Jaoc 02 2015 0024

Journal of Accounting & Organizational Change
The effect of a budget-based incentive compensation scheme on job

performance: The mediating role of trust-in-supervisor and organizational
commitment
Vincent K. Chong Maggie B.C. Law
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JAOC
12,4
The effect of a budget-based
incentive compensation scheme
on job performance
590 The mediating role of trust-in-supervisor and
organizational commitment
Vincent K. Chong
Accounting and Finance, The University of Western Australia,
Crawley, Australia, and
Maggie B.C. Law

Capital and Balance Sheet Management, AmBank Group,
Kuala Lumpur, Malaysia
Abstract
Purpose This study aims to examine the role of trust-in-supervisor and organizational commitment
on the relationship between a budget-based incentive compensation scheme and job performance.
Design/methodology/approach A survey was conducted involving 120 managers from
Australian manufacturing firms listed in the Whos Who in Business in Australia electronic database.
A partial least squares approach was used to assess the psychometric properties of the theoretical
model and proposed hypotheses. Data analysis was conducted using WarpPLS Version 5.0.
Findings The results suggest that the reliance on a high budget-based incentive compensation
scheme was found to lead to higher trust-in supervisor, which in turn resulted in higher organizational
commitment and improved subordinate job performance.
Research limitations/implications This study is subject to the limitations of survey-based
research.
Practical implications This study may assist top management to better understand the
importance of designing an effective budget-based incentive compensation scheme to promote high
interpersonal trust and organizational commitment among subordinates. Cultivating a climate of trust
may help to enhance interpersonal trust between subordinates and their superior, which in turn may
lead to higher levels of organizational commitment and improvement in subordinate job performance.
Originality/value This paper elucidates and contributes to the existing literature by suggesting
that a budget-based incentive compensation scheme can directly affect subordinates level of trust in
their supervisor, and that trust-in-supervisor can serve as an antecedent to the development and
cultivation of subordinates commitment to the organization, which in turn improves their job
performance.
Keywords Organizational commitment, Job performance,
Budgeted-based incentive compensation scheme, Trust-in-supervisor
Paper type Research paper
Journal of Accounting &
Organizational Change
Vol. 12 No. 4, 2016
pp. 590-613 The authors gratefully acknowledge the helpful comments and suggestions from Ralph Kober,
Emerald Group Publishing Limited
1832-5912
Michele Leong, Stijn Masschelein, Lokman Mia, John Sands, two anonymous reviewers and
DOI 10.1108/JAOC-02-2015-0024 participants at the 2013 AAAA Conference and 2013 AFAANZ Conference.
1. Introduction Incentive
The formal controls used by organizations include explicit rules, policies and compensation
procedures, performance measurement and budget-based incentive compensation scheme
systems that guide and influence the behavior of managers and other subordinates.
Prior studies have found that formal controls can provide many benefits for
organizations. For example, they can help to:
shape leadership styles, individual routines and organizational cultures (Bititci 591
et al., 2006; Jazayeri and Scapens, 2008);
increase role clarity (Hall, 2008; Lau, 2011);
enhance interpersonal trust and job satisfaction (Hopwood, 1972; Lau and
Buckland, 2001; Lau and Sholihin, 2005); and
improve subordinate job performance (Chong and Eggleton, 2007; Lau, 2011; Van
der Stede et al., 2006).
However, some studies have criticized the effectiveness of formal controls and find that
they can have negative consequences such as lowering subordinate work effort, job
performance and firm profit (Christ et al., 2008, 2012a, 2012b; Tayler and Bloomfield,
2011). For example, Christ et al. (2012a, p. 450, emphasis added in italics) conclude that
the preventive control, a formal control, reduces intrinsic motivation [] which in turn,
will be detrimental to performance. Christ et al. (2012b, p. 1930) also suggest that
negatively framed formal controls create a negative effect [], deteriorating the trust
environment. These studies suggest that the presence of formal controls can be
interpreted by subordinates as a sign of a lack of trust, competence and/or integrity.
The conflicting views on the effectiveness of formal controls on subordinate job
performance provided the motivation for this study. This study examines the
effectiveness of a formal control (in the form of a budget-based incentive compensation
scheme) on subordinate behavioral outcomes (e.g. job performance). It has been
suggested that a budget-based incentive compensation scheme is used to incentivize
subordinates so that they exert greater effort to improve their job performance (Chow,
1983). Theoretical frameworks that have examined the relationship between incentive
and performance include the goal-setting theory and the agency theory. The goal-setting
theory indicates that financial incentives can increase acceptance of difficult
performance goals, thus enhancing performance (Locke et al., 1988). However,
proponents of the agency theory argue that the effort-inducing effect role of a
budget-based incentive compensation scheme induces the first-best effort by
subordinates to improve their job performance. Indeed, prior accounting studies have
found that incentive-based compensation schemes can affect individuals performance
by inducing a higher level of effort, thus supporting the hypothesis of the effort-inducing
effect (Farrell et al., 2008; Chong and Eggleton, 2007; Church et al., 2008; Banker et al.,
1996, 2001; Sprinkle, 2000; Dillard and Fisher, 1990; Chow, 1983). Although prior
accounting studies have found that the reliance on a budget-based incentive
compensation scheme enhances subordinate job performance, results are not
unequivocal. For example, prior research has revealed that monetary incentives do not
improve individual task performance (Bonner et al., 2000; Deci and Ryan, 1985). In their
study, Deci and Ryan (1985) rely on the cognitive evaluation theory and argue that
JAOC performance-contingent financial incentives erode intrinsic motivation and, thereby,
12,4 diminish task performance.
In addition, numerous studies have indicated that the behavioral effects of a
budget-based incentive compensation scheme are far more complex than previously
thought. Some studies have demonstrated that the link between a budget-based
incentive compensation scheme and job performance is moderated by factors such as
592 organizational commitment (Chong and Eggleton, 2007) and assigned goal (Fatseas and
Hirst, 1992). However, a review of the literature by Jenkins et al. (1988) has highlighted
the complexities of the process by which a budget-based incentive compensation scheme
affects behavioral outcomes such as job performance. This suggests that the
relationship between a budget-based incentive compensation scheme and job
performance is far more complex than believed, and that other mediating variables (e.g.
trust-in-supervisor and organizational commitment) may have been overlooked in the

