under relatively stable conditions (Malina and Selto, 2001) they are
considered inappropriate given the changes in local government. For instance, local
governments are increasingly adopting a more commercially oriented managerialist
164 approach, termed the new public management (Watty et al., 2008; Houston et al., 2006;
Bellamy et al., 2003). With an increasing focus on efficiency and effectiveness, a broader
set of performance measures is required to support the requirements of the changing
local government environment. Hence, organizations are increasingly looking to adopt
an improved performance measurement system, one which focuses on different aspects
of the organization and is aligned with the organizational strategy (Tardivo and
Viassone, 2010).
Financial measures fail to capture most of the intangible value that an organization
has or can create (Soderberg, 2006). For example, in local government, the focus is not
profit maximization, with customer satisfaction and the efficiency of internal processes
considered to be much more important. Traditional financial measures have also been
criticized for focusing mainly on what has transpired in the past rather than what
needs to be done in the future (Soderberg, 2006). Furthermore, traditional measures do
not provide decision makers with sufficient information to manage their organizations
(Atkinson et al., 1997; Kaplan and Norton, 1996, 1992).
Johnson and Kaplan (1987) recognized that traditional financial performance
measures are not only provided too late to aggregate, but also provide poor proxies for
aspects that matter to customers, such as quality and speed of delivery. As a result,
a number of multi-dimensional performance measurement systems including the
balanced scorecard (Kaplan and Norton, 1992), the performance pyramid (Lynch and
Cross, 1991) and the results and determinants framework (Fitzgerald et al., 1991) have
been developed. It is claimed that these multi-dimensional performance measurement
approaches lead to more effective performance management in the nonprofit sector
(Becker et al., 2011; Kaplan, 2001). Among these systems, the balanced scorecard (BSC) is
argued to be the most popular (Maltz et al., 2003) with organizations in both the private
and public sector using it as a tool for performance improvement (Chan and Ho, 2000;
Hoque and James, 2000). Accordingly, this study operationalizes the use of
multi-dimensional performance measures in respect to the extent to which
organizations use measures relating to the five perspectives of the BSC: financial,
internal, customer, learning and growth, and environment.
The effectiveness of PMSs in local governments is expected to be enhanced by the use
of a multi-dimensional performance measurement system for a number of reasons. First,
in the local government sector, objectives are often stated in non-financial terms.
Financial reporting will therefore not fully capture performance, and hence the use of
non-financial performance measures can provide a more accurate assessment of
performance (Guthrie and English, 1997). Second, multi-dimensional performance
measures can also support a local governments strategy (Kloot, 1999). Long-term
survival of an organization is linked to its chosen strategy and short-term financial
results cannot adequately support the strategy. For example, a study of a local
government child-care organization indicated that multi-dimensional performance
measures are needed to implement strategy (Brignall, 1993). Third, Kaplan and Norton
(1992, 1996) argue that by using multiple performance measures, the BSC provides a PMS
comprehensive view of an organizations performance. Local government is also effectiveness
accountable to a variety of stakeholders, hence, it is necessary to provide different
perspectives of performance to enhance service delivery and better resource allocation.
The use of multi-dimensional performance measures, as part of a PMS, can result in
more accurate and meaningful measurement of performance, provide a stronger
strategic focus for local government, encourage appropriate employee behavior and 165
provide management with better information for decision making purposes, thereby
assisting local governments in achieving their goals. Martinez and Kennerley (2010)
refer to a number of survey studies highlighting the positive effect of a balanced PMS
on organizational performance. Hypothesis 1 is therefore stated as follows:
H1. The extent of use of multi-dimensional performance measures is positively
related to the effectiveness of PMSs.

