Eisenhardt 1985.pdf

8/14/2019 Eisenhardt 1985.pdf

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MANAGEMENTSCIENCEVol. 31. N o.2. February 1985m U.S.A

CONTROL: ORGANIZATIONAL AND ECONOMICAPPROACHES*KATHLEEN M. EISENHARDT

Department of Industrial Engineering and Engineering Mana gement Stanford UniversityStanford California94305Organizational design often focuses on structural alternatives such as matrix, decentraliza-tion, and divisionalization. However, control variables (e.g., reward structures, task character-istics, and information systems) offer a more flexible approach. The purpose of this paper is toexplore these control variables for organizational design. This is accomplished by integrationand testing of two perspectives, organization theory and economics, notably agency theory.The resulting hypotheses link task characteristics, information systems, and business uncer-tainty to behavior vs. outcome based control strategy. These hypothesized linkages areexamined empirically in a field study of the compensation practices for retail salespeople in 54stores. The findings are that task programmability is strongly related to the choice of

compensation package. The amount of behavioral measurement, the cost of measuringoutcomes, and the uncertainty of the business also affect compensation. The findings havemanagement implications for the design of compensation and reward packages, performanceevaluation systems, and control systems, in general. Such systems should explicitly considerthe task, the information system in place to measure performance, and the riskiness of thebusiness. More programmed tasks require behavior based controls while less programmedtasks require more elaborate information systems or outcome based controls.( O RG A N I Z A T I O N A L D E S I G N ; I N CE N T I V E S ; CO N T RO L S Y S T E M S )

1. IntroductionConsider the following vignettes. A minicomputer manufacturer sees increasedcompetition, volatile technology, and high interest rates. In this environment, plantmanagers play a crucial role in balancing customer service, quality and inventoryconsiderations with traditional manufacturing concern with costs. How does themanufacturing vice-president encourage the balancing of these often conflicting objec-tives by the plant managers?A fast food chain has purchased its franchises. The chain management now musthire and manage the managers of the newly acquired stores. How should thesemanagers be evaluated and rewarded given the geographic dispersion of stores and thelong hours and attention to detail demanded of retail store managers?A large metals fabricator has a mature salesforce, experienced in selling to small andmedium sized firms. However, recent market analyses demonstrate that the organiza-tion should shift its emphasis to larger, more profitable customers. Many salesmendisagree. What should management do?These and similar cases concern questions of organizational design. However, whilethe thinking on organizational design often focuses on structural solutions such asmatrix, decentralization and divisionalization (e.g., Galbraith 1977), these cases illus-trate the importance to organizational design of control tools such as reward structureand information systems. Control is an impcMtant, if sometimes neglected, facet of

organizational design.The focus of this paper is on organizational control as a design mechanism in


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CONTROL: ORGA NIZATIONAL A ND ECONOMIC APPROACHES 135

first portion of the paper describes, compares, and integrates organizational andagency perspectives on control. The result is a general model which relates taskcharacteristics, information systems, rewards, and uncertainty. The second portion ofthe paper describes an empirical examination of the model in retailing from which therelative importance of the model variables and the extent to which the model mirrorsreality can be considered. The third portion of the paper discusses a broader frame-work for designing organizations using control mechanisms.2. Organizational Theory and Control

Recent organizational approaches to control (e.g., Ouchi 1979) suggest two underly-ing control strategies. On the one hand, control can be accomplished through perfor-mance evaluation. Performance evaluation refers to the cybernetic process of monitor-ing and rewarding performance. This strategy emphasizes the information aspects ofcontrol. Namely, to what degree can the various aspects of performance be assessed?Alternatively, control can be achieved by minimizing the divergence of preferencesamong organizational members. That is, members cooperate in the achievement oforganizational goals because the members understand and have internalized thesegoals. This strategy emphasizes people policies such as selection, training, and social-ization.

