MEASUREMENT EVALUATION AND REWARD OF PROFIT CENTER MANAGERS

Description
This study explored differences between U.S. and Taiwanese firms in measuring, evaluating and rewarding
profit center managers, a subject which has not been addressed in the research literature. Four
research propositions were developed based on a review of the existing literature on the effects of
differences in national culture.

Pergamon Accounting, Organizations and Society, Vol. 20, No. 718, pp. 619-638, 1995
Copyright 0 1995 Elsevier Science Ltd
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MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS:
A CROSS-CULTURAL FIELD STUDY*
KENNETH A. MERCHANT
Uni versi ty of Southern Cal i forni a
CHEE W. CHOW
San Di ego State Uni versi ty
and
ANNE WU
Nati onal Chengchi Uni versi ty (Tai pei )
Abstract
This study explored differences between U.S. and Taiwanese firms in measuring, evaluating and reward-
ing profit center managers, a subject which has not been addressed in the research literature. Four
research propositions were developed based on a review of the existing literature on the effects of
differences in national culture. These propositions were used to guide a field study in four firms, two in
each country, matched in terms of existence of multiple profit centers, industry, and, to some extent,
size. The choice of a field research method reflected the nascent state of theory development in the areas
being studied. Thus, possible statistical significance of the findings was sacrificed in favor of depth of
situational understanding and opportunities to explore new theoretical possibilities. The findings were
generally inconsistent with the research propositions, thus suggesting at best a weak link between the
previously identified dimensions of national culture and firms’ measurement, evaluation and reward
practices. The only finding consistent with expectations was that as compared to U.S. firms, Taiwanese
firms make less use of long-term (multi-year) incentives. However, the study did reveal seven other
variables that seem to be more important than national culture in explaining differences (and similarities)
between the practices of the firms in the two countries. This list includes senior managers’ education and
experience, the company’s stage of economic development, managers’ beliefs about the workings of
their nation’s stock market, the company’s type of business, the nation’s labor force mobility, the
company’s pattern of growth, and the use of consultants. The paper explains the effects of each of
these variables on the firms’ management control system practices and, consequently, provides a
contribution to theory development in this area.
In the current era of rapidly accelerating globa- practices which are effective in one country
lization of business, managers are increasingly can be used effectively in another (Child,
interested in knowing whether the control 1981; Yang, 1984; Chang, 1985; Bimberg &
l We are grateful for helpful comments from participants at the International Management Accounting Conference (hosted
by the National University of Malaysia) and research workshop participants from the University of Miami, Florida Atlantic
University, Florida International University, and the University of Southern California, and, especially, Tom Lin, Ted Mock,
and Mike Shields.
619
620 K. A. MERCHANT ef ai
Snodgrass, 1988; Bartlett & Ghoshal, 1989; 1985; Vancil, 1979; Reece & Cool, 1978),’
Steers, 1989). Managers of multinational cor- and proper motivation of these managers is
porations must be concerned with whether important to firms’ strategic executions in any
the control practices they are using in their culture. Profit center managers typically have
home country must be modified for use in significant authority over both manufacturing
other national settings, and if so, how. And and marketing and must make trade-offs
managers of most firms can benefit from global between these two critical business functions.
benchmarking; they should consider the These trade-offs are so important that Porter
extent to which they can profitably import or (1980) has suggested the profit center organiza-
emulate elements of the control systems that tion level is where a firm’s competitive advan-
successful foreign competitors are using. tage is generally won or lost.
Importing or exporting control practices
across cultures is fraught with risk, however,
because there is accumulating evidence that
people of different national origins have differ-
ent preferences for, and reactions to, manage-
ment controls (Vance et al., 1992; Chow et al.,
1991; Hofstede, 1980, 1991; Birnberg & Snod-
grass, 1988; Kreder & Zeller, 1988; Adler et al.,
1986). Thus, controls which are effective when
applied to one national group may be a source
of competitive disadvantage when applied to
another. Such disadvantages can arise by
increasing the costs of attracting and retaining
employees, by affecting the attributes of
employees attracted to the firm, and/or by
inducing employee behaviors that are contrary
to the firm’s interests.
This study was designed to explore cultural
effects on one of the core sets of control vari-
ables - those related to measurements, evalua-
tions, and rewards - and to address two
understudied areas in the control-related cul-
tural-effects literature: the lack of focus on
the profit center level of analysis and the fail-
ure to devote much attention to the important
Chinese culture. The lack of attention paid to
the profit center level of analysis in cultural
studies is significant because the profit center
form of organization dominates among busi-
ness firms of even minimal size (Merchant,
The relative lack of attention paid to the
Chinese culture is also significant because of
this culture’s long history, world importance,
and sharp contrasts with Western cultures
(e.g. Hofstede, 1980, 1991; Chinese Cultural
Connection, 1987).’ Chinese people currently
constitute more than one-quarter of the world’s
population (Bond, 1986), and because of the
recent, rapid industrial growth of the People’s
Republic of China, many experts predict that
the Chinese culture will be one of the domi-
nant cultures on the world stage in the Zlst
century. It is also widely accepted that the Chi-
nese culture and, hence, management prac-
tices are quite different from those in other
countries. For example, Stan Shih, Chairman
of the Acer Group, Taiwan’s largest computer
company, recently said about management
textbooks (Kehoe, 1993, p. 32), “The text-
books are all from a U.S. or Japanese point of
view, but we have to do it our own way.”
However, little formal research evidence exists
which describes the Chinese management
way.
In this study, the impact of the Chinese cul-
ture on profit center manager evaluations and
incentives is studied in Taiwan, which is a rela-
tively advanced, industrialized nation and sig-
nificantly larger than other advanced-nation,
Chinese-study possibilities, notably Hong
1 We are not aware of any comparable surveys of Chinese management practices, but our observations suggest that the
situational forces causing managers to decentralize and use multiple profit centers are universal.
* Anthropologists have also paid relatively little attention to the Chinese culture. For example, the editor of one book in the
area (Bond, 1986, p. viii) wrote, “At present, there is no book available that summarizes and integrates the empirical data
on the psychological functioning of Chinese people. This is a lamentable state of affairs.”
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS
621
Kong and Singapore.3 Many of the firms in the
Chinese-dominated countries tend to be either
small in size and family or government con-
trolled. But Taiwan has 21 million people, the
13th-largest trading economy in the world, and
a relatively actively-traded stock market, so it
has a much larger population of privately-
owned manufacturing firms of above minimal
size that offers greater possibilities for match-
ing with a U.S. sample. While each of the Chi-
nese-study possibilities is somewhat different,
for example, in terms of political and legal struc-
tures, comparative economic advantages, and
government industrial policies, they have
some commonalities which can be labeled as
Chinese culture or “Confucian ideology”
(Bond, 1986). Taiwan is as representative of
the Chinese culture as are the other countries.
Our exploration was guided at a general level
by the extant literature on national culture dif-
ferences. We used some formal theoretical pro-
positions to guide our empirical investigation.
