Performance Measurement System and its Contributions to...

Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)

An Online International Research Journal (ISSN: 2311-3162)

2016 Vol: 2 Issue: 1

413 www.globalbizresearch.org

Performance Measurement System and its Contributions to Improve

Performance: In the Context of Sri Lankan Water Board

Dayananda Ambalangodage,

Department of Accounting,

Faculty of Management Studies and Commerce,

University of Sri Jayewardenepura, Sri Lanka.

E-mail: [email protected]

David Yong Gun Fie,

Faculty of Management,

Multimedia University, Malaysia.

____________________________________________________________________

Abstract

Purpose – The purpose this study is to report the results of a study in the context of Sri

Lankan water Board that explains the relationship between performance measurement

systems (PMS) and its contribution to improve performance. The study investigates

contributions of PMS to improve performance where the employee behavior and

organizational capabilities were considered as the contributions of PMS.

Design/ Methodology/Approach - The paper expects to identify the extent to which PMS -

influences employee behavior, organizational capabilities, and organizational performance.

A questionnaire was used to collect data from 223 managerial employees of Sri Lankan

Water Board. PMS was tested against employee behavior, organizational capabilities -

applying regression analysis.

Findings - The findings of this study reveal moderate positive relationship between PMS and

its contributions. The relationships are statistically significant. Contributions were

categorized as employee behavior and organizational capabilities.

Practical Implications – Recognizing the important role of PMS and its contribution to

improve effectiveness and efficiency in Sri Lankan Water Board.

Originality/value- This study offers an understanding of existing literature relating PMS and

its contributions. The study was instrumental in testing the relationship between PMS and its

contributions by using the survey data collected from Sri Lankan Water Board.

___________________________________________________________________________

Key Words: Performance measurement systems, Employ behavior, Organizational

capabilities

mailto:[email protected]





1. Introduction

In recent years there has been a dramatic growth in the number of journals devoted to

performance measurement system and publications concerning a wide range of PMS and their

components in a variety of perspectives (Choong 2013). Further, business performance

Measurement is a fast evolving and diverse research which features highly on the agenda of

academics, practitioners, and researchers from functions including general management,

accounting, operations research, marketing and human resources (Marr and Schiuma 2003).

From an accounting perspective dominating approach to measure performance of an

organization, the study focuses on financial measures. This area still remains a critical and

much-debated issue. Management control system and performance measurement literature

have revealed that traditional measures such as profits, and return on investment, were not

sufficient for decision –making, planning, motivating, controlling a in rapidly changing and

hyper-competitive business environment. It is true that financial measurements are important

but the so called traditional performance measurements are under serious challenges since

they focus on monitory values in order to satisfy the regulatory and accounting standards

requirements. Traditional financial measures can be distorted purposefully by management

due to various reasons in the measuring and recognition process. There are different strategies

to distort financial measures such as increasing income and income smoothing. Since

financial measures are applied periodically. However, these measures are criticized as short

term rather than longer term. Profit for a period is calculated based on accrual but not on cash

basis. Critics of accrual accounting decry its lower reliability and prefer reliable cash flows.

Even though profit calculated based on accrual subject to distorted cash flow information are

more reliable since it is calculated on cash basis. There was a gap to measure performance

from other perspective such as general management, operations research, marketing, human

resource just because of limitation in the accounting perspective measurement.

Over last two decades, significant attention has been paid to the development and use of

non-financial measurement and such approaches have been used for both motivate and

report organizational performance. Kaplan and Norton (1992) have introduced the balanced

scorecard (BSC) offering a superior combination of non-financial and financial measures. The

aim of the balanced scorecard is to provide a comprehensive framework for translating a

company’s strategic objectives into a coherent set of performance measures. BSC was

implemented by a number of organizations worldwide in response to the new global

competitive environment.

The public sector, in most Western and European economies, has been subjected to

increasing demands for greater financial accountability, efficiency and effectiveness over the

last two decades (Hopwood, 1984; Chua and Degelling, 1993; Covaleski et al., 1993).





Operation of the organization in public sector are naturally linked to many internal and

external parties such as government, media, community, politician, global economy, and

organizational trade unions and employees (Parker and Guthrie, 1993; Pendlebury and

Karbhan, 1997; Funnel and Cooper, 1998; Guthrie et al., 1999; Rutherforld,2000; Lane, 2000;

Brignal and Modell,2000; Modell 2005). Thus, these organizations are normally criticized for

alleged poor services to customers and misuse of resources even though such claims are not

always true. The role of the accounting function is crucial to measure the performance

especially with regard to financial measurements. Governments are implementing numerous

market-based reforms, broadly known as New Public Management (NPM) (Olson et al.,

1998), with an aim to bring the public sector in line with the private sector. This is also

evident in developing countries.