The two control strategies are interrelated. An organization can tolerate a work forcewith highly diverse goals if a precise evaluation system exists. In contrast, a lack ofprecision in performance evaluation can be tolerated when goal incompatibility isminor (Ouchi 1979). The choice between the two is driven by the ease of performanceevaluation.The performance evaluation control strategy suggests that something is measured. Inthe organizational literature, this view is seen in the classic work of Thom pson (1967),and later that of Ouchi (1979). Thompson and Ouchi argue that the something whichis measured is either the behavior of employees or the outcomes of those behaviors.Therefore, the performance evaluation strategy for control can be either behavior oroutcome based. Thompson and Ouchi further argue that which of these is used forcontrol depends upon the information characteristics of the given task. In Ouchi'sterms, these characteristics are: (1) knowledge of the transformation process, or taskprogrammability, and (2) the ability to measure outcomes.Figure 1 is Ouchi's (1979) formulation of Thompson's (1967) linkage of taskcharacteristics and control strategies. There are three control strategies, two of whichare performance evaluation strategies (behavior and outcome based) and one which isa soda l or people based strategy. The underlying linkage between task characteris-tics and control strategy is simple. If the t a ^ can be programmed, then behaviors areexplicitly defined and readily measured. Therefore, control is accomplished by perfor-

Conb'ol strategy = (task characteristics)Task Programmability


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136 KATHLEEN M. EISENHARDTmance evaluation of behaviors. However, as task programmability decreases, behav-iors are more difficult to use as the basis of the control strategy because they are lessclearly specified. Now consider outcomes. If the goals can be clearly stated, thenoutcomes can be measured and performance evaluations of outcomes is the appropri-ate control strategy. If both behaviors and outcomes can be measured, then either canbe used (Ouchi 1979). Finally, if the task is neither programmed nor has a measurableoutcome, then the alternative control strategy of minimizing divergence of preferences(i.e.,people side of control) becomes appropriate.In sum mary, the task characteristics determine which control strategy is appropriate.The key insights of the organizational approach to control are: (1) the role of taskcharacteristics, especially task programmability, in the choice of control strategythrough impact on measurement costs and (2) social control as an alternative tocontrol based upon performance evaluation.

3 Agency Hieory and ControlControl is also considered in the theoretical economics/accounting literature onagency theory. There the traditional interest is in contracting. Agency theory considersthe optimal contract form for that ubiquitous control relationship in which one person,the principal, delegates work to another, the agent. As Ross (1973) notes: Therelationship of agency is one of the oldest and commonest codified codes of socialinteraction. We will say that an agency relationship has arisen between two (or more)parties when one, designated as the agent, acts for the other, designated the principal,in a particular domain of decision problems. Examples of agency are universal.Jensen and Meckling (1976) add: It (agency relationship) exists in all organizationsand in all cooperative effortsat every level of management in firms.The agency problem is to determine the optimal contract for the agent's service. Forexample, in our earlier vignette of the minicomputer manufacturer, the manufacturingvice-president is the principal and the plant managers are the agents in an agencymodel of the vignette. Again, in the case of the vignette, the agency problem is todetermine the measurement and reward structures for the plant managers such thatthey appropriately balance concerns for inventory, service, quality, and cost in acontext of uncertain demand.

The theory is simply stated in terms of two cases. When the behavior of the agent isobserved, a behavior based contract is optimal because the agent's behaviors are thepurchased commodity. This is the simple case of complete information. Both parties,principal and agent, know what the agent has done. The second case is incompleteinformation. The agent is aware of his/her behaviors, but the principal is not. Adilemma arises because the principal cannot determine if the agent has behavedappropriately. If the principal rewards the agent based upon the agreed job behaviors,but without confirmation of those behaviors by the principal, the agent may shirk. Theagent cannot be relied upon to perform as agreed.In the case of incomplete information, the principal has two options. The principalcan purchase information about the agent's behaviors and reward those behaviors.This requires the purchase of surveillance mechanisms such as cost accounting


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CONTROL: ORGAN IZATIONAL A ND ECONOMIC APPROACHES 137Control strategy = (costs of information systems, uncertainty)1. Com pare costs of: Behavior control vs. outcom e control

Behaviormeasurement

Risk sharingOutcomemeasurement2. Choo se least expansive alternative

Assum ptions: Uncertain outcom e and risk averse agentDivergent preferences between principal

and agent for agent s b ehavior (i.e.,effort averse agent)

FiGURn 2. Agen cy Theo ry.the two options rests upon the trade-off between the cost of measuring behavior, andthe costs of m easuring ou tcom es and transferring risk to the agent (Figure 2).Agency models explicitly recognize two key features of organizations. One is thedivergence of preferences amo ng organizational m em bers (often termed effort aver-sion in the formal agency literature). People are assumed to have preferences for theirown actions which do not necessarily coalign with those of other organizationmembers. In this political view of organizations, the role of control is to providemeasures and rewards such that individuals pursuing their own self-interest will alsopursue the collective interest. Notice that if there is no divergence of preferences, thenthe measurement of either behaviors or outcomes is unnecessary for control. In effect,relaxation of the divergent preferences assumption is analogous to social control in theorganizational literature.