2.2.2 Link of performance to rewards. Swiss (2005) argued that information and
capacity to improve without performance based rewards will often lead to inertia. For
example, if a manager or front-line worker has information that indicates a shortfall in
expected results, but they are not motivated to take responsibility to improve results,
such information is of little value. This may explain why some employees pay little
attention to results. A number of studies have examined the importance of and
the benefits of linking performance to rewards in order to motivate employees to
improve performance (Rynes et al., 2005; Swiss, 2005; McShane and Travaglione, 2003;
Lawler, 2003; Fletcher and Williams, 1992). Rewards not only motivate individuals due
to their economic needs, but also serve to meet psychological needs, such as security,
status, and feedback about achievement (Gerhart and Rynes, 2003).
There are many benefits of linking performance to rewards. First, superior
performers will feel valued if they are equitably compensated for their efforts, and they
are less likely to leave the organization (Rollins, 1988). This is an important
consideration, since research has shown that high performers are likely to seek
alternative employment if their performance is not sufficiently rewarded (Trevor et al.,
1997). Second, the reward system has an important role to play in aligning interests by
motivating employees (Lawler, 2003) to achieve strategic goals (Becker et al., 2011).
Through distributing rewards to better performers, local governments can achieve
higher staff retention, as well as providing more incentives for employees to provide
higher quality services (Wright and Davis, 2003). Third, supervisors are provided with
a concrete and effective means of convincing poor performers to improve or leave.
Without a link between performance and rewards, poor performers may not be
motivated to improve. Finally, the importance placed on the PMS due to the resulting
rewards available, will focus managers attention on the importance of accurate
performance appraisals based on objective standards and measurable objectives.
Lawler (2003) empirically examined the association between the link to rewards and
PMS effectiveness, concluding that performance appraisal systems are more effective
when there is a connection between the results of the performance management system
and the reward system of the organization (p. 402). Similarly, a number of studies have
found a positive association between linking performance to rewards and performance
measurement systems (Burney et al., 2009; Johanson et al., 2006; Chan, 2004),
a component of PMSs. Hence, it is seen that a PMS with a strong link between
PAR performance and rewards is more likely to motivate employees, focus managers
24,2 attentions on performance evaluation, better manage poor performers, and result in a
more effective allocation of resources. Hypothesis 2 is therefore stated as follows:
H2. The link of performance to rewards is positively related to the effectiveness of
PMSs.
166 2.2.3 PMS related training. Training is defined by Wexley and Latham (1982) as a
planned program of organizational importance designed to bring about relatively
permanent changes in employee knowledge, skills, attitudes, and behaviour. The level
of training has been found to be associated with the success of new projects (Tait and
Vassey, 1988) and adequate training is essential in overcoming resistance to change
and convincing employees of the benefits of new approaches (Smith, 1998). An effective
PMS is dependent on executives and managers having the knowledge, ability and
willingness to use the system correctly (Chamberlain, 2011).