However, because of the nascent state of the
theory linking cultural variables with measure-
ment, evaluation and control variables and the
dearth of prior findings on the topic, we chose
a small-sample-size field research design built
around mostly open-ended, in-depth inter-
views. This method emphasizes depth of
situational understanding and provides oppor-
tunities for following up on unexpected
findings and revelations, thus enhancing oppor-
tunities for new theoretical developments and
refinements. Necessarily, this choice sacrificed
possible statistical significance of the findings.
The sample consisted of four manufacturing
firms, two in each country, matched across
countries in terms of existence of multiple
profit centers, industry and, to some extent,
size.
The remainder of this paper is organized as
follows. In the next section, we discuss the
national culture construct and the literature
suggesting links between aspects of national
culture and managers’ control system choices.
The second section presents four formal theo-
retical propositions about differences between
Taiwanese and U.S. firms’ approaches to profit
center-level measurements, evaluations and
rewards. The third section describes the
research method. Then the findings are dis-
cussed in two parts, those related specifically
to the tests of the research propositions and
those related to theory extensions. The final
section highlights the limitations of the study
and makes suggestions for future research.
MAKING THE NATIONAL CULTURE
CONSTRUCT OPERATIONAL
Many researchers have proposed definitions
and taxonomies of national culture (e.g. Hof-
stede, 1980, 1991; Child, 1981; Brislin, 1983;
Triandis, 1984; Schein, 1985; Adler et al .,
1986). Of these, Hofstede’s constructs are the
most widely used in business and accounting
research (e.g. Jaeger, 1983; Triandis, 1984;
Ronen & Shenkar, 1985; Kreacic & Marsh,
1986; Soeters & Schreuder, 1988; Gudykunst
& Ting-Toomey, 1988; Pratt & Beaulieu, 1992;
Harrison, 1992, 1993; Pratt et al ., 1993).
Hofstede (1980, p. 25) defined national cul-
ture as “. . . the collective programming of the
mind which distinguishes the members of one
group or society from another . .“. Based on a
survey of lI6,000 workers from 72 countries,
Hofstede (1980, 1983) “unbundled” national
culture into four work-related cultural dimen-
sions along which individuals in the countries
differed. He also suggested (1980, 1983, 1984,
1991), though without providing formal
empirical evidence, specific relationships
among these cultural dimensions and indivi-
3 While the People’s Republic of China has experienced a dramatic increase in the number of private enterprises in recent
years, many of these enterprises are small-scale, and others are derivatives of public enterprises. Further, the relative youth
of these enterprises suggests that their management control systems are likely to be still evolving. These factors limit the
feasibility of a matched-pair study against a sample of mature, large-scale, U.S. companies.
622 K. A. MERCHANT et aI .
duals’ preferences for, and reactions to, alter-
nate management controls.
Hofstede’s four cultural dimensions are as
follows.
I ndividualism vs Collectivism. This dimen-
sion relates to individuals’ self concept: “I” or
“we”. In a collective culture, the individual is
motivated by group interests and emphasizes
the maintenance of interpersonal harmony. In
contrast, individuals from an individualistic cul-
ture tend to place their self-interests ahead of
those of the group, and prefer interpersonal
conflict resolution over conflict suppression.
Hofstede suggested that in an employment set-
ting, people who are high in individualism tend
to prefer individual-oriented, rather than group-
oriented, work arrangements, performance
evaluations, and compensation.
Large vs Small Power Distance. This dimen-
sion relates to the extent to which members of
a society accept that power in institutions and
organizations is distributed unequally. Hofstede
suggested that people who are high in power
distance tend to prefer, or at least are more
willing to accept, greater centralization of deci-
sion-making authority and less participation in
decision-making processes.
Strong vs Weak Uncertainty Avoidance.
This is the degree to which members of a
society feel uncomfortable with uncertainty
and ambiguity. Hofstede suggested that people
high in uncertainty avoidance prefer to avoid,
reduce, or deny uncertainty by relying on writ-
ten or unwritten rules of behavior, structuring
of activities, and standardization of procedures.
Masculinity vs Femininity. This dimension
relates to the preference for achievement,
assertiveness and material success, as opposed
to an emphasis on relationships, modesty and
the quality of life. Hofstede suggested that peo-
ple high in masculinity tend to prefer basing
rewards on performance, whereas those high
on femininity prefer allocations based on need.
Hofstede (1980, 1991) gathered data from
large samples of workers from Taiwan and
the United States and found that scores from
workers in the two countries are different on
all four cultural dimensions:
Mean (Range)
Cultural Dimension Taiwan U.S. for 40 Countries
Individualism 17 91 50 (12-91)
Power Distance 58 40 52 (11-94)
Uncertainty Avoidance 69 46 64 (8-112)
Maculinity 45 62 50 (5-95)
As compared to the Taiwanese culture, the U.S.
culture is much more individualistic and mascu-
line, but substantially lower in both power dis-
tance and uncertainty avoidance. Since
Hofstede suggested links between each cul-
tural dimension and preferences for manage-
ment control features, some of which relate
directly to performance evaluations and incen-
tives, these data provide a basis for establishing
research hypotheses to be tested and explored.
Hofstede’s data are now over 20 years old
and were obtained from only one firm (IBM),
but numerous other studies have found sup-
port for Hofstede’s taxonomy and findings.
Regarding Hofstede’s individualism dimension,
much research has isolated the self-interest
motive as being the cornerstone of American
worldview and management theories (e.g. Har-
ris & Moran, 1987; Locke & Latham, 1984;
Mitchell, 1974; Sampson, 1977; Spence, 1985;
Triandis et al., 1988) while students of Chinese
culture (of which Taiwan is substantially part)
have repeatedly cited Chinese society’s empha-
sis on both subjugating one’s own interests to
those of the collective and the avoidance of
interpersonal conflict (e.g. Leung & Bond,
1984; Bond et al., 1982; Redding, 1980; Lin,
1977). Another oft-cited characteristic of Chi-
nese culture is related to Hofstede’s power dis-
tance dimension. Chinese culture has a high
regard for hierarchy in which everyone has
his/ her assigned place, and in which indivi-
duals in superior positions are accorded a
wide range of perogatives and authority over
those below them (Bond & Hwang, 1986; Hof-
heinz & Calder, 1982; Ring & Bond, 1985). This
cultural outlook is reflected in the Five Cardinal
Relationships central to Chinese tradition -
ruler-subject, father-son, older brother-
younger brother, husband-wife, and senior
friend-junior friend - four of which are expli-
citly vertical (Redding & Wong, 1986).
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS
623
More specifically related to the current
research is the study by the Chinese Cultural
Connection (1987). This study sought to
address the concern that Hofstede’s taxonomy
may be culturally biased due to its being based
on Western thinking. A list of 40 values (e.g.
filial piety, humbleness, adaptability) was devel-
oped by a sequential process of analyzing the
Chinese literature on work and culture and
surveying respected researchers of Chinese cul-
ture. This list was used to collect preference
data from university students from 23 coun-
tries (both Asian and Western) with prior
work experience. Factor analysis of the data
yielded a model with four dimensions, of
which three were significantly correlated
with three of Hofstede’s dimensions: individu-
alism, power distance, and masculinity. Hence
one implication of these results is that three of
the four dimensions of Hofstede’s taxonomy, at
least, can be reliably applied to a study compar-
ing Taiwanese and U.S. management practices.