The second key feature of organizations modelled in agency theory is the outcomeuncertainty of organizations. Organizations are assumed to have uncertain futures. Thefuture may bring prosperity, bankruptcy, or a myriad of intermediate outcomes. Therisk of the uncertain future is partially bome by the owners. However, employees(agents) also bear risk and they bear increasing risk as control becomes more outcomebased. In this view, control system measures and rewards, not only motivate behavior,but also alter risk sharing patterns. Organi2:ations are seen as risk sharing as well aswork sharing collectives. Notice also that if there is no outcome uncertainty or agentsare not risk averse, then the choice between behavior and outcome control reduces tosimply their comparative measurement costs in the organizational literature.In summary, agency theory suggests two underlying strategies of control: behaviorbased and outcome based. Both strategies rely upon performance evaluation. The keyinsights of agency theory are: (1) the role of uncertainty in the choice of controlstrategy through its impact on risk sharing costs, and (2) the role of informationsystems in maintaining behavior control as an alternative to outcome control wheninformation about the agent's behavior is otherwise incomplete.

4 . Com parismi of Oi^;anizational and Ag ency ApproachesComparison of agency theory with the organizational approach reveals obvioussimilarities (Figure 3). Indeed, Ouchi's (1979) work stems, in part, from the economic


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1 3 8 K A T H L E E N M.E I S E N H A R D TCostcompare ability tomeasures behaviorsa ndoutcomes(0 )vs .comparecc tsofbehavior controlandoutcome control(A )Rewardcontrolis ameasurementandevaluation process(0)vs .

controlis am easurement, evaluation, ndreward process(A )Socialor People controlassume divergent performances foreffort ofworkforce(A )vs.possibletoreduce divergent preferences through social control(0)Roleof Informationtask ch aracteristics determinet heinformation available(0)vs .information is apurchasable comm odity(A )Uncertaintycontrol determined bymeasurement issues(0 )vs.control determinedbym easurement ndrisk bearing issues(A )

I G U R 4. Differences Between O rganiz ationa l andAgency Approaches toControl.approaches are rational, efficiency approaches which are concerned with the determi-nants of control strategy. Both are information based. Both distinguish between twotypes of performance evaluation control: behavior based and outcome based control.However, there are differences in emphasis such that the two approaches are comple-m entary in imp ortantways.These differences are sum m arized in Figure 4.

One difference is agency's emphasis on rewards. In the organizational literature,control is a process of measurement and evaluation. Reward is implicit. In agencytheory, the contracting emphasis makes rewards explicit. Therefore, agency theorycaptures the reward linkage of control arrangements such as salary plus bonus(reward) if ROI exceeds target (measure) as well as more subtle rewards such aspromotion to partner (reward) if legal work meets the expectation of partners andclients (measure). This is a subtle distinction, but agency theory captures reality in amore precise way.A second difference is agency's emphasis on costs. The organizational approachlooks at the ease of performance evaluation given the nature of the task. (Clearly,ability to measure is related to cost. However, cost is a more comprehensive termwhich captures the practical impact of cost considerations of choice of controlmechanism. For example, size effects on administrative costs of information systems,and more subtle costs such as increased turnover resulting from some aspect of thecontrol system may be very relevant, but are not necessarily related to ability tom easure . It is a subtle difference, bu t the language of agency theory is m ore precise onthis point.A third difference concerns the assumption that there exists a divergence ofpreferences between the principal and agent for the agent's effort. This assumption(usually termed effort aversion ) is m ade in m ost agency formulations. In contrast, inthe organizational literature, the important realization is made that organizations vary


