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«Thu Thi Nguyen*, Lokman Mia, Allen Huang Department of Accounting, Finance and Economics, Griffith Business School Griffith University, Australia ...»

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Thu Thi Nguyen*, Lokman Mia, Allen Huang

Department of Accounting, Finance and Economics, Griffith Business School

Griffith University, Australia

Corresponding author: Thu Thi Nguyen, a PhD candidate at Griffith University, Australia

email: thu.nguyen@griffith.edu.au




Abstract—Reward systems and managerial use of broad scope management accounting system (MAS) information are critical in improving managerial performance. Researchers remark that reward systems may affect the use of MAS information and performance; however, these effects vary in different contexts. Previous studies have examined the effects of contingency factors, such as organisational structure and external environment, on the use of MAS information and managerial performance. In transitional economies, however, such studies are few in number. Reward systems and ownership type play important roles in transitional economies and they are different from western countries. This empirical study, using a contingency approach, examines the relationships between reward systems and managerial performance, taking into account the role of managerial use of MAS information and ownership type in the context of Vietnam. One hundred and eighty-two department managers in Vietnamese enterprises with different ownership types participated in a cross-sectional survey.

The findings indicate that managers’ perception of the link between reward systems and performance was positively associated with managerial performance directly and indirectly via the use of MAS information. Regarding the impact of ownership type, the significance of the relationship between reward systems and managerial performance was driven by privately owned enterprises (POEs) and foreign-owned enterprises (FOEs). In addition, with the structural model for state-owned enterprises (SOEs), the use of MAS information fully mediates the relationship between reward systems and managerial performance while it plays a partial mediating role in POEs and FOEs.

Keywords— Contingency, department managers, transitional economies, Vietnam 2

1. INTRODUCTION Accounting information is critical among the different types of information available to managers (Demski, 2008). Managers need broad scope MAS information (including non-financial, future oriented, and long-term oriented) in order to cope with a more competitive business environment (Bromwich, 1990, Mia and Clarke, 1999). However, the extent to which managerial use of broad scope MAS information (hereafter, the use of MAS information) in making decisions helps to improve performancedepends on several factors (Chenhall, 2006).

Previous studies have examined the influence of factors, such as environmental uncertainty, organisational structure (Gul, 1991, Mia and Chenhall, 1994, Chia, 1995), task uncertainty (Chong, 1996, Mia and Goyal, 1991), intensity of market competition (Mia and Clarke, 1999), information technology (Mia and Winata, 2008), span of control (Mia and Goyal, 1991), size (Mia and Winata, 2008), culture (Etemadi et al., 2009, Patiar, 2005, Tsui, 2001), corporate strategy (Abernethy and Guthrie, 1994, Chong and Chong, 1997, Bangchokdee, 2008), and industry (Bangchokdee, 2008).

Effective motivation for individual performance is the main goal of rewards (Epstein, 2008). In order to achieve certain goals, managers may orient themselves to using the appropriate information, such as MAS information, to make decisions (Eldenburg and Krishnan, 2008, Henri, 2006). However, previous researchers have paid little attention to the relationship between reward systems, the use of MAS information, and performance.

Moreover, the effects of related factors, such as reward systems, on the use of MAS information, and performance are different depending on the context (Chenhall, 2003). The literature suggests that ownership is one of the most important factors affecting companies in managing and controlling operations in transitional economies (Tan, 2002, Wang and Judge, 2011).

Contingency-based research on the use on MAS information in such a economic and social context is needed because a MAS only appropriate to a particular circumtance (Otley, 1980, Chenhall, 2003). To our knowledge, there are no studies on the impact of ownership type on the relationships between reward systems, the use of MAS information, and managerial performance in transitional economies such as Vietnam. Vietnam has moved from a centrally planned economy, in which state ownership dominated and the business environment was stable and less competitive, to a market-oriented economy, which is characterised by multiple ownership types and a competitive business environment (Pham and Mohnen, 2005, Nguyen and Pham, 1996). Many factors such as reward systems from the centrally planned economy have affected organisations, in particular state-owned enterprises, in the current economy.

Accordingly, empirical research into the effects of reward systems on managerial performance, both direct and indirect, via the use of MAS information incorporating the impact of ownership type, may contribute to the literature.

The purpose of this paper is to provide insight into this issue. Findings from this research may provide a better understanding of the important role of reward systems, which have positive effects on the use of MAS information, and managerial performance in certain ownership types.

The research attempts to answer the following research questions (RQ):

RQ1. How do reward systems affect the use of MAS information and managerial performance?

RQ2. How does ownership type affect the relationship between reward systems, the use of MAS information, and managerial performance?

In order to answer these questions, the research model illustrated in Figure 1 was developed.

This model aims to examine the role of reward systems and the use of MAS information in improving managerial performance. Then, the impact of ownership type on the model is investigated.

3 Insert Figure 1 here The rest of this paper is structured as follows: section two reviews the literature and develops hypotheses; the research method is discussed in section three; section four provides the findings and discussions of the results; and finally, the article concludes with discussions on theoretical and managerial contributions. Limitations and directions for future research are also offered.

2. THEORY AND HYPOTHESES Reward systems and their association with other variables, in particular the relationship between rewards/compensation and performance, have attracted the attention of management accounting (MA) researchers (Davila, 2008). The main goal of reward is to motivate individuals to achieve higher performance (Sprinkle, 2000). Performance measures play an important role in evaluating and rewarding employees. A close linkage between rewards and achieving performance targets may improve managereial performance. In order to achieve targets and thus obtain rewards, managers tend to use appropriate information in making decisions (Eldenburg and Krishnan, 2008, Henri, 2006). Researchers have emphasised the important role of MAS information in compensation practices (Rankin and Sayre, 2011).