However, the Chinese Cultural Connection
(1987) study found an additional dimension
along which Taiwanese and U.S. national cul-
tures differ, which was labelled Confucian
Work Dynamism. This dimension was com-
prised of eight values: ordering relationships
by status and observing this order, thrift, per-
sistence, having a sense of shame, reciproca-
tion of greetings, favors and gifts, personal
steadiness and stability, protecting one’s
“face”, and respect for tradition. U.S. subjects
scored much lower on this dimension than did
Taiwanese subjects (29 vs 87). Subsequent
research by Hofstede and Bond (1984) and Hof-
stede (1991) suggested that this cultural dimen-
sion is related to the length of individuals’ time
orientation, the extent to which they focus on
long-term, as opposed to short-term, goals and
concerns. (For lengthier and broader discus-
sions of both the validity and limits of Hofste-
de’s cultural taxonomy, see Harrison (1992)
and Chow et al. (1994))
THEORETICAL PROPOSITIONS
As the discussion in the preceding para-
graphs suggests, the extant literature on
national culture does not contain highly
focused predictions or evidence about specific
evaluation and compensation variables (e.g. the
preferred mix of fixed salary and performance-
dependent compensation) at profit center (or
any other) levels in the firm. It provides the
basis only for macro-level expectations. We
have taken these data and predictions and
used them to construct four theoretical propo-
sitions about how Taiwanese and U.S. firms
would differ in evaluating and rewarding profit
center managers. Exploration of these proposi-
tions guided much of our interviewing, and we
also use them to organize the discussion of
findings.
Proposition 1: Taiwanese firms offer smaller individual
performancedependent monetary rewards than do U.S.
firms.
Four cultural arguments support this propo-
sition. First, higher collectivism, in and of itself,
provides greater assurance that individual man-
agers voluntarily take actions that further the
interests of the firm, so performance-depen-
dent rewards are not as necessary to reduce
“agency costs”. Second, individual perfor-
mance-dependent rewards accentuate interper-
sonal differences and introduce interpersonal
rivalry. Both of these conditions are probably
more distasteful in the Taiwanese culture
which is relatively high in collectivism. Third,
the lower masculinity of the Taiwanese culture
implies that managers place a lower value on
monetary incentives. Fourth, performance-
dependent, as opposed to fixed, compensation
increases the risk imposed on employees. This
risk runs counter to the preferences of a rela-
tively high uncertainty avoidance national cul-
ture, such as that of Taiwan.
Proposition 2: For the performance-dependent
rewards they give, Taiwanese firms are more likely to
base the rewards on group, rather than individual, per-
formance than are U.S. firms.
624 K. A. MERCHANT et al.
Group rewards are those based on the per-
formance of more than one individual. When
group rewards are used at profit center organi-
zation levels, profit centers are grouped
together for measurement purposes. These
higher level aggregations are given any of a
variety of names, such as sectors, regions, or
groups. At the extreme, the largest possible
group is the entire corporation.
Two arguments support proposition 2 as is
stated. First, group-based rewards seem to fit
better with the higher collectivism in the Tai-
wanese culture. And second, group-based per-
formance measures facilitate the sharing of
risk, which fits the preferences of a culture
high in uncertainty avoidance. On the other
hand, cooperation and coordination seem to
be increasingly important to firm success in
the current competitive environment, and
U.S. firms may have a greater need for group-
based performance measures and rewards to
overcome the higher U.S. individualism.
Because of these countervailing forces, the
observed U.S.-vs-Taiwan difference may be
opposite in direction to that stated in proposi-
tion 2. Our statement of this proposition was
aimed at giving focus to the exploration and
discussion.
Proposition 3: As compared to U.S. firms, Taiwanese
firms make less use of long-term incentives (i.e. those
based on performance measured over periods longer
than one year).
This proposition is supported by two cultural
arguments. Most importantly, the higher Con-
fucian Work Dynamism of the Taiwanese
makes it less necessary to encourage a long-
term perspective. Second, the higher collecti-
vism in Taiwan provides some assurance that
the Taiwanese managers will not emphasize
their own short-term gains at the expense of
what is best for their firm’s long-term survival
and success.
Proposition 4: Relative to those in U.S. firms, perfor-
mance evaluations of profit center managers in Taiwa-
nese firms are more subjective.
This proposition is supported by two argu-
ments. First, because power distance is higher
(lower) in the Taiwanese (U.S.) culture, Taiwa-
nese (U.S.) managers are more (less) likely to
prefer or to accept greater discretionary power
- subjectivity - being left in their superiors’
hands. Thus, we expect U.S. firms to make
greater use of objective performance measures
and preset performance standards, rather than
highly subjective evaluations.
Second, the relatively high uncertainty avoid-
ance in Taiwan suggests a greater preference
for shielding managers from the risk caused by
uncontrollable factors. At profit center organi-
zation levels, adjustments for the effects of
uncontrollable factors usually involve the use
of subjective judgments, rather than more
objective methods such as flexible budgets or
variance analyses (Merchant, 1989). Thus, the
high uncertainty avoidance should lead toward
greater use of subjectivity in evaluations.
RESEARCH METHOD
We chose to explore these research proposi-
tions with a field study built around a series of
intensive, open-ended interviews. This method
choice provided several important advantages.
One is that field research methods are versatile.
They permit testing of the theoretical proposi-
tions stated above because just one valid coun-
terexample can negate a proposition. Then, if
the propositions are not supported, or not sup-
ported fully, as often happens when knowl-
edge is at an early stage of development, as it
is here, field study research methods allow
both for modification and refinement of the
propositions and development of interesting
new propositions not previously anticipated.
The primary research method alternative, a
questionnaire survey, might have been able to
test the specific propositions described above,
if adequate measures of the variables could be
developed, but it would not have allowed for
detailed explorations of causality or reaction to
surprises. Another advantage of field research
methods is that they allow for detailed explora-
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS 625
tions of the important “how” and “why” ques-
tions (Yin, 1989, p. 19). Finally, the field
research method is “the method of choice in
studying sensitive topics” because it enhances
researchers’ abilities to build relationships
based on trust with the individuals being stu-
died (Lee, 1993, p. 119). This trust was critical
in this study because almost all firms regard the
issues of performance measures, evaluations
and incentives, particularly at high manage-
ment levels, as sensitive. It was particularly
critical in the Taiwanese firms because the Tai-
wanese managers had no experience in dealing
with researchers and were, understandably,
quite cautious.
The field study was conducted in two U.S.
and two Taiwanese firms. We chose to study
companies headquartered in each of the two
countries so that the cultural effects on man-
agement practices would be as strong and pure
as possible. The primary sample selection alter-
native would have been to study one or more
multinational corporations employing people
both in the U.S. and Taiwan. But those corpora-
tions’ employees’ preferences are likely to be
homogenized through their common experi-
ences with the corporation’s management
practices or, more broadly, corporate cul ture.
Focusing the study on domestic corporations
and managers takes advantage of the fact that
firms’ domestic management practices evolve
over time to adapt to relevant features of their
home country’s work-related cultures. A large
number of studies have adopted this approach
of studying domestic corporations and have
documented systematic cross-national differ-
ences in many management control-related
practices, including long range planning and
strategic decision-making processes, organiza-
tion structure, budgeting, performance evalua-
tions, and cost accounting methods (e.g.