literature.
In this study, we investigate whether a budget-based incentive compensation scheme
is beneficial to an organization by examining the mediating role of subordinate
trust-in-supervisor and organizational commitment. We justify the inclusion of the two
mediating variables, namely, trust-in-supervisor[1] and organizational commitment as
follows. First, interpersonal trust has important implications for subordinate job
performance (Colquitt et al., 2007). Prior studies have noted the important link between
an incentive contract and interpersonal trust on behavioral outcomes (Christ et al., 2008,
2012b). For example, Christ et al. (2012b, p. 1916) argue that the manner in which an
incentive contract is framed can affect how the agent interprets the degree of trust/
distrust. Specifically, they argue that the framing of an incentive contract can
differentially affect the agents trust in the principal. Second, organizational
commitment also has important implications for subordinate job performance; however,
there are conflicting views about the link between organizational commitment and job
performance. For example, numerous studies have found that organizational
commitment leads to positive subordinate job performance (Mathieu and Zajac, 1990;
Meyer et al., 1989; Mowday et al., 1982; Randall, 1990; Subramaniam et al., 2002), but
some studies have found that it is not clearly related to job performance (Steers, 1977,
Wiener and Vardi, 1980). Third, Lau et al. (2008) and Sholihin and Pike (2009) have
examined trust-in-supervisor and organizational commitment in their structural model,
with Sholihin and Pike (2009) finding that the indirect effect of subordinates perceived
fairness of performance evaluation on job satisfaction is generalizable to managers from
different industries (e.g. health care, manufacturing and financial services). However,
neither study examined a budget-based incentive compensation scheme as a formal
control. Our study differs from the research of Lau et al. (2008) and Sholihin and Pike
(2009) in the following aspects. First, Lau et al. (2008) and Sholihin and Pike (2009)
examine the subordinates perceived fairness (i.e. procedural and distributive fairness) of
relying on a formal control to evaluate their performance and its behavioral
consequences such as job satisfaction and job performance (in Sholihin and Pike only).
However, our study specifically examines the use of a formal control, that is, a
budget-based incentive compensation scheme, on subordinate job performance. Second,
Lau et al. (2008) and Sholihin and Pike (2009) aimed to advance knowledge on procedural
fairness in the management accounting literature (Hopwood, 1972; Otley, 1978; Lau and
Sholihin, 2005; Graud et al., 2008), whereas our study aims to contribute to the stream of
literature that examines the effect of formal controls, for example, the effect of incentive Incentive
contracts on trust (Christ et al., 2008, 2012a, 2012b; Das and Teng, 1998, 2001; Malhotra compensation
and Murnighan, 2002) and behavioral outcomes such as organizational commitment
and job performance.
scheme
Our study postulates that trust-in-supervisor and organizational commitment are
important mediating variables in the relationship between a budget-based incentive
compensation scheme and subordinate job performance. We pose the following research 593
question:
RQ1. How do trust-in-supervisor and organizational commitment mediate the
relationship between a budget-based incentive compensation scheme and
subordinate job performance?
We propose a theoretical model (Figure 1) to explore the mediating role of
trust-in-supervisor and organizational commitment in the relationship between a

budget-based incentive compensation scheme and subordinate job performance.
This paper is organized as follows. Section 2 develops the hypotheses. Sections 3 and 4
present the research method and results, respectively. Section 5 concludes the paper with a
discussion of the findings and limitations of the study.
2. Hypotheses development
2.1 Budget-based incentive compensation scheme and trust-in-supervisor
The first hypothesis investigates the association between the use of a budget-based
incentive compensation scheme and subordinate trust-in-supervisor. Prior studies
(Hartmann and Slapnicar, 2009; Hopwood, 1972; Ross, 1994) have suggested that
subordinates are likely to perceive an accounting-based performance evaluation as more
trustworthy and certain than an evaluation that uses non-accounting methods. Indeed,
Ross (1994, p. 630) notes that a non-accounting evaluative style may be somewhat
subjective and, therefore, may well be ambiguous and difficult to measure [as well as
Budget-based incentive Organizational

Trust-in-supervisor
compensation scheme commitment
Job performance Working

Experience
Age Figure 1.
Theoretical model
JAOC subject to] a superiors biases and idiosyncrasies. He argues that accounting-based
12,4 performance evaluation styles are a great deal more objective and verifiable.
Further, Hartmann and Slapnicar (2009, p. 725) suggest that a formal performance
evaluation system measures performance by a set of clear metrics, and [] gives
rewards based on clear allocation rules [which allows] higher levels of integrity,
honesty, accuracy and consistency in performance evaluation[2]. Conversely, an
594 informal performance evaluation system implies the use of qualitative and
subjective measures and is likely to be associated with subordinates having greater
mistrust in a superior. Hence, it can be inferred that subordinates will be likely to have
higher confidence in the use of a budget-based incentive compensation scheme that is:
accounting-based (i.e. relies on budget data); and
formal-based (i.e. meeting budget is essential to being rewarded).
Lau and Buckland (2001) suggest that a superior is typically influential in choosing and
deciding which evaluative style should be implemented. Therefore, subordinates
usually find it difficult to separate their feelings about the evaluative style from their
feelings about their superior. Specifically, it is suggested that when subordinates feel
that the evaluative style is untrustworthy, they are likely to feel a similar feeling of
distrust for their superior[3].
In an organizational setting, interpersonal trust is important, particularly in a
supervisorsubordinate relationship, because it can improve cooperation and mitigate
potential agency problems by encouraging information exchange and reducing
subordinates perceived need to engage in short-term opportunistic behavior. Prior
studies (Hopwood, 1972; Lau and Buckland, 2001) have proposed a positive relationship
between the use of a budget-based incentive compensation scheme and subordinate
trust-in-supervisor. For example, Hopwood (1972, p. 173) notes that a high absolute
importance of meeting a budget is associated with greater reported trust, respect and
satisfaction with the supervisor. Similarly, Lau and Buckland (2001) find that heavier
reliance on budget targets is associated with higher subordinate trust-in-superior.
Considering these findings, we hypothesize that the greater use of a budget-based
incentive compensation scheme will lead to a higher level of subordinate
trust-in-supervisor. The first hypothesis is given below:
H1. A budget-based incentive compensation scheme is positively related to
subordinate trust-in-supervisor.
2.2 Budget-based incentive compensation scheme and organizational commitment