A number of studies have found a positive relationship between training and the
effectiveness of a PMS. For example, Chan (2004) and Emerson (2009) cite training as
an important factor and the key to maintaining the usefulness and effectiveness of
PMSs. All performance measures need to be clearly communicated and be perceived
as both relevant and reliable for decision making. Without relevant training, managers
may perceive the PMSs measures as less than useful. PMS related training assists
managers and employees in understanding performance management processes and
objectives, and how to operationalize the PMS. This improved understanding of the
PMS enhances the likelihood that employees and managers will commit to the system
and achieve desired organizational outcomes.
Similarly, Cavalluzzo and Ittner (2004) found that performance measurement
development and outcomes are positively associated with the extent of related training
provided. The provision of related training points to the willingness of organizations to
resource support for the development and implementation of PMSs. Hypothesis 3 is
therefore stated as follows:
H3. PMS related training is positively related to the effectiveness of PMSs.
2.2.4 Organizational culture. Organizational culture is generally described as a set of
shared values, belief, assumptions and practices that shape and guide members
attitudes and behavior in organizations (Kotter and Heskett, 1992; Denison, 1990).
Organizational culture has been incorporated in various studies as a contingency factor
that can influence business performance generally (Chan et al., 2004; Deshpande and
Farley, 2004; Ogbonna and Harris, 2000; Kotter and Heskett, 1992). Similarly, this
study includes organizational culture as a variable that may impact the effectiveness of
a PMS. Three organizational cultural factors were examined for their impact on PMS
effectiveness: innovation, outcome orientation, and teamwork.
2.2.4.1 Innovation. Innovation is defined as the creation of something qualitatively
new, through the process of learning and knowledge building. It involves changing
competences and capabilities, and producing new outcomes. Innovation has been found
to be related to organizational performance (Roper and Love, 2002; Du and Farley, 2001;
Li and Atuagene-Gima, 2001; Capon et al., 1992), and can indirectly assist in improving
the effectiveness of PMSs by providing a number of benefits. First, emphasis on
innovation promotes a culture that encourages responsiveness to new opportunities,
breaking existing paradigms, autonomy, risk taking, and tolerance for mistakes PMS
(Naveh and Erez, 2004). This in turn can lead organizations to better support change effectiveness
efforts which can lead to better performance. Second, Garcia-Morales et al. (2006) suggest
that innovative organizations are more likely to respond to external changes and develop
new capacities to enhance performance. Hence, innovation can support change efforts to
satisfy the increasing call for accountability expected from local governments. Third,
employees in innovative organizations have more opportunities to participate 167
in decision making, with additional responsibilities in carrying out their work
(Mohanty, 1999). Accordingly, a higher level of commitment can be expected from
employees (McKinnon et al., 2003). Therefore, it is hypothesized that a more innovative
organization is more likely to achieve the desired outcomes indicative of an effective PMS:
H4a. Organizations with more innovative cultures are expected to have a more
effective PMS.
2.2.4.2 Outcome orientation. Sheridan (1992) refers to outcome orientation as the extent
to which organizations emphasize action and results, have high expectations for
performance and are competitive. Grutter et al. (2001) proposed that organizations which
are more outcome oriented would be more performance oriented. In addition, Hofstede
(1998) indicated that employees in outcome oriented organizations would be more
motivated with employees perceiving that everyday could bring new challenges.
Therefore, employees are more likely to apply maximum effort to their work. Motivated
employees are also likely to have a higher level of commitment to their organization,
which will be reflected in greater work related effort (McKinnon et al., 2003).
Given that PMSs have the objective of enhancing organizations performance,
motivating employees and improving employees organizational commitment, it can be
posited that outcome oriented organizations are more likely to achieve such desired
results. It is hypothesized therefore that a more outcome oriented organization will
have a more effective PMS:
H4b. Organizations with more outcome oriented cultures are expected to have a
more effective PMS.
2.2.4.3 Team work. Work teams are popular in todays business and related environments
(Reader et al., 2009; Wuchty et al., 2007; Tata and Prasad, 2004; LaFasto and Larson, 2001).
Teams are considered the best way to deliver high performance in a competitive
marketplace. Increased focus on teamwork is envisaged to have a number of benefits. Team
work has been associated with increased performance, improvements in quality of
products and increases in the level of innovation (Tata and Prasad, 2004). Teams are also
thought to provide a better means of integrating the unique skills of individuals to produce
better performance across a variety of tasks than could be achieved by any individual
working alone or by individuals working outside a team structure (Katzenbach and Smith,
1993). Teamwork enables team members to plan, organize and coordinate the activities of
the team for goal attainment (Pineda and Lerner, 2006). Therefore, employee resources will
be used more efficiently. Increased frequency of team meetings can lead to increased social
contacts and will give employees the opportunity to learn from each other. Learning how to
deal with other team members can also serve as a valuable developmental outcome for a
team member, especially if the team has to work together on a recurring basis
PAR (Pineda and Lerner, 2006). Further, team members satisfaction with their team could
24,2 lead to greater commitment, less absenteeism and reduced turnover in the workplace
(Ulloa and Adams, 2004). In particular, since teamwork is usually associated with greater
employee empowerment and greater delegation of decision making power and
responsibilities, it is argued that the additional responsibilities and autonomy in
performing tasks leads to greater commitment amongst employees. Carson et al. (1999), for
168 example, found a positive association between employee empowerment and the level of
EOC. Similarly, Park et al. (2005) found a strong relationship between teamwork and
employee commitment. Hypothesis 4c follows from the above discussion:
H4c. Organizations with more teamwork oriented cultures are expected to have a
more effective PMS.
3. Method
Data were collected through a postal mail survey of finance managers, or similarly titled
executives in 450 Australian local governments. The random sample ensured the
inclusion of local governments of different sizes from across the country, inclusive of city
and regional councils. The potential respondents were randomly selected from the
Australian Local Government Association web site. Finance managers were chosen due
to their understanding of the PMSs within their organization. The survey was
administered using Dillmans (2007) Tailored Design Method approach, with the survey
adhering to guidelines on format and style of questions, as well as the recommended
techniques to personalize and distribute the survey.
A total of 184 responses were received, for a response rate of 40.9 percent. This
comprised 111 responses (24.7 percent) from the initial distribution (early responses), and a
further 73 responses (16.2 percent) from the follow-up (late responses). Non-response bias
was assessed by comparison of the independent and dependent variable values between
early and late responses. Table I reveals that the early and late responses were
Early Late
respondents respondents
Mean (SD) Mean (SD) F-value p-value
Dependent variable
Effectiveness of PMS 2.95 (0.72) 3.19 (0.70) 5.158 0.024
Independent variables
The use of multi-dimensional performance
measures 3.12 (0.59) 3.38 (0.70) 6.452 0.012
Link of performance to rewards 2.45 (0.96) 2.85 (1.00) 7.401 0.007
Level of training 3.63 (0.99) 4.10 (0.69) 12.033 0.001
Teamwork/respect for peoplea 16.94 (5.98) 15.07 (5.98) 4.231 0.041
Innovation 15.16 (3.50) 14.13 (3.26) 3.907 0.050
Attention to detail 9.92 (2.67) 9.95 (2.76) 0.003 0.960
Table I. Stability 7.51 (2.53) 7.23 (2.33) 0.578 0.448
Results of one-way Outcome orientation 16.46 (4.46) 15.23 (3.97) 3.560 0.061
ANOVA comparing the
mean values of all the Notes: aThe factor analysis of the cultural factors produced a combined team work/respect for people;
variables between early lower scores on the organizational culture dimensions indicate that the cultural attribute is more
and late respondents prevalent in business units
significantly different regarding the effectiveness of PMSs (at p # 0.05). They also PMS
differed significantly for the use of multi-dimensional performance measures, link of effectiveness
performance to rewards, training, teamwork/respect for people and innovation
(at p # 0.05). Specifically, the late responses indicated higher PMS effectiveness,
greater use of multi-dimensional performance measures, a stronger link of performance to
rewards, a higher level of training, and more innovative and teamwork/respect for people
oriented cultures. 169
To gain a deeper understanding of the differences between early and late responses,
further analysis was undertaken into the nature of the two respondent groups. First, an
analysis of the size of local governments across the two groups was undertaken.
The overall mean population of the responding 180 local governments was 51,285, with
early respondents tending to be smaller in size (mean population of 43,290) and late
respondents larger (mean population of 63,278). The mean population of both early and
late responding local governments was much larger than the mean (37,808) of the
sampling frame (450 local governments), indicating that the mean population of
non-respondents must be less than this, approximately 28,749[1]. Hence, non-respondents
appear to be smaller local governments, thus making early respondents more
representative of non-respondents. Given the identified differences in the values of the
independent and dependent variables for the two groups of respondents, coupled with
the apparent difference in mean populations for the two groups, the analysis of the
hypothesized associations was conducted on an overall basis, and separately for larger
and smaller sized councils. The delineation mark for larger and smaller councils was set
at 37,808, the average population for the entire sample of 450 councils. The distinction
between larger and smaller sized councils was also considered appropriate given
evidence of better performance in larger authorities (Andrews et al., 2006).
3.1 Measurement of variables