Anyane-Ntow, 1987; Bailes & Assada, 1991;
Birnberg & Snodgrass, 1988; Daley et al .,
1985; Horovitz, 1980; Inzerilli & Laurent,
1983; Kreder & Zeller, 1988; Laurent, 1983;
Lincoln et al ., 1986; Lincoln & McBride, 1987;
Eucik & Hatvany, 1983; Snodgrass & Grant,
1986). These studies have primarily focused
on firms in Western countries and have been
directed at other than profit center levels of
organizations.
We selected our sample of firms so as to
produce a limited form of a “natural experi-
ment”, a matched-firm comparison with the
findings of a U.S.-based study by Merchant
(1989). Most of the firms Merchant studied do
not have Taiwanese counterparts, but we iden-
tified two Taiwan-based firms that provided
reasonably close matches to two of Merchant’s
U.S.-based firms in terms of existence of multi-
ple profit centers, industry, performance, and,
to some extent, size. The arguments for con-
trolling these variables are as follows: (1) the
study could not be conducted in firms without
multiple profit centers; (2) comparing firms in
the same industry controls, to some extent, for
differences in the economic and critical suc-
cess factors which are often reflected directly
in performance evaluation plans; (3) each of
the firms has been in existence and has grown
many-fold over the last few decades. These
long-term records of success are important
because we wanted to study the practices of
arguably effective managers. We did not want
to have to engage in the difficult exercise of
distinguishing effective from ineffective prac-
tices. In other words, we wanted to conduct
an “anatomical”, not “pathological” study; and
(4) size is important because it is an indicator
of both information asymmetry between top
management and profit centers and economies
of scale in the design and monitoring of perfor-
mance measurement, evaluation, and reward
systems.
One of the matches we found is in the che-
mical industry. Both the U.S. firm (hereafter
“USChem”) and the Taiwanese firm (“T-
Chem”) are multinational companies that pro-
duce and sell a broad range of chemicals, and
both have a number of nonchemical busi-
nesses. Both firms are large, with annual reven-
ues in excess of US$5 billion.
The other match is in the electronics indus-
try. Both “US-Elec” and “T-Elec” manufacture
and sell a broad range of electronic products
and appliances for both consumer and com-
626 K. A. MERCHANT et al.
mercial markets. While both lirms are large, US-
Elec is considerably larger than T-Elec: annual
revenues for US-Elec are slightly less than US$2
billion; for T-Elec they are nearly US$500
million4
We contacted both of the Taiwanese firms by
approaching top management and secured per-
mission for our study. We replicated Mer-
chant’s research method as closely as
possible. In both firms, we began the study
by interviewing corporate personnel, includ-
ing high-level general, financial, and personnel
managers. These interviews were used to
gather information on the company’s busi-
nesses, organizational structure, and manage-
ment systems, including its performance
measurement and incentive systems. During
these interviews, we collected as many rele-
vant documents as we could to corroborate
the interview responses.
Then we interviewed a sample of managers
at the lowest level of profit center (i.e. where
the marketing and production functions first
come together). In most cases, we also inter-
viewed the profit center manager’s immediate
superior and some of his5 functional managers.
These interviews with operating managers
helped us understand how the performance
measurement, evaluation, and reward systems
worked within profit center levels of the firms.
In both firms, we returned with follow-up ques-
tions for some managers.
In total, we conducted interviews with 13
managers, including 3 profit center managers,
in T-Chem and 10 managers, including 4 profit
center managers, in T-Elec. The formal inter-
viewing in these two firms took approximately
40 hours. To get a feel for the extent to which
the findings in these two firms are broadly
representative of Taiwanese firms’ practices,
we also conducted interviews on a more lim-
ited basis in another Taiwanese electronics lirm
which had multiple profit centers but was not
considered as good a match with US-Elec as
was T-Elec (9 managers for a total of 12
hours) and with consultants in two compensa-
tion consulting firms with offices in Taipei.
Some interviews were conducted in English,
but most were conducted at least partially in
Chinese. When the interviews were conducted
in Chinese, the questions and responses were
translated instantaneously.
FINDINGS
We found some significant similarities among
all four firms’ incentive plans. All the firms have
an annual incentive compensation program
offering bonuses to profit center managers.
All provide rewards in cash.6 Managers in all
four firms place primary importance on finan-
cial measures of performance, but they also
track a wide range of other performance mea-
sures and consider them in performance eva-
luations. In all four companies, the most
important performance standards are those
negotiated during an annual planning process.
As these variables are constant across these
four firms, we conclude, tentatively, that
none of them is greatly sensitive to cultural
effects.
Tests of propositions
Proposition 1 stated the expectation that
Taiwanese firms offer smaller performance-
dependent monetary rewards than do U.S.
firms. This proposition is not supported by
the data collected. Table 1, which summarizes
the findings regarding all four propositions,
4 In Merchant’s study, US-Chem was called “Corporation E - Diversified Chemicals.” USEIec was called “Corporation M -
Consumer Durables.”
5 In all four companies, all the profit center managers studied were male.
’ At the time of Merchant’s (1989) study, US-Chem provided its bonus awards two-thirds in cash and one-third In stock, but
the company has subsequently changed its program to offer the bonuses solely in cash.
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS 627
TABLE 1. Findinas on the four mono&ions
US-Chem T-Chem US-Elec T-EIec
Prop. 1 (not
supported)
Prop. 2 (not
supported)
Prop. 3 (supported) Use of long-term incentives?
Prop. 4 (not
supported)
Use subjectivity in
performance evaluations?
Size of annual bonus awards
(% of base salary):
- target
- maximum possible
Profit sharing plan?
Stock plans:
-stock option plan?
-stock purchase plan?
Incentive plan based on group
performance?
Bonus pool based on
corporate performance?
35%
unlimited
no
Yes
yes
yes
yes
yes
loo+%
unlimited
no
no
no
no
yes
no
25%
67.5%
yes
Yes
yes
yes
yes
yes
none specified
71%
no
no
no
no
yes
no
yes, occasional yes, heavily yes, incorporated in no
high-level overall rating on
override 5-point scale
shows that the annual bonuses the two Taiwa-
nese firms offer are proportionally at least as
large as those offered by the U.S. firms. T-Elec’s
maximum potential bonus is slightly larger than
that of US-Elec (71% vs 67.5% of base salary).
And, T-Chem’s target bonus (what the firm
expects to give) is considerably larger than
that of US-Chem (lOO+%, as compared to 35%).
Proposition 2 stated the expectation that as
compared to those given in U.S. firms, perfor-
mance-dependent rewards given in Taiwanese
firms are more likely to be based on group,
rather than individual, performance. Our find-
ings provide no evidence that culture has a
significant effect on this measurement choice.
Merchant (1989) explained that profit center
managers’ bonus awards can be linked to group
performance in any of four ways. First, some
companies make awards to individuals which
are totally dependent on the performance of
the corporation or a smaller entity of which
the profit center is a part (e.g. group, sector).