The second hypothesis examines the relationship between budgeted-based incentive
compensation scheme and organizational commitment. Proponents of the agency theory
suggest that the major premise of a budget-based incentive compensation scheme is to
induce first-best effort on the part of subordinates to improve their job performance.
Indeed, prior studies (Church et al., 2008; Chong and Eggleton, 2007; Banker et al., 1996,
2001) have found that an incentive compensation scheme can positively affect
subordinate job performance by inducing a higher level of effort. Thus, it can be inferred
that a budget-based incentive compensation scheme is effort-inducing. As such, it is
expected that subordinates are willing to exert considerable effort on behalf of the
organization (Angel and Perry, 1981; Porter et al., 1974). Therefore, we posit that a
budget-based incentive compensation scheme will be positively related to subordinates Incentive
levels of organizational commitment. The following hypothesis is tested: compensation
H2. A budget-based incentive compensation scheme is positively related to scheme
organizational commitment.
2.3 Trust-in-supervisor and organizational commitment

The third hypothesis examines the relationship between trust-in-supervisor and 595
organizational commitment. Organizational commitment is defined as a subordinates
identification with and involvement in the organization. It may be conceptualized as
affective, continuance or normative commitment (Meyer and Allen, 1991)[4]. This study
adopts the affective aspect of organizational commitment, as highlighted in Meyer and
Allens (1991) review. This is characterized by two factors:
(1) a strong belief in and acceptance of organizational goals and values; and
(2) a willingness to exert considerable effort on behalf of the organization (Porter
et al., 1974; Angel and Perry, 1981).
Affective commitment is an important attitudinal predictor of subordinates behaviors

and intentions (Mowday et al., 1979, 1982). Ketchand and Strawser (2001, p. 231) note
that organizational commitment appears to be particularly influenced by situation
factors, such as leader behaviors, role ambiguity, role conflict, the degree of
organizational centralization, and the extent of leader communications. That is,
subordinates tend to perceive the organization indirectly through their superior, who
works as a delegate and representative of the organization. Therefore, it can be inferred
that a high level of subordinate trust-in-supervisor will likely be translated into
favorable behavioral outcomes (i.e. higher level of organizational commitment). Indeed,
prior studies have recognized the links between variables related to work experience
(e.g. organizational support and fairness in performance-based rewards) and the
affective aspect of organizational commitment (Meyer and Allen, 1991). Lau et al. (2008,
p. 126) share this view and suggest that a high level of interpersonal trust between
subordinates and their superior may lead to the subordinates bonding with the
organization, and hence, high organizational commitment.
Apart from management accounting studies, research in psychology (Brockner et al.,
1997; Costa and Anderson, 2011) has also widely acknowledged that subordinate
trust-in-supervisor fosters the organizational commitment of subordinates. Allen and
Meyer (1990) propose that a high level of subordinate trust-in-supervisor improves their
perception of:
peer cohesion (i.e. cohesion between subordinates and their superior);
equity (i.e. subordinates receive equitable treatment from their superior); and
receptiveness (i.e. the superior is receptive to subordinates opinions).
The presence of these conditions develops subordinates feeling of comfort and harmony
in the work environment. These advantages are expected to enhance subordinates
emotional attachment (i.e. affective commitment). Indeed, Brockner et al. (1997) find
trust to be significantly positively related to organizational commitment. Similarly,
Costa and Anderson (2011) note that subordinate trust-in-supervisor increases
subordinates identification with and emotional attachment to the organization.
JAOC The literature discussed here suggests that interpersonal trust correlates positively
12,4 with organizational commitment. Hence, we posit that subordinates who have a higher
trust-in-supervisor are likely to have stronger organizational commitment[5].
Accordingly, the following hypothesis is tested:
H3. Trust-in-supervisor is positively related to organizational commitment.
596
2.4 Relationship between trust-in-supervisor and job performance
The fourth hypothesis investigates how subordinate trust-in-supervisor may affect their job
performance. According to Zand (1997, p. 230), trusting behavior refers to the willingness to
be vulnerable to another person whose behavior cannot be controlled, when ones potential
benefit is much less than potential loss if the other person abuses the vulnerability. Zand
(1997) further suggests that in the organizational context, two people who trust each other
will also help each other, work together constructively, improve their problem-solving
effectiveness and enhance the quality and implementation of their decisions.
Research in management accounting on trust (Lau and Buckland, 2001; Lau and
Tan, 2006) has demonstrated that high subordinate trust-in-supervisor leads to a
lower level of job-related tension. Specifically, these studies suggest that
subordinates who have a high level of trust in their superior are more likely to
express their feelings openly. Frankness in communication creates a more relaxed
working environment, which leads to lower levels of stress, anxiety, frustration and
conflict among subordinates. Hence, trusting subordinates are expected to
experience lower job-related tension than subordinates who have lower
interpersonal trust, as the latter are more likely to conceal their feelings from their
superior. Importantly, a more relaxed working environment is associated with a
higher level of subordinate job performance.
Numerous studies on psychological and organizational behavior also provide
strong theoretical and empirical support for a positive significant association
between subordinate trust-in-supervisor and job performance (Cremer et al., 2001; Li
and Tan, 2012; Zaheer et al., 1998). For example, Zaheer et al. (1998) propose that
individuals with high interpersonal trust could confront and resolve disagreement.
Confrontations that reduce the incidence of conflict will subsequently lead to
positive behavioral outcomes (e.g. better job performance). Further, Cremer et al.
(2001) indicate that individuals with higher trust are more willing to contribute than
individuals with low trust. Li and Tan (2012, p. 5) note that subordinates who have
a high level of trust-in-supervisor would not have to devote unnecessary resources
toward defending against their superior, [which leads to] less uncertainty perceived
in the social context of workplace[6]. These non-accounting studies provide
supportive evidence that subordinate trust-in-supervisor will translate to higher job
performance.
The literature discussed suggests that when subordinates trust their superiors,
they find the working environment more favorable (i.e. relaxed atmosphere and
fewer conflicts), eliciting their willingness and motivation to expend energy toward
productive work. Therefore, we posit that subordinates are more likely to increase
their job performance when they have high trust in their superior than when they do
not. The formal hypothesis is stated as follows:
H4. Trust-in-supervisor is positively related to job performance.
2.5 Relationship between organizational commitment and job performance Incentive
The fifth hypothesis examines the effect of subordinates organizational commitment on compensation
their job performance. Prior studies have provided empirical evidence that scheme
organizational commitment leads to positive job outcomes (Mathieu and Zajac, 1990;
Meyer et al., 1989; Mowday et al., 1982; Randall, 1990; Subramaniam et al., 2002). For
example, Mowday et al. (1982) and Meyer et al. (1989) argue that highly committed
individuals demonstrate greater willingness to contribute more and exert considerable 597
effort on behalf of the organization[7]. Further, Mathieu and Zajac (1990) demonstrate a
positive relationship between organizational commitment and subordinate motivation,
and Randall (1990) argues that organizational commitment directly leads to several
favorable behavioral outcomes in subordinates, for example, low subordinate turnover,
low absenteeism, high job performance and enhanced job effort.
In addition, numerous accounting researchers have found that organizational