3.1.1 Use of multi-dimensional performance measures. The use of multi-dimensional
performance measures was assessed using two approaches. The first approach relied on
respondents understanding the nature of a BSC and simply required respondents to
indicate if they were using a BSC (Yes or No). The second, somewhat more complex
approach, required respondents to indicate the extent to which they were using
20 different performance measures relating to the customer, environment, financial,
internal process and learning and growth perspectives of the BSC (Appendix).
Respondents were required to indicate the extent to which each measure was used to
evaluate their councils performance on a five-point Likert scale with anchors of 1 not at
all to 5 to a great extent. These measures were identified in the Australian
Government Productivity Commissions (1997) report as the key performance indicators
for the Australian local government.
Factor analysis revealed that the 20 items loaded onto four specific dimensions three
of which covered the financial, learning and growth, and environment perspectives.
The fourth dimension included items relating to both the customer satisfaction and
internal processes perspectives. In accordance with the five perspectives BSC model,
these two areas were treated as separate dimensions in the subsequent analysis. Each
of the five perspectives were scored as the sum of the items loading onto
each perspective (Appendix), with higher (lower) scores indicating the PMS focused on
each perspective to a greater (lesser) extent. Given that a different number of items
PAR loaded onto each perspective, the use of multi-dimensional performance measures was
24,2 scored as the sum of the averages across the five perspectives, with higher (lower)
scores indicating that multi-dimensional performance measures were used to a greater
(lesser) extent.
3.1.2 Link of performance to rewards. The link of performance to rewards was
measured using two self-developed questions with respondents asked to what extent
170 is performance measurement linked to financial rewards in your council? and to what
extent is performance measurement linked to non-financial rewards in your council?
(Appendix). They were required to identify the extent to which performance is linked
to such rewards in their local governments using a five-point Likert scale with anchors
of not at all and to a great extent. Higher (lower) scores indicated a stronger
(weaker) link of performance to rewards.
3.1.3 PMS related training. Training was measured using a single-item
self-developed question (Appendix) with respondents asked to what extent is

training provided to staff in your council? Respondents were required to indicate
the extent of training using a five-point Likert scale with anchors of not at all
and to a great extent. Higher (lower) scores indicated a higher (lower) level of PMS
related training.
3.1.4 Organizational culture. Organizational culture was measured using the 26 item
version of OReilly et al.s (1991) organizational culture profile (OCP) instrument.
Respondents were required to indicate the extent to which each item was valued within
their organization on a five-point Likert scale with anchors of not at all and to a
great extent. Factor analysis produced five cultural factors, including outcome
orientation, attention to detail, innovation and stability (Appendix). These dimensions
consist of items similar to previous studies (Baird et al., 2007; McKinnon et al., 2003;
Windsor and Ashkanasy, 1996). The fifth dimension consisted of items relating to
teamwork and respect for people. While in some studies these items loaded onto
separate dimensions, their combination is consistent with Tung et al. (2011). Each of
the three hypothesized dimensions were scored as the sum of the items loading on to
each dimension.
3.1.5 The effectiveness of PMSs in Australian local government. The assessment of
PMS effectiveness is complex (Harper and Vilkinas, 2005; Boland and Fowler, 2000)
with different aspects referred to in the literature. The effectiveness of PMSs was
measured by assessing the extent to which 17 desired outcomes of PMSs had been
achieved. The 17 measures (Appendix) were developed based on a review of the
literature relating to the effectiveness of PMSs and desirable local government
outcomes. Each measure was customised to reflect the nature of the local government
environment. Respondents were required to indicate the extent to which their PMS had
achieved each of the 17 perceived outcomes using a five-point Likert scale with anchors
of 1 not at all and 5 to a great extent.
Factor analysis revealed that the 17 outcomes loaded onto two factors. These factors
corresponded to Tung et al. (2011), with the items on the first dimension focusing on
the achievement of organizational goals and objectives, and the items on the second
dimension more concerned with employees. This distinction is also consistent with the
literature which emphasizes organizational performance (Biron et al., 2011;
Padovani et al., 2010) and the human relation perspectives (Becker et al., 2011;
Gruman and Saks, 2011; Stanton and Nankervis, 2011) in relation to PMSs.
The two dimensions were labeled performance related outcomes and staff related PMS
outcomes. The dimensions were scored as the sum of the items loading cleanly on to effectiveness
each dimension with higher (lower) scores representing a more (less) effective PMS.
4. Results
The summary statistics for the dependent and independent variables are provided in
Table II. For the multi-item scales, the actual range was comparable with the 171
theoretical range, and with the exception of the link of performance to rewards, the
Cronbach a coefficients met or exceeded the 0.70 threshold generally considered
acceptable in regard to scale reliability (Nunnally, 1978, p. 245). While the Cronbach a
for the link of performance to rewards fell below this threshold (0.609), this is still
considered acceptable (Fleming, 2010; Moss et al., 1998).
Regarding the two dependent variables, the mean score for performance related
outcomes (3.13) was slightly higher than the mid-point of the range, indicating that on
average the respondents assessed their PMS to be moderately effective in achieving
such outcomes, while in relation to the staff related outcomes, the mean score (2.94) was
at the mid-point of the range, indicating less emphasis was being placed on the
achievement of staff related outcomes. Additional analysis revealed that the majority
of the performance related outcomes (eight out of ten) were achieved to a greater extent
than six of the seven staff related outcomes. The performance related outcomes that
were achieved to the greatest extent included assisting in achieving council goals
(mean score of 3.44) and providing useful performance feedback to employees
(mean score of 3.39). The staff related outcomes that were achieved to the greatest
extent included developing individuals skill and knowledge (mean score of 3.33) and
identifying poor performing employees (mean score of 2.99).
The mean score (3.23) for the use of multi-dimensional performance measures was
slightly above the mid-point of the range, indicating a moderate level of use of
multi-dimensional performance measures. This relatively low use of multi-dimensional
performance measures was further highlighted by the fact that only 25 councils
Minimum Maximum Cronbachs