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CONTROL: ORGANIZATIONAL AND ECONOMIC APPROACHES 1 3 9information about behaviors and outcomes depends upon static characteristics of thetask. Implicitly, task characteristics affect the costs of gathering information. Forexample, if task behaviors are programmed, then information about behaviors isreadily, and presumably cheaply, available. In contrast, information is a commodity inagency theory. Varying amounts of information about behaviors and outcomes areavailable at varying prices through the purchase of information systems such asbudgeting systems, monthly reporting, and layers of management.A final difference is uncertainty. In agency theory, outcome is assumed to be afunction of employee behaviors and random effects. Such effects include competitoractions, government policies, weather and the like. Such effects introduce uncertaintysuch that appropriate behaviors can lead to good or bad outcomes. Therefore, whenoutcome control is used, the employee bears risk for which he/she typically is paid apremium (except when the employee is not risk averse or when there are no unknownexogenous factors). This is an important contribution of agency theory because itexplicitly recognizes the risk bearing implication of control strategies. In contrast, theThompson/Ouchi framework ignores uncertainty.In summary, the organizational and agency approaches are complementary. Theorganizational approach emphasizes (1) the importance of task characteristics, espe-cially task programmability, to the choice of control strategy, and (2) the existence of people or social control as an alternative to control th ro u ^ performance evaluation.Agency theory adds to the organizational approach more explicit emphases on (1)information systems, (2) uncertainty, (3) costs, and (4) rewards.In order to clarify these arguments, consider the vignette of the minicomputermanufacturer which begins this paper. The problem of the manufacturing vice-president is to design a control system for plant managers. From the organizationalperspective, the choice of control system depends upon the plant manager's task. Ifthat task is relatively programmed (e.g., a single, simple, and mature product isproduced), behavior based control is appropriate. If the task is less programmed (e.g.,a new product or production process is used, a complex production process is used,multiple products are manufactured) and plant output is readily measured by unitsshipped or some other simple measure, outcome based control is appropriate. Finally,if the task is less programmed and plant outputs are costly to measure (e.g., plantmorale and product quality are important outputs in addition to units produced), thensocial control is appropriate. This is the organizational theory approach. Agency addstwo ideals to it. One is information systems. Organizations can compensate fordecreased task programmability and outeome measurability by increasing informationsystems (e.g., additional layers of management, improved accounting procedures, morefrequent formal reports). The second idea is uncertainty. Uncertainty in technology(e.g., silicon chip manufacture, cancer medicine), or environment (e.g., muliple com-petitors, government policies) raises the costs of outcome control because of the risksto the plant m anagers posed by highly uncertain outcomes. Organizations can compen-sate for high outcome uncertainty by the improvement of information systems or bysocial control.

In sum mary, the integration of the organizational and agency approaches yields taskprogrammability, information systems, and uncertainty as determinants of control


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1 4 0 K A T H L E E N M .E I SE N H A R D TTask Characteristics-

Information Systems ' ~~~II^^ ^^ Control Strategy Behavior Measurement ^ ' ' Behavior BasedOutcome Measurement ^ ' ' vs. Ou tcome^ BasedUncertainty

I G U R S. T heHypothesized Model fo r Relationships Between Control Variables forDesign.

For s impl ic i ty , we focus on four pr inc ipa l hypotheses , which re la te to the use o fbehavior vs . outcome contro l s trategy . The major s impl i f icat ion i s that we ignore thesocial control strategy by assuming that there are divergent preferences for the effortsof the workforce . The hypotheses are:H\: As task programm ability increases, behavior based control is more likely.Hiis hypothes i s fo l lows from the organizat ional arguments that task performanceaffects the cos ts o f behavior measurement, and, thus , those o f behavior based contro l .More programmabi l i ty impl ies more complete information about the agent's behav-iors . Less programmabi l i ty impl ies incomplete information about the agent's behaviorand resul ts in h igher behavior measurement cos t .H2: As behavior measuremen t increases, behavior based control is mo re likely.This hypothes i s i s based on the agency argument that behavior measures (e .g . ,budget ing sys tems, quant i ta t ive measures) improve information about behaviors , andare an a l ternat ive to outcome contro l .H3 : As the cost of outcome measurement increases, behavior based control is morelikely.Th is hy po thes i s fo l lo ws f ro m the a g ency a rg uments tha t o utco me m ea surement i s aco s t co mpo nent o f o u tco me ba s ed co ntro l .H4: As outcome uncertainty increases, behavior based con trol is mo re likely.This i s based on the agency argument that addi t ional reward for r i sk bearing i s aco s t co mpo nent o f o u tco me ba s ed co ntro l . The a s s umpt io n tha t the emplo y ee i s mo rerisk averse than the organization underl ies the direction of the hypothesis . Figure Ssum m arizes the overa ll m odel w hich i s exam ined in the empir ica l se tt ing .