Reward systems A reward system is considered a sub-element in the management process of organisations and a motivator of managerial performance (Davila, 2008). According to Langfield-Smith, Thorne and Hilton (2006), “a reward system consists of processes, practices and systems that are used to provide levels of pay and benefits to employees.” (p. 627). A good reward system has to include two aims: rewarding employees for the outcomes of past actions/decisions and encouraging people to improve their performance. Performance-based reward systems “base rewards on achieving some performance targets” (p. 629). This study characterised a reward system in terms of the departmental managers’ perception of a link between rewards and performance targets (hereafter reward systems).

Broad scope MAS information MAS information characteristics are clasified in four dimensions: scope, timeliness, aggregation, and integration (Chenhall and Morris, 1986). These dimensions have been studied in many previous studies on management accounting. This study examines the use of broad scope MAS information. Broad scope MAS information comes from both internal (e.g., operation, finance, marketing, and human resources) and external sources (e.g., economic conditions, customer taste, and competitors); information of a financial and non-financial nature (e.g., output rate and machine efficiency); and information about historical and future-oriented events (e.g., expected price and expected sales volume). In a competitive and uncertain business environment, it is critical for managers to use MAS information in decision making appropriately in order to improve their performance (Bromwich, 1990, Mia and Clarke, 1999).

Managerial performance Performance can be measured at different levels: industry, organisation, divisions (corporate, plant, department, or team), or managerial hierarchy (Langfield-Smith et al., 2006). The current study focuses on examining managerial performance at the department level, because measuring performance at this level provides “valuable feedback on the effectiveness of various resources and processes” (Patiar, 2005, p. 24) in planning and control systems.

In line with several contemporary management accounting studies (Agbejule, 2005, Chong, 2004, Tsui, 2001), this study uses the instrument developed by Mahoney, Jerdee and Carroll 4 (1963) to measure the main aspects of a manager’s performance through eight functional dimensions: planning, investigating, coordinating, evaluating, supervising, staffing, negotiating, and representing.

Ownership type As a transitional economy, Vietnam has moved from a centrally planned economy with the domination of state ownership to a market-oriented economy with many types of ownership coexisting (Pham and Mohnen, 2005, Nguyen and Pham, 1996). The present study examines ownership in three groups: state-owned (including enterprises with over 50% state capitals);

privately owned (100% domestic private); and foreign-owned (including partial and 100% foreign investment) enterprises, hereafter abbreviated to SOEs, POEs, and FOEs, respectively.1

2.1 Reward systems and the use of MAS information MAS information plays an important role in evaluating and rewarding managers (Chenhall and Langfield-Smith, 2003). MAS information is critical in developing a performance measurement system, based on which managers can plan and control their organisations (Chenhall and Langfield-Smith, 2007). A performance evaluation system can motivate managers to focus on key aspects of the organisations (Kaplan and Norton, 1992). A reward system will be effective in motivating employees when employees can perceive more clearly the link between their efforts and achieving performance targets through performance measures (Langfield-Smith et al., 2006). The link between rewards and performance measures may influence the extent to which managers use MAS information in making decisions (van Veen-Dirks, 2010, Chow et al., 2006). Once managers have the information related to achieving targets, they are more likely to use appropriate information such as MAS information for making better decisions to enhance performance (Eldenburg and Krishnan, 2008, Sprinkle, 2000, Sprinkle, 2003). For example, when rewards are linked to specific performance measures such as quality and productivity, managers’ efforts may be guided towards the desire to achieve these measurements (Gupta and Govindarajan, 2000). In particular, when managers are rewarded for improving quality and productivity, they may require broad scope MAS information such as production budgeting, product quality and vendor quality in making decisions (Fullerton and McWatters, 2002, van Veen-Dirks, 2010). Accordingly, there is a potential effect of reward systems on the use of MAS information; however, the literature review suggests that studies on the relationship between them have not been carried out. Thus, conducting research on this relationship is crucial to test the limit of MAS knowledge.

Operating in a transitional economy, Vietnamese enterprises have been forced to innovate production operations and change to new technologies. Many contemporary management practices have been implemented. For example, companies have strengthened the link between reward systems and skills and outcomes of performance. Besides financial targets, as in traditional performance measurement systems, non-financial indicators for rewarding such as learning new skills and improving productivity have been encouraged (Zhu et al., 2007). Such a comprehensive performance measurement system focuses more on broader management perspectives with non-financial measures arising from operations management, marketing, human resource management, and corporate strategy (Chenhall and Langfield-Smith, 2007).

These, in turn, encourage managers to use more broad scope MAS information to achieve 1 According to the Law on Investment Vietnamese National Assembly 2005, Law on Investment 2005, Statistical Publishing House, Hanoi, Vietnam.: “Enterprises with foreign owned capital comprise any enterprise established by a foreign investor in order to conduct investment activities in Vietnam; or a Vietnamese enterprise in which a foreign investor purchases shares, [with which it] merges or which it acquires” (p. 2).

5 performance targets. Extrapolating from these discussions, the present study proposes the

following hypothesis:

H1: There is a positive relationship between department managers’ perceptions of reward systems and the use of MAS information.

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