A common example of this type of program is a
proj i t shari ng plan which allocates a share of
the corporation’s profits to employees in pro-
portion to each employee’s compensation. Of
these four firms, only US-Elec has a profit-shar-
ing plan.
Second, some companies base rewards on
stock performance which, obviously, reflects
the performance of the corporation as a
whole. Both U.S. firms have plans designed to
get equity into the hands of management; the
Taiwanese firms do not. US-Chem and US-Elec
both have a stock opti on pl an that annually
awards to managers (including profit center
managers) stock options with a 10 year hori-
zon. Both U.S. corporations also have a stock
purchase pl an for all employees, but neither
Taiwanese firm has such a plan. US-Chem’s
plan allows the purchase of company stock
with no commission charge and with payments
made with money borrowed from the company
at zero interest to be repaid over three years. US-
Elec’s plan allows employees to contribute part
of their compensation for purchase of company
stock, and the corporation matches 25% of the
contribution, up to a maximum of 1.5% of the
employee’s compensation.
Third, some companies base incentive pay-
ments partially on either the performance of a
higher-level entity (e.g. sector, group) or on an
assessment of the individual’s contribution to a
group effort (e.g. co-operation, teamwork).
The two U.S. firms use this incentive plan fea-
ture; neither Taiwanese firm does. In US-Elec,
25% of the bonus awards are assigned based on 90-105% of budget. US-Elec compares its
the performance of the immediately higher return-on-equity (ROE) performance with that
organization level (corporate or group). In of the Scoreboard Companies reported in Bus&
US-Chem, the blend is between profit center ne.ss Week. No bonus pool is created unless the
and corporate performance. Bonuses for man- company ROE exceeds 25% of the Scoreboard
agers of large profit centers are based 50% on companies, and the higher the ROE perfor-
profit center performance, measured mostly in mance, the larger the pool.
financial terms, and 50% based on corporate These data suggest that national culture does
profit-after-tax. (The importance weighting not have a significant effect on the firms’ desire
placed on corporate performance is lower for to link group performance with incentive
smaller profit centers.) In T-Chem, perfor-
awards. All four firms have such a link. They
mance evaluations of profit center managers
use different methods (see Table l), but the
are done subjectively, but the corporate and
result appears approximately the same -
division managers we talked to stated that
profit center managers in all four companies
only the performance of the profit center is
know that their individual awards are affected
considered, with the highest weighting of significantly by corporate performance.
importance consistently being placed on per-
Proposition 3 stated the expectation that as
cent of profit targets attained. In T-Elec, perfor-
compared to U.S. firms, Taiwanese firms make
mance targets are negotiated between the
less use of long-term (multiple-year) incentives.
profit center manager and his immediate super-
Our findings support this proposition. Neither
ior, and we found no example where any of
Taiwanese firm’s evaluation/ reward system has
these targets related to group performance.
a long-term component, while both U.S. firms
Finally, some companies link individuals’
tie part of their profit center managers’ rewards
bonus payments to group performance by
to long-term performance.
funding a bonus pool based on corporate per-
US-Chem offers senior managers (including
formance. All four firms studied use this fea-
In T-Elec, annual corporate-wide
most profit center managers) cash payments
ture.
performance directly affects the size of the
based on the corporation’s achievement of
bonus pool. In T-Chem, the variation occurs
earnings-per-share and return-on-capital goals
over a longer period of time, as one corporate
over three-year performance cycles. These
manager explained:
awards are designed to be approximately one-
half as lucrative as the short-term awards. It
also has a long-term incentive plan based on
[The total bonus amounts] are put in the budget at a
operating group performance for employees
fixed number and are not varied by the actual profit for
the year. If the corporation earns a big profit, corporate
in one non-core (non-chemical business) group
managers take a portion of the bonus and put it in “the
that was recently acquired. But corporate man-
bank” to save for another year. If this year is no good
agers have no plans to implement a similar
and next year is no good, then maybe we will consider a long-term plan (based on multi-year operating-
lower bonus. It makes the situation more steady.
group performance) in other entities.
US-Elec has what it calls a medi um-term
In US-Chem, the size of the bonus pool is incentive plan. It provides 40 top-level man-
affected by corporate performance only if cor- agers (including all profit center managers)
porate or group profits deviate significantly awards based on corporate ROE as compared
from budget; the pool is funded at the planned to that of comparable firms over a three-year
amount if actual performance is in the range of period.’
628 K. A. MERCHANT et al.
’ USRlec also uses a stock option plan which gives a small number of options to approximately 25 employees, including aU
profit center managers. Managers in the company do not believe that this plan provides any useful long-term incentive
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS 629
Proposition 4 stated the expectation that
relative to those in U.S. firms, performance
evaluations of profit center managers in Taiwa-
nese firms are more subjective. The findings
suggest that national culture does not provide
a dominant explanation of firm’s use of subjec-
tivity (see Table 1).
Of the four firms we studied, the most highly
subjective evaluations were done in ‘I-Chem. T-
Chem profit center managers are not told the
performance factors on which they are evalu-
ated, although they developed beliefs, of
course. The managers interviewed mentioned
beliefs that they were evaluated based on some
combination of a long list of factors they could
control, including profit (to the extent it was
controllable), units sold, product quality, effi-
ciency, use of capacity, cost of maintenance,
and leadership. The top T-Chem managers we
interviewed, those who evaluated the profit
center managers’ performances, admitted they
consider factors such as those listed above, but
said they did not use them in any form of objec-
tive, weighted-average calculation. They also
explained that they use their discretion to
reward individual skill, individual effort, team-
work, position, and years on the job. The top-
level managers agreed that while they tell the
profit center managers their performance rat-
ings, they do not describe to them the bases
for the ratings.
The top-level managers in T-Chem often
make adjustments for bonus purposes, nearly
every year for every manager. They also made
the adjustments in both,directions; i.e. both to
benefit or penalize the managers. For example,
one profit center manager said, “Sometimes we
earn a nice profit but the president doesn’t give
us credit for it. He says, ‘It was not your
impact’.”
The T-Chem profit center managers were not
troubled by the use of high evaluation subjec-
tivity and ambiguity, however, and they
expressed their belief that subjectivity in eval-
uating performance is typically Taiwanese. For
example, one profit center manager in T-Chem
said:
We don’t ask [about the judgments causing our perfor-
mance rating]. It is the Chinese culture to accept sub-
jectivity We consider more factors, including
management ability, years in the company, teamwork,
cooperation, the situation, the person’s potential for the
future, and the creation of product or management
potential for the future. And we evaluate performance
subjectively because some factors are not easy to eval-
uate. It is not easy to put everything into a formula.
The findings from T-Chem are wholly consis-
tent with proposition 4. The findings from T-
Elec are almost exactly the opposite, however.
T-Elec’s evaluation system is nearly totally
objective; T-Elec’s measured results map
directly into its managers’ monetary rewards.
Senior managers at T-Elec never make adjust-
ments for uncontrollable factors for purposes
of assigning bonuses, although they acknowl-
edge they will “consider situations” when
deciding if low-performing managers should
keep their jobs.