The research sample cons is ts o f a l l 9S spec ia l ty s tores in a suburban Bay Areashping center. Special i ty stores are operation^y defined as those stores with lessthan 8,000 square feet of sel l ing space. This restriction el iminates large, multi-department stores. The control practices for store salespersons are the specif ic focus.A l l stores in the sam ple were contacted v ia d irect contact wi th the s tore m anager. Aftertwo fo l low-up le t ters , usable responses were obta ined from 54 s tor .The sample is attractive for several reasons. One is that i t provides a relatively la i^e

number o f comparable organizat ions which are convenient ly located. Second, andm ore im portant ly , reta il ing c](ely resemb les a com pet i t ive nuuicet and, t i ierefO T C ,


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CONTROL: ORGA NIZATIONAL AN D ECONOMIC APPROACHES 141Store manager, and possibly one, two or three assistant managers. Twenty-five percent(25%) are private/family owned firms. The size of the store chain ranges from 1 localstore to 948 nationwide stores. The salespeople are you ng (mean age - 25.3), and bothmale and female (mean wom en 40). Turnover is h i ^ . Part-time employment iscommon, and promotion is not. A range of merchandise is present, including women'sand men's wear, cameras, toys, shoes, cheeses, and sporting goods.

7. MediodsThe principal instrument is a qutionnaire. The Survey of Retail Store Managers. Itwas completed by each store manager. The questionnaire was developed from inter-views with store managers and salespeople at a neighboring shopping center, retaOunion business agents, and personnel managers from several Bay Area departmentstores. The questionnaire was pre-tested at a third shopping center for clarity andrelevance.The store manager was selected as the principal informant because that individual isboth knowledgeable and accessible. Although store managers are generally knowledge-able, multiple methods and informants are used to provide more robust measures asappropriate. Secondary informant sampling was accomplished by a snowballing proce-dure in which the store manager designated two salespeople to be informants. Thereare 21 three-informant stores, 22 two-informant stores, and 11 single-informant stores.

8. MeaBesThe measures were developed from the preliminary interviews mentioned above.The measures are relatively objective an d som ewhat specific to retailing. Such a designstrategy emphasizes measurement accuracy. The internal consistency of the measuresfor each construct is assessed by (1) a test for unidimensionality using a commonfactors model with oblique rotation and an eigenvalue > 1 cutoff and (2) a standard-ized Cronbach reliability statistic (Bagozzi 1980). A multitrait-multimethod (MM)correlation matrix (Campbell and Fiske 1959, Bagozzi 1980) is used to determineconvergent and discriminant validity. Convergent validity is judged by whether thecorrelations between measures of the same construct are significant, greater than zero,and sufficiently large (Cam pbell Fiske criterion 1) (Bagozzi 1980). Discrim inantvalidity is judg ed by the number of correlations between measures of the same

construct that are smaller than the correlations of those measures with the measure ofodier constructs. Finally, single measures for each construct were computed from thefirst factor score of a common factor model.8.1. Task roff^ammability

The preliminary interviews were particulariy important for the design of the pro-grammabiUty measures because they provided a good description of the sales job. Theinterviews revealed that the seUing task w as consistently the most tim e-consuming andimportant part of the sales job.The measures of progranimability focus on the amount of service in the sellingprocess. Here service impUra a less programmable job because service is a highly


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14 2 KATHLEEN M. EISENHARD TI. How would you describe the service which you offer to customers?

Check oneCustomer fills out warehouse requisition, check out onlyCheck out onlyCheck out only with limited sales assistanceCheck ou t only, but sales assistance readily availableCustomer is assisted continuously

Cronbach A lpha - 0.86 (21 3 informant stores) 0.88 (23 2 informant stores)= 0.80 (44 2 or 3 informant stores)

The second measure is a set of commonly used categories of customer effort(Redinbaugh 1976). The categories are based upon the effort which the averagecustomer spends in purchasing the product, and are reflective of the service demandedby store patrons. Service increases with each category.2. How would you describe your merchandise? Checkone

Customer buys product often and expends minimal effortCustomer buys the product occasionally, has som e brandand price sensitivity, may shop many storesCustomer buys the product infrequently, and/or expendsmuch effort to understand the features of the productand brand differences

Cronbach Alph a - 0.92 (21 3 informant stores)= 0.90 (23 2 informant stores)= 0.94 (44 2 or 3 informant stores)The third measure is an estimate of the time which the salesperson spends with thetypical customer who makes a purchase.