commitment is an antecedent of subordinate job performance (Chong and Eggleton,
2007; Nouri and Parker, 1996; Quirin et al., 2000; Subramaniam and Mia, 2003).
Subramaniam and Mia (2003, p. 392) state that an subordinates loyalty to the firm
relates to genuine acceptance and preparedness to work hard so as to attain the firms
goals. Further, Chong and Eggleton (2007) suggest that organizational commitment is
one of the possible explanations for subordinates who act against the theory prediction
of the agency. They argue that agents with strong organizational affiliations usually
perceive that their own performance is directly connected to overall organizational
performance. Hence, highly committed agents are more willing and motivated to exert
greater effort in helping the organization to achieve its goals. Indeed, several studies
(Nouri and Parker, 1996; Quirin et al., 2000) document that subordinates who exhibit
high levels of organizational commitment have higher job performance than those with
low levels of organizational commitment. The accounting and non-accounting literature
provide supportive evidence for the idea that strongly committed subordinates will
contribute more effort in their work than subordinates with lower levels of commitment.
Our hypothesis in relation to this idea is expressed as follows:
H5. Organizational commitment is positively related to job performance.
2.6 Relationship between a budget-based incentive compensation scheme and job

performance
The sixth hypothesis explores the association between the use of a budget-based
incentive compensation scheme and subordinate job performance. Prior research has
focused on how budget-based incentive compensation systems affect performance at the
group level (Fisher et al., 2003) and the individual level (Hopwood, 1972; Otley, 1978;
Ross, 1995). Hopwood (1972, p. 173) states that of itself, concern with meeting the
budget can result in quite favourable consequences. This might reflect the fact that
one purpose of a budget is to outline clearly the objectives for a cost center. That is,
reliance on budget achievement provides clear and specific goals to subordinates.
Further, the great reliance on a budget-based incentive compensation scheme conveys
the perception to subordinates that meeting budget targets is fundamental to being
rewarded (Lau and Tan, 2003). Accordingly, Lau and Tan (2003) suggest that the
presence of goals, together with the pressure elicited from achieving budget targets,
motivates subordinates to persistently exert more effort in their jobs.
JAOC In addition, Brownell (1982) suggests that in a participative budgeting setting, a
12,4 heavier reliance on budget-based incentive compensation schemes is likely to favorably
affect subordinate job performance, because subordinates are assured that the budget
targets are reasonably achievable through participation in the budget-setting process.
Consequently, subordinates are likely to have high confidence and react positively to
attainable budget targets. Thus, the use of a budget-based incentive compensation
598 scheme may have a direct effect on subordinate job performance, as stated in the
following hypothesis:
H6. A budget-based incentive compensation scheme is positively associated with
job performance.
3. Method
3.1 Sample selection

This study used a survey method to collect data. Participants were managers
(departmental heads or supervisors) from Australian manufacturing firms listed in the
Whos Who in Business in Australia electronic database. Firms were selected
exclusively from the manufacturing sector to provide some degree of control for
industry and limit the sample to a manageable size.
The criteria for inclusion in the sample were that each manager held a senior
executive position in a manufacturing firm and have budget-setting responsibility, and
the firms had an annual sales turnover in excess of AU$200m to provide a control for
firm size. In total, 122 firms were found to satisfy these criteria. Of these, a sample of 100
firms was randomly selected. Maximum of three managers were selected from each firm
to ensure that respondents were independent. Also, 260 participants who were
departmental heads or supervisors of the accounting, production, marketing and sales
functions were identified as valid respondents.
The administration of the survey was based on the recommendations of Dillman
(2007) as follows:
telephone calls to check data accuracy;
a questionnaire package with a cover letter, questionnaire and reply-paid
envelope;
a reminder postcard to be sent two weeks after the questionnaire package; and
a follow-up telephone call to be made two weeks after the reminder postcard.
To enhance the response rate, each respondent was promised a gift voucher of AU$15.00
if the questionnaires were returned. Of the 260 questionnaires sent, 134 were returned,
producing a response rate of 51.54 per cent. Only 14 out of the returned questionnaires
were incomplete and, therefore, not useable. Consequently, 120 responses were used in
the final statistical data analyses.
3.2 Measurement of variables