T-Elec uses two incentive plans. One, the
individual evaluation system, is an manage-
ment-by-objectives (MBO)-type system offering
bonus potentials of up to 6 months salary (the
recent average was 2.5 months salary) to man-
agers at all organization levels. Annually, the
managers and their immediate superiors nego-
tiated performance measures and standards and
their weighting. Profit center level financial
measures, such as revenue, profit before tax,
expenses, and receivables, dominated the mea-
sures by which the profit center managers
were evaluated.
T-Elec’s other system, an entity evaluation
system designed for only the top managers in
the firm (including all profit center managers),
offers bonuses of up to 2.5 months salary based
on their profit centers’ performance in three
areas:
because the options are not restricted in any way, and many participants exercise their options as soon as the company’s
stock price makes its first significant upward move.
630
K. A. MERCHANT et al
TABLE 2. Translation of performance into points in T-Elec’s entity measurement system
Revenue Profit before tax
% new Profit per person ROA
Quality
Points % budg. % growth products % budg. % growth (X budget)
(%)
management*
100 130 30 50 160 60 160 160
95 125 25 45 150 50 150 150
90 120 20 40 140 40 140 140
85 115 15 35 130 30 130 130
80 110 10 30 120 20 120 120
75 105 5 25 110 10 110 110
70 100 0 20 100 0 100 100
65 95 -5 17.5 90 -10 90 90
60 90 -10 15 80 -20 80 80
55 85 -15 12.5 70 -30 70 70
50 80 -20 10 60 -40 60 60
45 75 -25 7.5 50 -50 50 50
40 70 -30 5 40 -60 40 40
* Tailored to the profit center.
Revenue (revenue attained, revenue
growth over last year, new product rev-
enue vs total revenue).
Profit before tax (PBT attained, PBT
growth over last year, return on assets,
PBT/ person) as compared with budget.
Quality management (warranty expense,
inspection failure rate, percent on-time
deliveries, quality assurance).
Points are assigned for performance in each of
the three areas, as is shown in Table 2. The
performance areas are weighted to come to
an overall point score for each profit center.
The weightings are varied across profit cen-
ters, as is shown in Table 3, to reflect the prio-
rities in their business. The weightings have
remained lixed for the two years in which
the system has operated, but managers said
they might vary them over time as business
conditions change. The overall point score is
linked directly with incentive awards as
follows:
1. If a manager achieves either his PBT goal
or 60 points, he earns a bonus of 2
months salary.
2. If he earns both the PBT goal and 60
TABLE 3. Weightings of performance measures in T-Elec’s
entity measurement system
Division A B C D
Revenue .3 .5 .5 .4
Profit before tax .3 .5 .3 .4
Return on assets .2 .2 .2
Quality management .2
3.
points, he earns another 0.5 month sal-
ary, plus an achievement medal.
If he fails to achieve 60 points, penalties
are assessed:
a. for points from 50-59.99, deduct 0.5
month salary;
b. for c 50 points, deduct another 0.5
month salary, plus the manager is
asked to resign.’
In each of our interviews, we asked the man-
ager what, if anything, he would like to change.
Each manager had suggestions. Most common
were complaints about transfer prices and
expense allocations. But all of the T-Elec profit
center managers we interviewed expressed
satisfaction with the company’s highly objec-
tive evaluation system. In the words of one:
a This happened twice in 1991
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS
631
Our system is scientific. I like the structure. It is reason-
able, clear and open. We can evaluate ourselves. Our
bosses do not evaluate us. Our old system was totally
subjective. I didn’t know how my performance was
evaluated.
The U.S. firms’ practices lie between the
extremes defined by the Taiwanese firms.
US-Elec managers use significantly more sub-
jectivity in performance evaluations than do
those in US-Chem. US-Elec uses an MBO-type
system requiring profit center managers and
their immediate superiors to agree in writing
on no more than five, “very meaningful”,
“stretch” objectives. End-of-year performance
evaluations, however, are subjective because,
as the company incentive plan documentation
states: “Because conditions and environments
change, objectives set at the beginning of the
year may become obsolete, may be pre-empted
by more important objectives, or may become
impossible to accomplish.” Thus, superiors are
asked to rate their subordinates on a five point
scale, from “Outstanding” to “Unacceptable”.
These ratings map directly into incentive
awards. Individuals rated unacceptable earn
no bonus. Those rated outstanding earn 50%
more than those rated at the midpoint
(“Meets Expectations”).
US-Chem uses an MBO-type system, similar
to that of US-Elec, built on “four or five suc-
cinct, measurable results areas,” most of which
are financial. At the beginning of the year,
profit center managers and their immediate
superiors negotiate the result areas, impor-
tance weightings, and targets. Normally, the
quantitative results are linked directly with
the bonus award, but the system allows for
the possibility of subjective override, and man-
agers described a few examples where subjec-
tivity had been used. For example, one profit
center manager explained:
Last year we had a lot of writeoffs and didn’t make any
of our targets. But I asked for a partial payout for my
management team. I thought we had performed very
well in a difficult year, and I wanted some recognition
of that. [My superior] asked me to nominate one or two
people for special awards, but I thought it was more
important to reward all of us, as a team. He gave us 50%
[of what would have been earned had the targets been
achieved]. It was a very pleasant surprise.
Both U.S. firms allow immediate superiors
the possibility of subjective adjustments for
the effects of uncontrollable factors. They are
made much more often in US-Elec. Both firms
also allow for corporate-level adjustments to
the size of the bonus pool, but these are
made relatively rarely. In US-Chem, the incen-
tive plan explicitly allows the board of direc-
tors to adjust the bonus pool subjectively for
non-recurring situations not built into the
annual plan that had a material effect on corpo-
rate net income, taking into consideration:
l performance in light of competition;
l the economy;
l the quality of performance; and
l the motivational impact of the award.
Over the years, the US-Chem board has made a
few of these bonus pool adjustments. Managers
gave examples of acquisitions and a significant
extinguishment of debt. US-Elec’s board of
directors is given the power to adjust the size
of the bonus pool up or down based on the
achievement of strategic, non-financial cor-
porate objectives, but it has not yet exercised
this power.
Based on the findings in, particularly, the
Taiwanese companies, we conclude that cul-
ture is not important in explaining either the
use or effectiveness of the degree of subjectiv-
ity in profit center manager performance eva-
luations. While the T-Chem managers are
comfortable with highly subjective evalua-
tions, the T-Elec managers are comfortable
with highly objective evaluations. These find-
ings suggest either that highly subjective per-
formance evaluations are not essential in a
Taiwanese context or that subjectivity is not
an important decision variable in Taiwanese
companies.
The four propositions discussed above were
formulated to explore the basic question posed
in this study: Do cultural differences between
the U.S. and Taiwan affect &rns’ practices for
measuring, evaluating, and rewarding profit
632
K. A. MERCHANT er al
center managers? Our findings support only
one of the propositions - No. 3, that regard-
ing the use of longer-term incentives. These
findings suggest that the cultural dimensions
we considered are not among the most signih-
cant variables affecting the use of these control-
related management practices. Within-country
variance is higher than across-country variance!
This negative finding points to the need to
understand what factors do determine these
firms’ practices.