3. Approximately how much time is spent with the averagecustomer wh o m akes a purchase (minutes)?

Cronb ach Alpha - 0.95 (21 3 informant stores)= 0.89 (23 2 informant stores)- 0.91 (44 2 or 3 informant stores)

The fourth measure is an estimate of the length of the training period. Lessprogrammable jobs usually require more product knowledge, and more selling tech-nique. Therefore, such jobs should have longer training periods.4. Ho w long would it take an average full-time salesperson to learn the

basic du ties of the sales job in your store? Circleone 6 months

Cronbach Alpha 0.88 (21 3 informant stores) 0.88 (23 2 informant stores)- 0.94 (44 2 or 3 informant stores)

In order to overcome the problem of different numbers of informants per store, the


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CONTROL: ORGANIZATIONAL AN D ECONOMIC APPROACHES 1 4 38.2. ehavior Measurement

The preliminary interviews mentioned above were used to define the importantmeasures of behavior. The interviews revealed that store managers evaluate salespeopleby personal observation of their work. This is consistent with prior empirical researchon the relationship between size and formalization of measures (e.g.. Child 1972). It isnot surprising since the stores are small, and personnel administration is a major partof the store m anag er s jo b . The interviews also revealed virtually n o use of formal,quantitative behavior measures such as comparison to budgeted performance.

The behavior measurement construct is measured by the physical hmitations on theobservation of salespeople by management. The measures are (1) selling space squarefootage of the store, (2) total number of store employees, and (3) number of sales-people per store supervisor (i.e., managers and assistant managers).Internal consistency: Standardized Cronbach Alpha -=0.82,Convergent validity: Range of correlations 0.49 0.65, significant at0.01,Discriminant validity: # cross construct correlations > within construct correlations 0 of 54.

8.3. Outcome UncertaintyThe preliminary interviews mentioned above revealed that store managers do nothave a clear sense of the outcome uncertainty of their store. It was quickly apparentthat store managers were not able to answer these questions in other than vague terms.Therefore, secondary source measures were sought.There are three measures of outcome uncertainty. One is the number of competitorsin the San Francisco SMSA by merchandise category. The second and third are thefailure rates in 1975 and 1979 respectively by merchandise category. The competition

measure captures a major source of uncertainty in industries like retailing with lowbarriers to entry (Porter 1980), and high flexibility in product/service niche (Thomas1978). The two failure rate measures are more directly tied to the variance in theoutcome distribution, and to the perceptions of risk within the industry (Redinbaugh1976). In general, merchandise, which is not subject to rapid fashion changes (e.g.,hard wa re) o r which requires an expensive inventory (e.g., jewelry), is less unc ertain.W om en s apparel ha s the greatest uncertainty.Internal consistency: Standardized Cronbach Alpha =0.82,Convergent validity: Range ofcorrelation=0.52- 0.76, significant at 0.05,Discriminant validity: # cross construct correlations > within construct correlations 0 of 54.

8.4. Cost of Outcome MeasurementAs mentioned above, the preliminary interviews suggest that selling is the primetask, and that sales are the principal outcome of the efforts of the salespeople.Therefore, differences in the cost of outcome observation because of differences in theinherent measurability of the outoome are minimal in this setting. Rather, the cost ofoutcom e observation depend s upon the cost of the outcome m easurement system. Thiscost is measured by (1) the number of stores in the store chain, and (2) a dichotomousownership variable, private/family owned vs. public corporation. Both are size mea-sures because, in this setting, outcome based control is commissions, which requireextra administration, a particularly burdensome cost in small organizations. Thisreasoning was supported by our preliminary interviews at other shopping centers.