To enhance the validity and reliability of this study, all variables of interest were measured
by instruments that had been previously developed and used in prior studies. The
budget-based incentive compensation scheme was measured using a four-item instrument
developed by Searfoss (1976), which requires survey participants to rate whether their
compensation and promotion are related to their budget performance on a seven-point
Likert-type scale. Trust-in-supervisor was measured by an instrument developed by Read Incentive
(1962) and has been in many prior studies (Hopwood, 1972; Otley, 1978; Ross, 1994; Lau and compensation
Sholihin, 2005; Lau and Tan, 2006; Sholihin et al., 2011). This four-item five-point instrument
has consistently demonstrated high internal reliability for Cronbachs (1951) alpha. We also
scheme
used the nine-item organizational commitment questionnaire developed by Mowday et al.
(1979) to measure organizational commitment. The seven-point Likert-type scale instrument
is considered appropriate, as acceptable levels of reliability and validity have been 599
documented in numerous prior studies (Nouri and Parker, 1996; Chong et al., 2006; Chong
and Eggleton, 2007). The nine-dimensional self-rating measures were adapted from
Mahoney et al. (1963, 1965) to evaluate job performance on a seven-point Likert-type scale.
The instrument consists of a single overall performance rating, together with ratings on
eight other managerial activities: planning, investigating, coordinating, evaluating,
supervising, staffing, negotiating and representing. The survey questionnaire used in this
study is presented in Appendix. We include two control variables: the respondents age and
work experience. These variables control for the potential effect of respondents age and
work experience on their job performance.
4. Results
The average age of respondents was 43.53 years. They had held their current positions
for an average of 5.11 years and had been employed by their companies for an average
of 10.30 years. They had an average of 11.88 years of experience in their areas of
responsibility. The firms had an average of 202.08 subordinates. The descriptive
statistics of the measurement instruments are presented in Table I.
4.1 Measurement model

A partial least squares (PLS) approach was used to assess the psychometric properties of the
theoretical model and proposed hypotheses[8]. The use of PLS is appropriate in this study,
because PLS requires relatively small sample sizes and makes minimal data assumptions
(Wold, 1985). Data analysis was conducted using WarpPLS Version 5.0. The measurement
properties of the various scales used in this study were examined through the statistics from
the PLS measurement model. First, the factor loadings for each variable were examined. As
demonstrated in Table II, all items loaded above the recommended minimum cut-off of 0.50
(Hulland, 1999).
Scale internal reliability was investigated using Fornell and Larckers (1981) measure of
composite reliability and Cronbachs (1951) alpha. As demonstrated in Table II, the
composite reliability ranged from 0.873 (budget-based incentive compensation scheme) to
0.964 (organizational commitment). The Cronbach alpha scores for each variable were
higher than the recommended benchmark of 0.70 (Hair et al., 2006). These results suggest
satisfactory internal reliability.
Sample Theoretical Actual

Variable size Mean SD range range
Budget-based incentive compensation scheme 120 3.863 1.344 1.00-7.00 1.00-7.00 Table I.
Trust-in-supervisor 120 5.248 1.434 1.00-7.00 1.25-7.00 Descriptive statistics
Organizational commitment 120 4.565 1.922 1.00-7.00 1.33-7.00 of measurement
Job performance 120 4.958 1.469 1.00-7.00 2.00-7.00 instruments
JAOC Items BBIC TIS OC JP Age Work experience
12,4
BBIC1 0.743 0.136 0.187 0.069 0.052 0.062
BBIC2 0.855 0.211 0.126 0.076 0.068 0.018
BBIC3 0.810 0.245 0.067 0.115 0.241 0.134
BBIC4 0.771 0.256 0.077 0.123 0.260 0.126
600 TIS1 0.313 0.913 0.263 0.417 0.007 0.105
TIS2 0.262 0.935 0.315 0.385 0.063 0.073
TIS3 0.252 0.939 0.287 0.440 0.053 0.045
TIS4 0.140 0.852 0.294 0.275 0.046 0.040
OC1 0.093 0.286 0.943 0.143 0.060 0.063
OC2 0.066 0.169 0.480 0.098 0.016 0.021
OC3 0.108 0.199 0.538 0.056 0.209 0.017
OC4 0.100 0.305 0.939 0.177 0.077 0.021

OC5 0.141 0.266 0.941 0.169 0.051 0.033
OC6 0.148 0.278 0.945 0.089 0.105 0.022
OC7 0.218 0.351 0.946 0.226 0.052 0.074
OC8 0.110 0.292 0.961 0.136 0.095 0.033
OC9 0.115 0.306 0.952 0.152 0.067 0.021
JP1 0.013 0.166 0.114 0.560 0.109 0.051
JP2 0.072 0.180 0.005 0.720 0.217 0.184
JP3 0.051 0.134 0.018 0.769 0.091 0.113
JP4 0.021 0.240 0.017 0.734 0.098 0.007
JP5 0.140 0.351 0.093 0.802 0.005 0.020
JP6 0.072 0.178 0.142 0.771 0.116 0.015
JP7 0.123 0.453 0.148 0.723 0.052 0.071
JP8 0.170 0.584 0.213 0.705 0.019 0.113
JP9 0.104 0.438 0.342 0.657 0.042 0.073
Age 0.164 0.046 0.088 0.092 1.000 0.494
Table II. Work experience 0.069 0.072 0.040 0.099 0.494 1.000
Structure loadings, CR 0.873 0.951 0.964 0.910 1.000 1.000
cross-loadings, CA 0.806 0.931 0.953 0.887 1.000 1.000
composite reliability AVE 0.633 0.829 0.755 0.517 1.000 1.000
(CR), Cronbachs
alpha (CA) and AVE Notes: BBIC budget-based incentive compensation scheme; TIS trust-in-supervisor; OC
from PLS model organizational commitment; JP job performance
Referring to the test for construct validity, Xu et al. (2012, p. 4) state that the items
within one construct should demonstrate relatively high correlation (convergent
validity), whereas the items from different constructs should be characterized by
low correlation (discriminant validity). Convergent validity of the variables was
assessed by examining the average variance extracted (AVE) statistics. The AVE
was 0.500 or greater for each scale, which demonstrates adequate convergent
validity (Chin, 1998; Hair et al., 1998). Discriminant validity was assessed by
comparing the square root of the AVE statistics to the correlations among the latent
variables (Fornell and Larcker, 1981; Chin, 1998). Table III demonstrates that the
square root of AVE for each variable was greater than the off-diagonal elements.
These results provide strong support for construct reliability, as well as the
convergent and discriminant validity of the scales.
To assess common method bias in the data, a Harman one-factor test was conducted, Incentive
following the procedure outlined in Podsakoff and Organ (1986). All of the principal compensation
constructs in the model were entered into a principal component factor analysis using
Statistical Package for the Social Sciences Version 19. The results revealed four factors
scheme
with eigenvalues greater than 1 in the data, and no single factor emerged as a dominant
factor accounting for most of the variance. Thus, there was no significant common
method bias in the data. 601
4.2 Structural model and tests for hypotheses
The structural model was assessed based on WarpPLS[9]. Bootstrapping (with 100
samples) was conducted to evaluate the statistical significance of each path coefficient,
because PLS makes no distributional assumptions (Chin, 1998). The results of the
structural model (which are illustrated in Figure 2 and summarized in Table IV) were
used to test the direct hypotheses[10].