According to the literature, there is no clear definition for NPM, but it is understood that

new approach is to encourage applying private sector values and principles in the public

sector in order to increase efficiency, effectiveness-and performance. Thus, there is a greater

demand for accurate and useful performance information. The contribution that performance

information can make to the promotion of accountability in the public sector has been widely

-emphasized in the literature (Rutherford, 2000; Modell, 2005). A number of measurements

are used based on the belief that “you get what you measure” in managing public sector

organizations. Practitioners embarking upon a development of their performance

measurement system assume that their efforts will have a positive impact on the

organization’s overall performance (Bourne et al., 1999). However, published research

suggests that success is not certain. Franco and Bourne (2004) have analyzed 99 published

papers on impact of performance measurement on organizational performance. Although

study revealed that the majority of papers found that performance measurement had a positive

impact on organizational performance, further analysis suggested that the more rigorous the

research method used, the less likely performance measurement would be found to have a

positive impact. The conclusion has to be that the research findings are contradictory. Whilst

some studies have found that the use of non-financial performance measures has a positive

impact on business performance (Ittner and larcker, 1998, 2003; Banker et al., 2000) others

found no relationship (Perera et al., 1997; Neely et al., 2004). This indicates performance

measurement system can be useful but there exists various pragmatic and research gaps. Thus,

this area needs further research and the purpose of this paper is to investigate the

contributions of performance measurement system to improve performance. Hence, it is

logical to raise the research question: Does the existing performance measurement contribute

to improve performance? The remainder of this paper is organized as follows. Section two

discusses literature, and then discusses the methodology used for this paper. Section 5 covers

the data analysis. The final section discusses and concludes the results.





This paper begins with a brief literature review followed by an explanation of the

theoretical framework employed. Section 3 then considers hypotheses formulation, and

section 4 discusses the research method used. Section 5 presents the results of the research.

Finally, discussion and conclusion is given at the end

2. Literature Review

2.1 Performance Measurement Systems (PMS)

According to the available literature, PMS related studies have been undertaken by a

variety of scholars from different perspectives. Thus, the literature lacks an agreed definition.

This issue may create confusion, limiting the potential for researchers to compare different

studies in this field. Moullin (2002) defined performance measurement as evaluating how

well organizations are managed and value they deliver for customers and other stakeholders.

This perspective of performance measurement provides much more guidance to people

involved in performance measurement. Specially, this encourages people to consider the

extent to which organizations measure the value they deliver to their customers and whether it

covers the main aspects of how performance is managed. It advocates the use of both

financial and non-financial measures. Definitions of scholars of Neely et al., (1995), Hall

2008, Marshal at al., (1999), Ittner et al., (2003), Najmi and Kehoe (2001), Taticchi et al.,

(2010), Moullin (2002), and Franco-Santos et al., (2007) have been used widely in

performance measurement related research papers with a view to look at the PMS from

broadly. Historically, public sector organizations have relied on actions controls (rules and

procedures) to manage and control organization. However, according to the literature, the past

two decades have witnessed various changes in management control of public sector

organizations including a shift towards output controls and outcomes controls by establishing

more comprehensive performance measurement system (Ter Bogt, 2003; Hyndman and Eden,

2001, 2000; Lapsley, 1999; Guthrie et al., 1999). Several multi-dimensional frameworks (e.g.

balanced scorecard) have been introduced, attempting to incorporate outcome and result-

oriented process measures for delivering long-term organizational objectives (see Lynch and

Cross, 1991; Fitzgerald et al., 1991; Kaplan and Norton, 1992; and). Thus, the public sector

organizations have even responded to the changes taken place in the business environment in

which they operate. Designing and implementing a well balance PMS is essential to an

organization to ensure its survival and growth. The degree of balance depends on the how

powerful actors influence on PMS.

2.2 Consequences of Performance Measurement Systems

Performance measurement systems are called strategic expert systems through which

organizations observe and measure their intangible elements of performance, both in form of

qualitative and quantitative assessments (Franco-Santos et al., 2007). While using these





systems organizations intend to monitor internal and external opportunities and threats

resulting from, and in intangible resources in strategic processes. Performance measurement

system can be seen as an enabler of strategic learning process (by providing feedback,

identifying problems, discovering opportunities) (Wouters and Wilderom, 2008). Thus,

performance measurement system should have its own results or consequences. Franco-

Santos et al., 2012 identified and categorized three consequences comprehensive performance

measurement systems, namely, people’s behavior, (i.e. employee behavior) organizational

capabilities, and performance consequences by reviewing the existing empirical evidence.