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144 KATHLEEN M EISENHARDT

Promotion, perquisites, stock options and the like are not relevant. Therefore, rewardcategories are from the literature on monetary compensation (Sibson 1974). A dichoto-mous measure is used. Outcome based rewards are those pay plans in which at least aportion of the compensation is based upon outcomes, generally sales, for which theemployee is personally responsible. Commission, commission against draw and salaryplus commission are considered to be outcome based. In this sample, most of theoutcome based plans are salary plus commission. The commission contribution is atleast 30% of the total pay in all cases. Behav ior based rew ards are tho se pay p lans inwhich pay is salary or hourly rate.8.6. Alternative Explanations

The Talbert and Bose study (1978) of the compensation of retail salespeople is agood source of alternative explanations to our hypotheses. Talbert and Bose studiedthe determinants of pay level. They found that pay level is related to type of store(specialty vs. department), store location (city vs. suburbs), sex (men are paid more),and price of the merchandise ("big ticket" salespeople are paid more). Since both typeand location are controlled by site selection in our research, only sex and price areconsidered.The sex composition of each store's sales staff was measured by the fraction of allsalespeople who are men. The price of the merchandise sold was obtained from thestore manager's response to a survey question which asked the store manager toestimate the dollar sales amount of the typical purchase in the store.

9. ResultsIn review, task programmability, behavior measures, cost of outcome measurement,and outcome uncertainty are hypothesized to predict control strategy for retailsalespeople. Salaried compensation indicates behavior control and commission com-pensation indicates outcome control. The major conclusion is that the theoreticalmodel and especially task programmability accurately capture control practices in theresearch setting. Means, standard deviations, and correlations for the constructs areshown in Figure 6. In general, the correlations between independent variables are notsignificant. The exception is the positive correlation between cost of outcome measure-ment, and the use of behavior measures. That is, store chains, which are too small forcommissions to be feasible from a cost standpoint, substitute greater managementsupervision of behavior. Thus, behavior measures and outcome based rewards substi-tute for one another as predicted by agency theorists. This is contrary to the argumentthat behavior and outcome controls are not substitutes (e.g., Ouchi and Maguire 1975).The results for the alternative explanations of sex composition of the salesforce andm erchan dise price are shown in model 1 of Figure 7. N eithe r sex nor price ofm ercha ndise is a significant pred ictor of control ( F = 0.4, not significant at 0.10 a ndF = 1.8 not significant at 0.10 respectively). M odel 2, the hypothesized variables alone ,is statistically significant (/?^ = 0.49, F = 11.8 significant at 0.01 , A = 54). Model 3,

which includes the alternative explanation and the hypothesized vaHbles, suggests thatthe al ternative explanations add vir tually no explanatory power R^ - 0.49, F- 7.6


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CONTROL: ORGANIZATIONAL A ND ECONOMIC APPROACHES 5

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14 6 KATHLEEN M. EISENHARDT1. Hypothesized model

ActualPredicted Behavior based Outcom e basedBehavior based 27 3Outcom e based 6 18

PercenU ge correctly classified - 4 5 /5 4 - 832. Na ive model IAll cases assigned to larger group

ActualPredicted Behavior based Outcom e basedBehavior based 33 21Outcome based 0 0

Percentage correctly classified - 3 3 /5 4 - 61

3. Na ive m odel 2R andom assignment of cases to groups in proportion to group sizeActualPredicted Behavior based Outcom e basedBehavior based 20 10Outcom e based 13 11

Percentage correctly classified - 3 1 /5 4 = 57FIGURE 8. Discriminant Analysis Classification Tables (/V = 54).

All hypotheses are supported. Programmabihty HI) is the single most importantpredictor ( F = 27.8, significant a t 0.01). That is, the nature of the selling task is theprincipal determinant of whether commissions or salaries are used. When morecustomer sales service is provided, outcome based control through commissions ismore likely.Behavior measures .H2)and cost of outcome measures iH3) are also significantpredictors (F =6.1, significant at 0.05, and F = 4.7, significant at 0.05 respectively).That is, stores in which employees are supervised more, and smaller stores, for whichadministration of commissions is expensive, are more likely to use salaries. Outcomeuncertainty {H4) is the least important predictor (F = 3.6, significant at 0.10). Thus,the risk bearing problems associated with commission compensation in more competi-tive and failure prone types of retailing are modest.10. Dkois^on

The results suggest that the combined organizational and economic perspectiveyields a more complete view of control than either alone in the specialty retail setting.The results are particularly strong with regard to explained variance (49 ) andpercentage of the stores correctly class in g into commission or salary (83 ). Theresults are particularly convincing because of the use of multiple methods, multipleinformants, and tests for internal consistency, convergent validity and discriminant


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CONTROL: ORGANIZATIONAL AND ECONOMIC APPROACHES 1 4 7task and measurement system characteristics, are relatively more important than theeconomics of risk bearing as measured by outcome uncertainty. In summary, theresults sup{X)rt the hypothesized linkages among the concrete control variables of taskcharacteristics, information systems, and reward structures in the context of uncer-tainty. We turn now to some implications of the research.