The results lend support to H1, H3, H4 and H5, indicating a significant positive
relationship between:
a budget-based incentive compensation scheme and subordinate trust-in-supervisor
( 0.300, p 0.001);
trust-in-supervisor and organizational commitment ( 0.316, p 0.001);
subordinate trust-in-supervisor and job performance ( 0.389, p 0.001); and
organizational commitment and subordinate job performance ( 0.152,
p 0.043).
However, the relationships between reliance on a budget-based incentive compensation

scheme and organizational commitment ( 0.055, p 0.272) and subordinate job
performance ( 0.049, p 0.293) are statistically non-significant.
Thus, H2 and H6 are not supported, suggesting that a budget-based incentive
compensation scheme does not directly influence subordinates levels of
organizational commitment or job performance.
4.3 Additional analyses

We conducted additional analyses to examine the indirect relationship between the
reliance on a budget-based incentive compensation scheme and job performance
through trust-in-supervisor and organizational commitment. The sums of the
Budget-based incentive Trust-in- Organizational Job

Variable compensation scheme supervisor commitment performance
Budget-based incentive 0.796

compensation scheme
Trust-in-supervisor 0.263** 0.910
Organizational commitment 0.146 0.319** 0.869 Table III.
Job performance 0.122 0.441** 0.185* 0.719 The Pearson
correlation matrix
Notes: square roots of AVEs shown in diagonal; ** correlation is significant at 0.01 level and square root of
(two-tailed); * correlation is significant at 0.05 level (two-tailed) AVEs
JAOC = 0.055, p < 0.272
12,4
= 0.300, p < 0.001 = 0.316, p < 0.001
Budget-based incentive Organizational
Trust-in-supervisor
compensation scheme commitment
602
= 0.049, p < 0.293 = 0.389, p < 0.001 = 0.152, p < 0.043
= 0.149, p < 0.047
Job performance Working

Experience
= 0.129, p < 0.073
Age
Notes: Model fit and quality indices: Average path coefficient (APC) = 0.192, p < 0.007;
Average R2 (ARS) = 0.153, p < 0.021; Average adjusted R2 (AARS) = 0.135, p < 0.032;
Average block VIF (AVIF) = 1.060, acceptable if 5, ideally 3.3; Average full collinearity
VIF (AFVIF) = 1.276, acceptable if 5, ideally 3.3; Tenenhaus GoF (GoF) = 0.348,
small 0.1, medium 0.25, large 0.36; Sympsons paradox ratio (SPR) = 0.875,
acceptable if 0.7, ideally if =1; R2 contribution ratio (RSCR) = 0.986, acceptable if 0.9,
Figure 2. ideally if =1; Statistical suppression ratio (SSR) = 1.000, acceptable if 0.7; Nonlinear
Path coefficients of bivariate causality direction ratio (NLBCDR) = 0.875, acceptable if 0.7
the structural model
Variable BBIC TIS OC Age Work experience R2
TIS 0.300, p 0.001 0.090

OC 0.055, p 0.272 0.316, p 0.001 0.112
Table IV. JP 0.049, p 0.293 0.389, p 0.001 0.152, p 0.040 0.129, p 0.073 0.149, p 0.047 0.258
PLS results path
coefficients, p-values Notes: BBIC budget-based incentive compensation scheme; TIS trust-in-supervisor; OC
and R2 coefficients organizational commitment; JP job performance
indirect effects of a budget-based incentive compensation scheme and job

performance consist of the three paths (Table V).
Path 1 indicates the indirect effect exclusively via organizational commitment
with a path coefficient of 0.009. Path 2 indicates the indirect effect exclusively via
trust-in-supervisor with a path coefficient of 0.120. Path 3 reveals the indirect effect
through trust-in-supervisor and organizational commitment with a path coefficient
of 0.015. These results indicate that the relationship between reliance on a
budget-based incentive compensation scheme and job performance consists of
two effects:
(1) direct effect of 0.073 (Figure 2 and Table IV); and Incentive
(2) sum of indirect effects of 0.144, which can be further decomposed into the compensation
portions attributable to organizational commitment (0.009), trust-in-supervisor scheme
(0.120) and trust-in-supervisor and organizational commitment (0.015).
The sum of the indirect effects (0.144) is considered meaningful, because they exceed an
absolute value of 0.05 (Bartol, 1983; Pedhazur, 1982)[11]. This result suggests that there 603
is an indirect relationship between a budget-based incentive compensation scheme and
job performance through trust-in-supervisor and organizational commitment. In
addition, we tested the indirect relationship between reliance on a budget-based
incentive compensation scheme and organizational commitment through
trust-in-supervisor. This relationship is computed based on the path coefficients in
Figure 2 as follows: BBIC TIS OC 0.300 0.316 0.095. The indirect effect (0.095)
is considered meaningful, because it exceeds an absolute value of 0.05 (Bartol, 1983;

Pedhazur, 1982). This result suggests that there is an indirect relationship between a
budget-based incentive compensation scheme and organizational commitment through
trust-in-supervisor.
5. Discussion and conclusions

This study examined the mediating effect of trust-in-supervisor and organizational
commitment in the relationship between reliance on a budget-based incentive compensation
scheme and subordinate job performance in a single structural model. Our results
demonstrate that a budget-based incentive compensation scheme is not directly associated
with subordinate job performance; rather, it is indirectly associated with subordinate job
performance through trust-in-supervisor and organizational commitment. These results are
consistent with agency theorys prediction that budget-based incentive compensation
schemes induce effort and, in turn, indirectly influence subordinates job performance via
their trust-in-supervisor and levels of organizational commitment.
Our study contributes to the existing literature in several ways. First, from a theoretical
perspective, our study indicates that the development of a theoretical model that includes
relevant variables such as trust-in-supervisor and organizational commitment can help to
enhance understanding of how a budget-based incentive compensation scheme affects
subordinate work behaviors. Specifically, the results suggest that the direct influence of a
budget-based incentive compensation scheme on job performance is not statistically
significant. Rather, a significant indirect effect of a budget-based incentive compensation
scheme on subordinate job performance was found. This indirect effect can be further
decomposed into the portions attributable to trust-in-supervisor only and to both
trust-in-supervisor and organizational commitment. The practical implications of these
Path 1 BBIC OC JP 0.055 0.155 0.009