Variables n a Mean SD (theoretical) (theoretical) a
Independent variables
Use of multidimensional performance
measures 168 3.23 0.65 1.32 (1) 4.75 (5) 0.841
Link of performance to rewards 184 2.61 0.99 1.00 (1) 5.00 (5) 0.609
Training 184 3.82 0.92 1 (1) 5.00 (5)
Teamwork/respect for people 179 2.31 0.86 1.00 (1) 4.43 (5) 0.943
Innovation 179 2.95 0.69 1.40 (1) 4.80 (5) 0.806
Outcome orientation 177 2.66 0.72 1.00 (1) 4.67 (5) 0.892
Dependent variables
Effectiveness of PMS (performance related
outcomes) 178 3.13 0.75 1 (1) 4.50 (5) 0.932
Effectiveness of PMS (staff related
outcomes) 179 2.94 0.79 1.00 (1) 4.86 (5) 0.903
a
Note: The number of responses (n) varies due to the fact that not all survey items were completed by Table II.
respondents Descriptive statistics
PAR (13.8 percent) indicated that they were using a BSC. Table III shows that councils
24,2 placed greatest emphasis on the financial perspective (3.45) followed by the internal
(3.39), and environmental (3.37) perspectives whereas the focus on the customer (3.09)
and learning and growth perspectives (2.70) was substantially less than the other three
perspectives.
172 4.1 Analysis of the association between the organizational and cultural factors with the
effectiveness of the PMS
Table IV presents the results of the one-way analysis of variance (ANOVA) examining
the difference in the level of PMS effectiveness for respondents using or not using a
BSC. The level of PMS effectiveness for performance related outcomes was
significantly higher for the 25 councils employing a BSC. While the achievement
of staff related outcomes was also higher for BSC users, the difference was not
statistically significant. These results provide preliminary evidence that the use of
multi-dimensional performance measures is associated with the effectiveness of PMSs,
thereby providing partial support for H1.
Stepwise regression was used to examine the association between the organizational
and cultural factors with PMS effectiveness, with the results presented in Table V. In
respect to the effect on performance related outcomes, the model was statistically
significant (F 25.783, p 0.000) with an R 2 of 0.331. Two organizational factors
(the use of multi-dimensional performance measures and the link of performance to
rewards) and one cultural factor (outcome orientation) were significantly associated
with the performance related outcomes. The staff related outcomes model was also
statistically significant (F 17.014, p 0.000) with an R 2 of 0.301. Three
organizational factors (use of multi-dimensional performance measures, training, and
link of performance to rewards) and one cultural factor (teamwork/respect for people)
were significantly associated with the staff related outcomes. The findings provide
support for H1 and H2 and partial support for H3 and H4b and H4c.
Further analysis was performed to assess the hypothesized relationships for both
smaller and larger sized councils due to the significant divergence in the mean scores
for the independent and dependent variables between early and late respondents, and
the observed differences in the populations of councils between the two groups
BSC perspectives n Minimum Maximum Mean Rank
Financial 173 1.20 (1) 5.00 (5) 3.45 1