Theory development Cfactors most
affecting firms’ measurement/evaluation/
reward practices)
While we were surprised that our data did
not support more of our theoretical proposi-
tions, we were able to use our field explora-
tions to understand better the factors that do
shape these firms’ measurement/ evaluation/
reward practices and the reasons for these
factors’ effects. We identified seven factors
which, collectively, largely explain these
firms’ practices:
1. Education and experience of senior
managers. The evaluators of profit center man-
agers are invariably high-level, senior managers
within the firm. It is the mind-set (culture) of
these influential managers, not that of people
in the nation as a whole, which affects styles of
measurement, evaluation, and reward. In Tai-
wan, some aspects of senior management cul-
ture seem to be changing, primarily because of
greater recent contact with the Western world.
Many Taiwanese managers are receiving some
of their education in the West. Trading barriers
have been broken down; the U.S. surpassed
Japan as Taiwan’s number-one trading partner
in the first quarter of 1985. And many Taiwa-
nese firms, including the two studied here,
have become multinational.
This increased international contact appears
to be changing some aspects of senior Taiwa-
nese management culture, the way these top-
level managers “think, feel and act” (Hofstede,
1991, p. 3). These cultural changes are, in turn,
reflected in Taiwanese firms’ management
practices. For example, while performance-
dependent monetary rewards in Taiwanese
firms appear to be smaller, on average, than
in U.S. firms, we learned from some Taiwanese
compensation consultants that Taiwanese firms
are rapidly increasing the performance-depen-
dent component of employee compensation.
One reported that:
There has been a noticeable increase in the number of
companies introducing an element of variable payment,
such as performance bonuses or profit sharing, in their
compensation packages.
The old Chinese generation is more Japanese-style
because they have been governed by the Japanese.
Many had close working relationships with Japanese;
they speak Japanese; and some were educated in
Japan. They think that merely having a job is nice,
and they don’t think about the pay-for-performance
issue. The new generation has traveled abroad more;
they’re more Westernized; they speak English, and
they want pay related to performance.
A comment by a corporate manager at T-Chem
supports this conclusion:
As long as [our chairman] stays, our system will stay the
same. He is the founder; he knows everything very well.
When the chairman changes, things might be different.
One man’s leadership can have a significant effect.
The second generation of Taiwanese man-
agers, some of whom are now assuming top
management positions, are less “Japanese-
like”. They are more likely to have been edu-
cated in the U.S. or Western Europe, and they
speak English, but not Japanese. Some of these
managers told us they believe that as compared
with Japanese, Chinese people are more con-
cerned about their individual self, not the
group, and that when they are forced to work
together, they are not very successful.
What does this generational change suggest
for the future of Taiwanese management and,
in particular, measurement/ evaluation/ reward
practices? It may be that T-Elec, which now
uses a relatively objective American model of
performance evaluation and incentive system,
is a precursor of the model larger Taiwanese
firm of the future. These firms will emphasize
management control by systems, rather than, as
talked, T-Elec was one of the first Taiwanese
before, by a strong central figure. firms to adopt such a “U.S.-model” system.
2. Company’s stage of economi c devel op- Like many Taiwanese firms, T-Elec did not
ment. Most Taiwanese firms are at an earlier adopt a formal evaluation/ reward plan earlier
stage of development than most U.S. firms. Tai- because it did not feel the need for one. It
wan has a smaller core of professional man- was a relatively small, original-equipment-man-
agers (per capita) than the U.S., its firms’ ufacturer (OEM)-type supplier with little con-
management styles have been dominated by tact with world markets. But now that it is
centralization, and its firms’ management prac- much larger and emphasizing exports, it is
tices and procedures are not as we11 developed. facing more competition and its managers
Many Taiwanese firms (including the two
judged that it needed a more formal evaluation
studied here) were founded by smart managers
and reward system. The T-Elec managers still
with good vision who surrounded themselves
need training and experience with the sys-
with a group of loyal, hardworking people who
tem: for example, many do not yet know
did not have to have the full range of general
how to set personal targets well.
management skills because the boss made vir- In Taiwanese companies, major changes
tually all the decisions. The subordinates’ roles
such as those started in T-Elec may be rela-
were primarily to implement the decisions. The tively slow for cultural reasons because, as
founders used corporate-performance-based
compared to their counterparts in the U.S.,
rewards to enhance the spirit of teamwork. Chinese people tend to be less assertive. As
They also expressed their appreciation for
the Vice-Chairman of the other Taiwanese elec-
their employees by paying them an extra 1 or
tronics firm we studied said: “A good perfor-
2 months salary at end of year (as is still tradi-
mer in Taiwan will not stand up and say, ‘I
tional in Taiwan). As the businesses grew and,
am good. I deserve the spoils’.”
in many cases, the founders retired, some 3. Seni or manager bel i efs about the stock
decentralization became imperative. (T- market. We found that the vast majority of
Chem’s founder is still active as Chairman of Taiwanese managers do not pay much atten-
the company, and T-Elec’s founder retired tion to short-term stock performance. This is
only a few years ago.) Decentralization creates partly because the stock of many Taiwanese
greater demands for systematic, individual per- firms, even the large ones such as T-Chem, is
formance appraisals which, in turn, require dif- held in large proportion by a family group. But
ferent sets of management skills and it is also due to Taiwanese managers’ general
procedures. The Taiwanese managers have belief that the Taiwanese stock market is not
less experience in dealing with such issues, greatly concerned with short-term financial
but they are learning. reports. For example, the President of the
It is notable that the current T-Elec incentive
other electronics firm we visited in Taiwan
system, which is highly objective, is relatively
(not T-Elec) said:
new.’ Prior to 1989, the company’s perfor-
mance evaluation was highly subjective. In
1989, it adopted its current, relatively objec-
The stock market does not respond to short-term eam-
tive system and squeezed most subjectivity
ings swings. It is not mature. People buy a stock based
out of its performance evaluations. According
on the capital the firm has, not what it earns. Stock-
holders are not pressing to replace the President
to one of the consultants with whom we
when the stock market is down.
9 T-Chem’s incentive plan has been in place for many years. The company developed its plan relatively early because it has
long had a significant international presence, including in the U.S., and it adopted some international practices. Its
incentive plan is used throughout the world.
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS
633
634 K. A. MERCHANT et al.
So, unlike U.S. firms, the managers of the Tai-
wanese firms express no desire to get more
stock in the hands of operating managers, and
they do not feel inclined to use stock-based
reward instruments such as restricted stock or
stock options. This U.S. vs Taiwan difference
seems to be more due to differences in the
maturity of the capital markets than to differ-
ences in national culture.
4. Type of busi ness (marketfocus). Until 5-
8 years ago, most Taiwanese companies sold
almost exclusively to OEMs. They produced
good quality products but had a stable custo-
mer base, so they had little need for broad-
based interaction with the outside world.
Most managers including profit center man-
agers, could properly be buffered from the
environment and held accountable primarily
for production quality and costs, not for
profit. T-Chem still operates in this way, while
US-Chem, for example, holds its profit center
managers accountable for profit. As many Tai-
wanese firms have moved into direct sales to
consumers, distributors, and retailers, how-
ever, they have faced a greater need for sales
efforts and market planning. These demands
lead tirms to make profit center managers
bear at least some of the business risk.