Path 2 BBIC TIS JP 0.300 0.401 0.120
Path 3 BBIC TIS OC JP 0.300 0.316 0.155 0.015
Total indirect effects: 0.144*
Table V.
Notes: BBIC budget-based incentive compensation scheme; TIS trust-in-supervisor; Computation of total
OC organizational commitment; JP job performance indirect effect
JAOC results suggest that when designing an incentive compensation scheme, managers must
12,4 ensure that it is effort-inducing, for example, the design of bonus contracts versus penalty
contracts (Hannan et al., 2005; Christ et al., 2012b).
Second, our study reveals the indirect influence of a budget-based incentive
compensation scheme on organizational commitment through trust-in-supervisor. This
suggests that a budget-based incentive compensation scheme can be used as a motivational
604 tool to cultivate the organizational commitment of subordinates. Third, our study suggests
that a formal control such as a budget-based incentive compensation scheme can influence
subordinates perceived levels of trust in their supervisor, which can in turn serve as an
antecedent to the subordinates affective commitment. Colquitt et al. (2007, p. 912) note that
affective commitment indicates the existence of a social exchange relationship. Thus,
subordinates with strong affective commitment will continue their employment with the
organization, because they want to do so. In addition, they are better at building
social-exchange relationships, because they are more likely to adhere to the norm of
reciprocity (Colquitt et al., 2007). Such individuals are able to expand their social networks,
which allows them to gain the information and support necessary to improve their decisions
and performance (Wayne et al., 1997). Thus, it can be concluded that trust-in-supervisor can
serve as an antecedent to the development and cultivation of subordinates commitment,
which in turn improves their job performance.
Fourth, the results of this study have important implications for management
accounting practices. Our findings provide a practical application in assisting top
management to better understand the importance of designing an effective
budget-based incentive compensation scheme to promote high interpersonal trust
and organizational commitment among subordinates. Cultivating a climate of trust
may help to enhance interpersonal trust between subordinates and their superior,
which may in turn lead to improvement in subordinate organizational commitment
and job performance. We examined budget-based incentive compensation schemes,
because they form a major component of a firms management control system. A
budget-based incentive compensation scheme is crucial, because it provides
important direction and motivation for corporate executives (Kaplan and Atkinson,
1998, p. 676). Thus, our findings are relevant and have important implications for
the design management control systems.
This study has a number of limitations. First, the sample was selected from
mid-level managers of the manufacturing industry. Hence, generalization of the
results should be restricted to similar management levels and organization types.
Any generalization beyond that should be made with due consideration. Second, in
common with most survey studies, the use of proxies based on the respondents
perceptions and self-reported data may affect the accuracy of model relationships
(Kren, 1992; Sholihin et al., 2011). Prior studies (Prien and Liske, 1962; Thornton,
1968) argue that the use of such scales (e.g. job performance and organizational
commitment) is likely to generate higher mean values (higher leniency error) and a
restricted range (lower variability error) in the observed scale. Future research
should consider the use of supervisor ratings. Third, the sample used in this study
may induce the problem of survivorship bias. The data analyses showed that the
managers surveyed in this study have been employed in the same organization for
an average of 10 years. Managers who serve their organization for a relatively long
period are likely to have stronger bonding with the organization (Hrebiniak and
Alutto, 1972). In addition, the participated managers have approximately 12 years of Incentive
experience in their current areas of responsibility on average. For these reasons, compensation
their organizational commitment is likely to be high in conjunction with more
experience and familiarity with their job, which consequently leads to high job
scheme
performance. Finally, this study may suffer from potential omitted variables such as
procedural fairness, leader-member exchange and perceived organizational
support. Future research may partially replicate and extend the theoretical model 605
proposed here by including these variables.
Notes
1. The terms superior, supervisor and principal, as well as subordinate and agent, are
used interchangeably in this paper.

2. According to Meyer and Allen (1991, p. 67), affective commitment refers to the subordinates
emotional attachment to, identification with, and involvement in the organization.
Continuance commitment refers to an awareness of the costs associated with leaving the
organization. Normative commitment reflects a feeling of obligation to continue
employment.
3. Trust refers to a psychological state comprising the intention to accept vulnerability
based on positive expectations of the intentions or behavior of another (Rousseau et al.,
1998,
p. 395). Although trust can be examined across multiple organizational levels (Fulmer
and Gelfand, 2012), this study examines trust at a micro-organizational level, specifically,
trust-in-supervisor (i.e. trust between the supervisor and subordinate) at an interpersonal
level.
4. Hartmann and Slapnicar (2009, p. 724) define formality as the situation in which
superiors explicate performance targets in quantitative and written terms, whereas
informality means having implicit, qualitative targets, that are communicated
informally, and whose subsequent achievement cannot be measured objectively. There
are three dimensions of the performance evaluation system that determine its overall
formality: target setting, performance measurement and assignment of
performance-based rewards.
5. The causal ordering between trust-in-supervisor and organizational commitment is
unclear. Gregson (1992, p. 84) warns that if the theoretical causal ordering is incorrectly
specified, the strength of the direct and indirect effects may be erroneous [and]
researchers should know the appropriate causal order among these variables. Therefore,
we conduct an analysis of the causal ordering between these two variables before testing
our hypotheses.
6. Li and Tan (2012) find that trust-in supervisor contributes to job performance through
psychological availability and psychological safety but not psychological
meaningfulness. Psychological meaningfulness is defined as a feeling that one is
receiving a return on investment for ones self in a currency of physical, cognitive or
emotional energy. Psychological availability refers to the perception of having the
physical, emotional or intellectual resources to perform ones work tasks. Psychological
safety is defined as feeling to be able to demonstrate and employ ones self without fear of
negative consequences to self-image, status or career.
JAOC 7. Meyer et al. (1989) suggest that affective commitment is positively related to
12,4 performance, whereas continuance commitment is negatively related to performance.
8. There are two approaches for estimating the parameters of a structural equation modeling
(SEM): these are covariance-based and variance-based. PLS analysis is a variance-based SEM
(Haenlein and Kaplan, 2004). PLS regression analysis refers to a latent-variable modeling
technique that considers multiple dependent variables and explicitly recognizes
606 measurement error (Fornell, 1982). A measurement model is typically assessed before a
structural model to ensure that the variables measures are reliable and valid before assessing
the nature of the relationships between the variables (Barclay et al., 1995).
9. WarpPLS generates path coefficients and associated p-values, which indicate the strength of
the proposed relationship, as well as R2 values of the dependent variables, which represent the
productiveness of the theoretical model.
10. The results of our analysis of the causal ordering between trust-in-supervisor and
organizational commitment (not reported in this paper) suggest that a causal ordering from
trust-in-supervisor to organizational commitment is the best fitting model.
11. The threshold of 0.05 is an absolute value.
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JAOC Appendix: Survey questionnaire
Budget-based incentive compensation scheme
12,4 Please respond to each of the following questions by circling a number from 1 to 7.
Strongly Strongly
Disagree Agree
1. Budget variances have been mentioned by my 1 2 3 4 5 6 7