Customer 181 1.00 (1) 5.00 (5) 3.09 4
Table III. Internal business process 173 1.00 (1) 5.00 (5) 3.39 2
Use of multidimensional Learning and growth 172 1.17 (1) 5.00 (5) 2.70 5
performance measures Environmental/community 169 1.00 (1) 5.00 (5) 3.37 3
Table IV. Performance related outcomes Staff related outcomes

Results of the one-way BSC usage n Mean F-statistic Significance Mean F-statistic Significance
ANOVA comparing the
level of PMS effectiveness BSC user 25 34.16 4.314 0.039 21.52 0.945 0.332
based on BSC usage Non-BSC user 150 30.81 20.36
PMS
Performance related outcomes Staff related outcomes
Variables Coefficient t-statistics Significance Coefficient t-statistics Significance effectiveness
Use of multidimensional
performance measures 0.808 4.344 0.000 0.300 2.205 0.029
Training 0.967 2.037 0.043
Link of performance to 173
rewards 0.905 3.038 0.003 0.855 3.929 0.000
Outcome orientation 21.651 22.171 0.031
Teamwork/respect for Table V.
people 2 1.040 2 2.324 0.021 Results of stepwise
F-value 25.783 17.014 regression analysis of the
p-value 0.000 0.000 association between
R2 0.331 0.301 the organizational and
Adjusted R 2 0.319 0.283 cultural factors with the

n 159 162 effectiveness of PMSs
of respondents. The two groups were split into large and small based on the mean
population (37,808) of the entire sample population (i.e. all 450 councils), with the
findings presented in Tables VI and VII.
Table VI reveals that the models for the large sized councils were statistically
significant for both the performance related (F 9.977, p 0.000) and staff related
(F 6.568, p 0.003) outcomes with R 2 values of 0.253 and 0.182, respectively.
Similarly, Table VII reveals that the models for the smaller sized councils were
also statistically significant for both the performance related (F 22.718, p 0.000)
and staff related (F 19.951, p 0.000) outcomes with much higher R 2 values of
0.428 and 0.465 reported.
The use of multi-dimensional performance measures was significantly associated
with both the performance and staff related outcomes for both large and small councils.
In addition, training was significantly associated with the performance (staff) related
outcomes for large (small) councils. The only other factor associated with PMS
effectiveness for large councils was teamwork/respect for people, which was
significantly associated with the staff related outcomes. Finally, in respect to small

Variables Coefficient t-statistics Significance Coefficient t-statistics Significance
Training 2.081 2.119 0.038
Teamwork/respect for
people 2 1.603 2 1.967 0.054
F-value 9.977 6.568 Table VI.
p-value 0.000 0.003 Results of stepwise
R2 0.253 0.182 regression analysis of the
Adjusted R 2 0.227 0.154 association between the
n 61 61 organizational and
cultural factors with the
Note: For large councils, population . 37,808 effectiveness of PMSs
PAR
24,2 Variables Coefficient t-statistics Significance Coefficient t-statistics Significance
Training 1.550 2.733 0.008
174 Link to rewards 1.186 3.290 0.001 1.067 4.566 0.000
Outcome orientation 22.184 22.244 0.027
Teamwork/respect for
Table VII.
people 2 1.083 2 2.055 0.043
Results of stepwise
F-value 22.718 19.951
regression analysis of
p-value 0.000 0.000
the association between
R2 0.428 0.465
the organizational and
Adjusted R 2 0.409 0.441
cultural factors with the

n 94 96
effectiveness of PMSs
(for smalla councils) Note: a Population , 37,808
sized councils, the link of performance to rewards was significantly associated with both
performance and staff related outcomes, and outcome orientation was significantly
associated with the achievement of performance related outcomes.
5. Discussion and conclusion

The first objective of the study was to examine the association between organizational
and cultural factors, and the effectiveness of the PMS, with PMS effectiveness assessed
in respect to the extent to which 17 desired outcomes of PMSs had been achieved. The
analysis revealed that overall the use of multi-dimensional performance measures, and
the link of performance to rewards exhibited a significant association with both
dimensions (performance and staff related outcomes). In addition, the level of training
and teamwork/respect for people were significantly associated with the achievement of
staff related outcomes, while outcome orientation was significantly associated with the
achievement of performance related outcomes.
The findings in respect to the use of multi-dimensional performance measures
support the many studies (Rigby and Bilodeau, 2009; Jusoh et al., 2008; Kaplan, 2001;
Kloot and Martin, 2000; Kloot, 1999; Brignall, 1993; Kaplan and Norton, 1992)
advocating the use of a BSC. However, while public sector organizations have
increasingly pursued a more commercial orientation, the evidence suggests that
the adoption of the BSC has been less prevalent than in the private sector. For instance,
the BSC adoption rate found in this study (13.8 percent) compares unfavourably
with that found in studies in the private sector. For example, Rigby and Bilodeau (2009)
report a 53 percent adoption rate, Chung et al. (2006) 31 percent and Speckbacher et al.
(2003) 26 percent. These findings suggest that local government managers have scope
to consider more extensive use of multi-dimensional performance measures in order to
achieve organizational objectives.
In addition, the findings suggest that staff will be more likely to work towards the
achievement of organizational objectives if they see a linkage of performance to rewards.
This is consistent with the literature advocating the positive impact of rewards on
employee performance (Rynes et al., 2005; McShane and Travaglione, 2003). It is also
apparent that if organizations are to address staff needs they could provide
adequate training, both in the design and implementation of PMSs, as suggested by PMS
Cavalluzzo and Ittner (2004). It is equally important that an effective management effectiveness
performance system requires that managers are familiar with the system and are able to
apply it (Chamberlain, 2011). Finally, there is scope for local government managers to
work towards developing a more outcome oriented culture, by focusing more on results
and having higher expectations for performance. Given the substantial international
interest in the impact of public sector reforms, and the effectiveness of performance 175
management practices, the research makes a significant contribution to the literature by
providing local government authorities worldwide with an insight into the factors that
can enhance the effectiveness of PMSs.
The second objective of the study was to evaluate the effectiveness of PMSs in the
Australian local government. Indications are that the PMSs of Australian local councils
are only moderately effective in relation to performance related outcomes, and less
effective in relation to the achievement of staff related outcomes. The effectiveness of