Despite the obvious problems of generalizing from a single study in a narrow setting,several tentative implications emerge. One implication is that the humanist/attribu-tionist argum en t th at salient extrinsic reward diminishes intrinsic m otivation (e.g., E>eci1972) should be used cautiously outside of the experimental laboratory.Our research results are that specialty retailers use policies which are contrary tohum anist-a ttributio nist prescription s. T ha t is, sales job s, which are m ore intrinsicallyinteresting becau se they are less prog ram m ed, a re precisely those jo bs for w hichcommissions, a salient extrinsic reward, are used. Such over-justification appears to bea viable policy in specialty retailing.The key point is that humanists/attributionists see motivation as a problem ofbored om in simple job s. How ever, when a dull jo b is m ade more interesting, m otiva-tion problems do not disappear. Rather, they change to problems of performanceevaluation under uncertainty as suggested by control theorists. Thus, the motivation ofsalesmen, engineers, an d un iversity professors is no t a proble m of jo b bo redo m , bu trather one of direction and evaluation under uncertainty as suggested by controltheories. In these contexts, organizational managers use over-justification, despite somepossible loss of intrinsic motivation, in order to achieve more overaU effort.

A second implication of the research results is that responsibility need not matchcontrollability. Such a mismatch violates the popular notion that responsibility andcontrollability should be matched (e.g., Gulick and Urwick 1937, Lawler and Rhode1976, Ko ontz and O Do nnell 1968).Our research results suggest that some viable specialty retailers violate this adage.Their salespeople are evaluated and rewarded through sales commissions even thoughthey typically do not select store merchandise, do not price that merchandise, do notselect advertising, and certainly cannot alter the overall economy which affectsconsumer buying. Thus, some viable specialty retailers mismateh controllability andresponsibility, despite the probable drawbacks of dissatisfaction and turnover, assuggested by organizational research (e.g., Dombusch and Scott 1974), for greatermotivation.

11 . C ondiBion: T owank a Broado Framework of C ontrol StrategiesA major underlying argument of this paper is that control is an important aspect oforganizational design. The approach has been to combine the organizational approachto control with that of agency theory, a major theoretical statement on control in theeconomics/accounting literature, and to examine the integrated theory in a fieldsetting. A more comprehensive framework for understanding organizational designfrom a control perspective emerges from the research.O ne strategy is to design a very simp le, rou tine jo b such that behavio rs are easily

observed, and to reward based upon behaviors. Behavior based control is accom-plished through job design. A second strategy is to desi^ a more complex, interesting


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148 K THLEENM.EISENH RDTUpon the results of the evaluation. Hiis relies on a much simpler evaluation scheme,and a flexible job content. Higher, but riskier rewards are substituted for measures,and precise job design. The disadvantage is that now the employee bears more riskthan in the other alternatives. The third option, outcome based control, is used becauseof its motivation effects when behaviors are difficult to observe, and in spite of its risksharing problems. Finally, a fourth option is available to organizations. That alterna-tive is to employ people whose preferences coincide with those of management. Incontrast to the first three options which emphasize the performance evaluation side ofcontrol, this option emphasizes people policies such as selection, training and socializa-tion. It is particularly attractive when any kind of measurement is costly (e.g., R D ,professional services). However, its disadvantage is lengthy implementation time.Finally, the choice among these options depends upon task programmability, informa-tion systems, and uncertainty. These are the basic building blocks for organizationaldesign through contro l.'

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1980.BAGOZZI, RICHARD, Causat Modeis, Wiley, New York, 1980.CAMPBELL^ D . AND D . F I SKE , C onvergent and D iscriminant Validation by the Multitrait-Mu ltimethod

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