612 superior as factors in his/her consideration of me
for promotion.
2. Budget variances have been mentioned by my 1 2 3 4 5 6 7
superior as factors in considering me for pay
raises.
3. Pay increase are closely tied into budget 1 2 3 4 5 6 7
performance.
4. Budget performance is an important factor in 1 2 3 4 5 6 7
getting a promotion.
Trust-in-supervisor
Please respond to each of the following question by circling a number.
1. Does your superior take advantage of opportunities that come up to further your interests by his/her
actions and decisions?
1 2 3 4 5 6 7
To a Very To a Very
Little Extent Large
Extent
2. How free do you feel to discuss with your superior the problems and difficulties you have in your
job without jeopardizing your position or having it "held against" you?
1 2 3 4 5 6 7
To a Very To a Very
Little Extent Large
Extent
3. How confident do you feel that your superior keeps you fully and frankly informed about things
that might concern you?
1 2 3 4 5 6 7
To a Very To a Very
Little Extent Large
Extent
4. Superiors at times must make decisions which seem to be against the interests of subordinates.
When this happens to you as the subordinate, how much trust do you have that your superior's
decision is justified by other considerations?
1 2 3 4 5 6 7
To a Very To a Very
Little Extent Large
Extent
(continued)
Organizational commitment
Please indicate the extent of your agreement to the following questions by circling a number from 1 to
Incentive
7, based on the following scale: compensation
scheme
1. Strongly disagree 5. Mildly agree
2. Moderately disagree 6. Moderately agree
3. Mildly disagree 7. Strongly agree
4. Neutral
613
1. I am willing to put in a great deal of effort beyond 1 2 3 4 5 6 7
that normally expected in order to help this
organization be successful.
2. I talk up this organization to my friends as a great 1 2 3 4 5 6 7
organization to work for.
3. I would accept almost any type of job assignment in 1 2 3 4 5 6 7
order to keep working for this organization.
4. I find that my values and the organizations values 1 2 3 4 5 6 7

are very similar.
5. I am proud to tell others that I am part of this 1 2 3 4 5 6 7
organization.
6. This organization really inspires the very best in me 1 2 3 4 5 6 7
in the way of job performance.
7. I am extremely glad that I chose this organization to 1 2 3 4 5 6 7
work for over others I was considering at the time I
joined.
8. For me this is the best of all possible organizations 1 2 3 4 5 6 7
for which to work.
9. I really care about the fate of this organization. 1 2 3 4 5 6 7
Job performance
Please rate your performance in the following areas of managerial activities by circling a number from
1 to 7.
Very Low Very High
1. Planning 1 2 3 4 5 6 7
2. Coordinating 1 2 3 4 5 6 7
3. Evaluating 1 2 3 4 5 6 7
4. Investigating 1 2 3 4 5 6 7
5. Supervising 1 2 3 4 5 6 7
6. Staffing 1 2 3 4 5 6 7
7. Negotiating 1 2 3 4 5 6 7
8. Representing 1 2 3 4 5 6 7
9. Overall performance 1 2 3 4 5 6 7
Corresponding author
Vincent K. Chong can be contacted at: Vincent.Chong@uwa.edu.au
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Journal of Accounting & Organizational Change

The effect of a budget-based incentive compensation scheme on job

*Related content and download information correct at time of download.

Maggie B.C. Law

trust-in-supervisor and organizational commitment) may have been overlooked in the

trust-in-supervisor and organizational commitment in the relationship between a

Budget-based incentive Organizational

Job performance Working

2.2 Budget-based incentive compensation scheme and organizational commitment

2.3 Trust-in-supervisor and organizational commitment

Affective commitment is an important attitudinal predictor of subordinates behaviors

In addition, numerous accounting researchers have found that organizational

2.6 Relationship between a budget-based incentive compensation scheme and job

3.1 Sample selection

3.2 Measurement of variables

4.1 Measurement model

Sample Theoretical Actual

OC4 0.100 0.305 0.939 0.177 0.077 0.021

used to test the direct hypotheses[10].

However, the relationships between reliance on a budget-based incentive compensation

4.3 Additional analyses

Budget-based incentive Trust-in- Organizational Job

Budget-based incentive 0.796

= 0.149, p < 0.047

Job performance Working

= 0.129, p < 0.073

Variable BBIC TIS OC Age Work experience R2

TIS 0.300, p 0.001 0.090

indirect effects of a budget-based incentive compensation scheme and job

is considered meaningful, because it exceeds an absolute value of 0.05 (Bartol, 1983;

5. Discussion and conclusions

Path 1 BBIC OC JP 0.055 0.155 0.009

used interchangeably in this paper.

Research, Vol. 29 No. 2, pp. 432-452.

Gregson, T. (1992), An investigation of the causal ordering of job satisfaction and

1. Budget variances have been mentioned by my 1 2 3 4 5 6 7

4. I find that my values and the organizations values 1 2 3 4 5 6 7

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