PMSs was higher for larger sized councils.
The findings suggest that PMSs are not as effective as they could be in achieving
desired organizational outcomes, and support Dollery and Johnsons (2005) claims for
more efficient municipal service delivery. Hence, there is scope for local government
management to improve their PMSs. For instance, if employees are treated as strategic
assets (Harel and Tzafrir, 1999) they are likely to be more committed, thereby enhancing
the achievement of organizational goals (Meyer and Allen, 1991). Hence, a greater
emphasis on addressing staff concerns, developing their skills, and identifying and
rewarding (managing) talented (poor) staff, could lead to positive outcomes for councils.
This research is of significance as it provides a national assessment of the effectiveness
of PMSs in local governments in Australia, thereby enabling a comparison with studies
in other countries that have embarked on public sector reforms. Furthermore, the poor
results reinforce the importance of focusing on the identified contingency factors as a
means of enhancing PMS effectiveness.
Finally, the study also provided a preliminary insight into the specific factors
associated with the effectiveness of the PMSs for smaller and larger sized councils. For
instance, the link of performance to rewards was associated with both performance and
staff related outcomes but only for the smaller councils. Hence, the motivation of staff
appears to be particularly relevant for smaller sized councils, and less relevant for
larger sized councils.
Furthermore, while training was found to be associated with PMS effectiveness, in
larger sized councils training appears to serve more as a means of informing staff and
driving them to achieve organizational objectives, while in smaller sized councils
training appears to be important in terms of addressing and driving individual goals.
Similarly, while outcome orientation was significantly associated with performance
related outcomes this association was only found for smaller sized councils, indicating
that these councils may need to place greater emphasis on efficiency and effectiveness
in order to achieve organizational outcomes.
5.1 Limitations and future research

The study is subject to the usual limitations of the survey method including the
simplification of questions, the absence of the opportunity to ask follow-up questions,
and social desirability bias. In addition, this approach can only ascertain associations
PAR rather than causal relationships between variables (Singleton and Straits, 2005).
24,2 Accordingly, future studies may incorporate alternative methodologies such as
interviews to further investigate the hypothesised associations. Case studies of small
and larger councils may unearth more in-depth findings of differences and similarities in
PMSs and their associated implications. Furthermore, to overcome common method
bias, future studies could collect data from multiple respondents within councils. While
176 the current study provides a preliminary insight into the association between specific
organizational and cultural factors with the effectiveness of PMS, future studies may
focus on examining the association between additional organizational and cultural
factors, such as geographic location (city vs regional), and the role of leadership in
developing and operating PMSs. Future studies may also provide cross country
comparisons. Finally, given the number of councils placed into administration in recent
times, a comparison of PMSs in failed vs operating councils may shed some light on the
role of PMSs in the viability of local government councils.
Note
1. [(37,808 450) 2 (107 43,290) 2 (73 63,278)]/270 (NB: four responding local
governments who failed to indicate their population were included in the denominator in
this calculation).
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Appendix
Use of multi-dimensional performance measures
To what extent are each of the following measures used to assess your councils performance?
Customer perspective
.
Surveys of customer satisfaction.
.
Number of customer complaints.
.
On-time service delivery.
.
Reduced waiting time for services.
Environment perspective
.
Average time for approval of building/development applications.
.
Environmental compliance.
.
Investment in community services. PMS
.
Investment in environmental management. effectiveness
Financial perspective
.
Operating income.
.
Debt ratio.
.
Return on investment.
183
.
Improvement in net assets/liquidity.
. Collection of rates and charges.
Internal process perspective

.
Cost effectiveness of providing services.
.
Quality of services.
.
Efficiency of providing services.
.
Usage/wastage of resources.
Learning and growth perspective