5. Labor force mobi l i ty. The U.S. has a
much more mobile managerial labor force
than does Taiwan. For example, without
exception, profit center managers’ in T-Chem
are career employees with over 20 years
experience with the company. This factor
undoubtedly lessens the need for the Taiwa-
nese firms to implement long-term incentive
plans because, as Merchant (1989) concluded,
the primary purpose of these plans is employee
retention, not motivation.
6. Company growth patterns. As compared
to Taiwanese firms, U.S. firms are more likely to
grow by acquisition. When firms acquire other
firms or pieces of other firms’ operations, they
are likely to have to use, at least for a period of
time, a multitude of incentive plans, some
designed to govern only the employees in the
acquired companies. US-Chem is an example of
a firm that has multiple plans in use. (Only the
plan used in the chemical part of the business
was described in this paper.) But T-Chem,
which is nearly as large as US-Chem, has a uni-
form set of incentive plans for all managers.
7. Use of consul tants. The use of consul-
tants, particularly compensation consultants,
is another factor that has a significant effect
on firms’ measurement, evaluation, and reward
practices. Compensation consultants have
been active in Taiwan only in the last few
years, and U.S.-based firms (e.g. Hay, Wyatt)
totally dominate this industry in Taiwan. Hay
came first to Taiwan, but only in 1988; Wyatt
came in 1989. No local firms yet exist. The
consulting firms largely employ Taiwanese
nationals who tailor their solutions to the
needs of the firms in Taiwan. But the consul-
tants receive considerable training in the U.S.
so it is no surprise that they tend to introduce
U.S.-type measurement, evaluation, and reward
models to their clients. It is not coincidental
that T-Elec’s system is so U.S.-like. T-Elec’s man-
agers received considerable guidance in the
design and implementation of their system
from a U.S.-based consulting firm.
We believe that a combination of these seven
factors largely explain differences and similari-
ties between the measurement, evaluation and
reward practices of the U.S. and Taiwanese
firms we studied. At the extreme, one could
argue that all of these factors are elements of
or are reflective of national culture in some
form. Even with this view, however, a need
still exists for specification of how these fac-
tors, perhaps together with other dimensions
and manifestations of national culture, affect
the design of performance evaluation and
reward systems. For our part, we were unable
to discern significant correlations between
these factors and the cultural dimensions we
used to guide our study. Including these other
factors in cross-cultural theories and studies
should enhance our understanding of manage-
ment practices.
We do not mean to suggest that cultural fac-
tors, of the types identified by Hofstede and
others, have no influence, as it is possible,
even probable, that culture is associated with
MEASUREMENT, EVALUATION AND REWARD OF PROFIT CENTER MANAGERS 635
some variables other than those explicitly men-
tioned in the research propositions. For exam-
ple, ‘I-Elec’s incentive plan uses a penalty
structure to take money away from low-per-
forming managers. Penalty structures such as
this may not be effective in the U.S. as Latham
and Saari (1982) found, in a U.S.-based study of
unionized truck drivers, that a punitive
approach to the use of incentives undermined
commitment to goals. Perhaps a tolerance for
motivation through penalties, rather than
rewards, is related to specific dimensions of
national culture.
LIMITATIONS AND SUGGESTIONS FOR
FUTURE RESEARCH
Several limitations in our study need to be
recognized. Most people will point first to our
small sample size and, indeed, small sample
sizes are a limitation inherent in field
research. Small samples sizes reduce the exter-
nal validity of our findings; that is, confidence
that the practices of the firms studied are repre-
sentative of general practice within each coun-
try. Also, a small sample size provides little
statistical power. Thus, one fruitful direction
for future research would be to replicate this
study with another, larger sample. It must be
remembered, however, that field studies, like
experiments, rely on anal yti cal generalization,
not stati sti cal generalization as is used in sur-
vey and large, archival database research (Yin,
1989, p. 43-45). That.is, field studies are prop-
erly used to build theories about the specific
settings studied. The external validity of these
theories must be tested through replications of
the findings in other settings where the theory
has specified that the same results should
occur, just as scientists generalize from one
experiment to another.
A second limitation is our study of multina-
tional Iirms. This sample choice, which unfor-
tunately is almost inevitable in a study of firms
comprised of multiple profit centers, has the
potential for diluting possible cultural effects.
In an era of growing international competition,
multinational firms are likely to have faced for-
ces leading to homogenization of management
practices. Sharper culturedependent differ-
ences in practices might have been observed
if we had been able to study firms operating
only domestically, and this is a potentially fruit-
ful possibility for future research. This design
choice, however, would cause the study to
focus on small firms or those operating in
unique industries (e.g. utilities).
Third, we faced some data accessibility con-
straints, especially within the Taiwanese firms.
We were the first academics allowed into these
firms to conduct such a study, and the firms’
managers were understandably quite cautious
about the process. This caution limited and
changed what we could do. For example,
many of the interviews were conducted in
group, rather than individual, settings, limiting
our opportunities to verify (“triangulate”) the
responses within the profit centers. And the
Taiwanese managers were not as free with
data as are managers in some U.S. firms. For
example, we requested but were unable to
obtain historical distributions of performance
ratings and rewards for either Taiwanese firm’s
set of profit center managers.
A factor which complicated this study, and
which should be taken into account in future
studies, is the intermingling of cultures. That is,
it is not clear that Taiwanese firms’ practices
reflect a predominantly Taiwanese-like cul-
ture. As was discussed above, many of them
may be due to a Japanese-like culture present
at top-management levels within the firms. In
retrospect, it would have been preferable not
to rely exclusively on Hofstede’s culture fmd-
ings which were not predominantly gathered
from top-level managers. In the Taiwanese,
and perhaps even the U.S. firms, Hofstede’s
findings may not apply specifically to the man-
agers making decisions regarding the firms’
measurement, evaluation and reward prac-
tices. We recommend that researchers con-
ducting further research in this area gather
cultural indicators specifically about the key
decision makers. These data could include use
of the culture-dimension questionnaires or
636 K. A. MERCHANT et al.
other indicators, such as managers’ educational
backgrounds and language skills.
The limitations of our study notwithstanding,
we believe we have made a substantive
research contribution. We have provided
some tests of some predicted culture-based dif-
ferences between Taiwanese and U.S. firms’
approaches to evaluating/rewarding profit cen-
ter managers and shown the limitations of
existing theory. But more importantly, we
have provided some means for enriching the
state-of-the-art theory explaining why manage-
ment practices vary between U.S. and Taiwa-
nese firms. We have identified areas where
cultural explanations seem not to be particu-
larly important and suggested other variables
that may be more important in explaining
firms’ evaluation and reward practices. This
knowledge should be important in influencing
the design of future studies on this topic.
Researchers who want to explain a significant
proportion of the variance in observed practice
will want to measure, or otherwise control for,
variables such as senior managers’ education
and experience, companies’ stages of eco-
nomic development, senior managers’ beliefs
about stock markets, companies’ market foci,
companies’ growth patterns, and uses of con-
sultants. Our descriptions and findings can be
used either to guide further field research or
the development of a structured survey instru-
ment that could be used to collect data from a
large cross-section of firms.
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