.
Number of new services provided.
.
Time to market for new services.
.
Career development of staff.
Link to rewards
To what extent is performance measurement linked to financial rewards (pay, bonuses, etc) in
your council?
To what extent is performance measurement linked to non-financial rewards (recognition,
service awards, etc) in your council?
Training
To what extent is training provided to staff in your council?
Organizational culture
Please indicate the extent to which each of the following values is valued in your council.
Teamwork/Respect for people
.
Fairness.
.
Respect for the rights of the individual.
.
Tolerance.
.
Being socially responsible.
.
Being people oriented.
.
Being team oriented.
.
Working in collaboration with others.
Outcome orientation
.
Being competitive.
.
Being analytical.
PAR .
Having high expectations for performance.
24,2 .
Being achievement oriented.
.
Being results oriented.
.
Being action oriented.
Innovation
184 .
A willingness to experiment.
.
Not being constrained by many rules.
.
Being quick to take advantage of opportunities.
.
Being innovative.
.
Risk taking.
Stability
.
Security of employment.
.
Stability.
.
Predictability.
Attention to detail
.
Being careful.
.
Paying attention to detail.
.
Being precise.
.
Being rule oriented.
Effectiveness of the PMS
PMS effectiveness was assessed in respect to the extent to which the PMS of councils achieved
the following outcomes.
Performance related outcomes
.
Motivating performance (Selden and Sowa, 2011; Rynes et al., 2005; Swiss, 2005; Lawler, 2003).
.
Assisting the council to achieve goals (Harper and Vilkinas, 2005; Lawler, 2003).
.
Developing a performance oriented culture (Gruman and Saks, 2011; Lawler, 2003).
.
Supporting change efforts (Harper and Vilkinas, 2005; Nankervis and Compton, 2006;
Lawler, 2003).
.
Supporting councils values (Lawler, 2003).
.
Providing an accurate assessment of performance (Lawler, 2003).
.
Ensuring staff commitment to council objectives (Selden and Sowa, 2011; Lawler, 2003).
.
Linking individual performance to unit performance (Helm et al., 2007; Lawler, 2003).
.
Providing useful performance feedback to individuals (Lawler, 2003).
.
Supporting councils strategy (Becker et al., 2011; Lawler, 2003).
Staff related outcomes

.
Developing individuals skill and knowledge (Nankervis and Compton, 2006;
Lawler, 2003).
.
Addressing the concerns of staff (Lawler, 2003).
.
Ensuring staff time is used efficiently (Lawler, 2003). PMS
.
Identifying talented employees (Nankervis and Compton, 2006; Lawler, 2003). effectiveness
.
Rewarding talented employees (Nankervis and Compton, 2006; Lawler, 2003).
.
Identifying poor performing staff (Lawler, 2003).
.
Managing poor performing staff * (Harper and Vilkinas, 2005; Nankervis and Compton,
2006; Lawler, 2003).
185
About the authors
Kevin Baird has taught both undergraduate and postgraduate subjects in the Management
Accounting area for 17 years. He has also supervised Honours and PhD students across many
different topic areas within the management accounting discipline including: activity based
management practices, total quality management, performance measurement systems,
management control systems, outsourcing, employee organizational commitment and

employee empowerment. Kevin Baird is the corresponding author and can be contacted at:
kevin.baird@mq.edu.au
Herbert Schoch has taught both undergraduate and postgraduate courses, primarily in
Management Accounting and he has supervised PhD and Honours students. He has also taught
Financial Accounting, Business Strategy and Entrepreneurship and Entrepreneurial
Management. He has taught in Australia, Singapore, Hong Kong, Canada and the USA. His
research interests include: management control systems, management accounting, outsourcing,
accounting education and entrepreneurship. He has published numerous journal articles, book
chapters and monographs. He also has experience in working in manufacturing, public
accounting and has managed and operated his own business.
Qi ( James) Chen is a Research Associate at Macquarie University. He completed his Honours
degree at Macquarie University and is currently employed as a Financial Analyst at ING.
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management precedes and follows performance measurement in a virtuous spiral and

2.2 The effectiveness of PMSs

related to the effectiveness of PMSs.

willingness to use the system correctly (Chamberlain, 2011).

3.1 Measurement of variables

self-developed question (Appendix) with respondents asked to what extent is

Minimum Maximum Cronbachs

BSC perspectives n Minimum Maximum Mean Rank

Financial 173 1.20 (1) 5.00 (5) 3.45 1

Table IV. Performance related outcomes Staff related outcomes

Adjusted R 2 0.319 0.283 cultural factors with the

Performance related outcomes Staff related outcomes

cultural factors with the

5. Discussion and conclusion

effective in relation to the achievement of staff related outcomes. The effectiveness of

5.1 Limitations and future research

role of PMSs in the viability of local government councils.

from world-leading firms, The International Journal of Human Resource Management,

Journal of Research in Marketing, Vol. 21, pp. 3-22.

Vol. 31 No. 12, pp. 1287-310.

Internal process perspective

Learning and growth perspective

Staff related outcomes

management control systems, outsourcing, employee organizational commitment and

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