The main purpose of their study was to develop a conceptual framework for understanding

the literature on the consequences of contemporary performance measurement systems and

the theories that explain these consequences. To meet the- research objectives the study was

conducted by focusing on two research questions; what are the consequences of contemporary

performance measurement systems? And what theories have been used to explain the

consequences of contemporary performance measurement system? They conducted the

literature review by following a six step- process and Table 1 shows the process. The

researcher reviewed broadly 76 empirical articles (the articles which met the specific

selection criteria) published in high-quality academic journals in the area of accounting,

operations, and strategy. Finally, they were able to identify and classify three consequences of

contemporary performance measurement systems which would be considered as

consequences of performance measurement system in their study

Table 1: A Six-Step Process to Review the Literature

Step Description

1 A scoping study based on an ad hoc list of empirical papers that focus on consequences of

contemporary performance measurement systems

2 Searching of the literature and identifying the relevant studies for the review

3 Selecting those studies which meet the specific selection criteria.

4 Reading the papers selected and developed a data set including the main variables and

characteristics of each study

5 Classification of the effects of contemporary performance measurement systems

6 Synthesizing the insights extracted from the literature review in order to answer the

research questions

This comprehensive yet parsimonious categorization allows us to accommodate numerous

variables that may be affected by performance measurement systems, thereby understanding

of this complex phenomenon (Franco-Santos et al., 2012). Employee behavior means to

consequences related to the actions or reactions of employees (e.g. motivation, participation)

and their underlying cognitive mechanisms (e.g. perceptions). Organizational capabilities

means the consequences associated with specific processes, activities, or competences that

enable the organization to perform and gain competitive advantages (e.g. Strategic alignment,





organizational learning) and Performance comprises the different effects that performance

measurement systems can have on financial and non-financial results at all levels of the

organization (e.g., firm performance, managerial performance and team performance) but in

this research performance is limited only to firm (i.e. organizational) performance.

3. Hypotheses for the Study

The research frame work developed by Franco-Santos et al, 2012 has classified

consequences of performance measurement into three components: people behavior ( here

after employee behavior), organizational capabilities and performance (individual, team,

organization, inter-organization). This study focuses only on organizational performance and

other components of performance are out of the scope of this study.

It is expected to explore the impact of performance measurement system on consequences

of performance measurement system. The study focuses on following hypotheses.

H2-There is positive relationship between Performance Measurement Systems and

Employee Behavior

H3-There is positive relationship between Performance measurement systems and

Organizational Capabilities

4. Research Method, the Sample and Data collection

Quantitative method was adopted by using survey method. A survey is a research

instrument in which information is gathered from a sample of people by the use of a

questionnaire (Zikmund 2003). A structured questionnaire is a formal questionnaire that

presents questions in a pre-arranged order (Malhotra 1996). The instructions of prior literature

(Churchill and Iacobucci 2005: Malhotra 1966) were used in designing the questionnaire.

The questionnaire was distributed among managerial employees of Sri Lankan Water

Board. Thus, the population of the study is managerial employees of Sri Lankan Water Board.

By using the 2014 diary of Sri Lankan Water Board, the sampling frame of managerial

employees was prepared. The diary offered useful information such as names, division,

position, contact information both official and residence. At the time of data collection total

number of managerial employees was 808. The study uses the probability sampling as the

sampling design. Data were in the period of November 2014 to February 2015. Researcher

himself distributed the questionnaires to the respective divisional heads. The divisional heads

were informed about the survey and the purpose of the study. Then the data were collected

through the heads. Total of 350 questionnaires were distributed to 12 divisions through head

office. However, all the Western Province and Southern province regional centers and

manager offices were visited by the researcher to collect data. Though, 231 questionnaires

were collected, only 223 questionnaires were usable for the study (incomplete questionnaires

were not considered for the study). Thus, the response rate of the questionnaire survey is

66%.





The sample composition of the study is given in two perspectives (Table 2); demographics

and work experience in the organization. According to Table 2, there were 114 males and 109

females. Thus, the final sample consisted of 51% males and 49%% females. Between 18

years and 35 years were categorized as young. While the respondent between 36 year and 50,

and above 50 were categorized as matured and well-matured respectively. The majority of

sample (49%) were between 36-50 years age.. From the final sample, 36% and 15% of the

respondents represent above 50years and between 18-35 years. Further, the majority of the

respondents (56%) had bachelor degree and 30% respondent had postgraduate qualification or

professional qualification. Thus, the final sample represents 86% of respondents with

bachelor degree, or postgraduate level, or professional level qualification. Only 14%

respondents had diploma level qualifications.

The majority respondents (34%) belong to above 20 years experience and 30%

respondents represent between 11-20 years. The experience less than one year, 2-5 years, 6-

10 of respondents represent 3%, 16% and 17% respectively. Thus, 64% respondents had more

than 10 years experience in the organization.

Table 2: Profile of Respondents

Description Frequency Percentage

Gender : Male 114 51

Female 109 49

Age (Years): 18-35 34 15

36-50 109 49

Above 50 80 36

Educational Level: Diploma 14 14

Bachelor and professional 56 56

Postgraduate 30 30

Total Experience (years): 1 or less than 1 7 3

2-5 38 17

6-10 36 16

11-20 67 30

Above 20 75 34

Source: Survey Data

In the present study, the unit of analysis is managerial employees. Managerial employees are

considered as those who work under the decision-making capacity in relation to work related

matters. Thus, all top, middle and lower level managers come - under the managerial

employees of the current study.

5. Sri Lankan Water Board

In 1948, the main sources of drinking water in Sri Lanka were unprotected wells, rivers,

tanks and canals. Pipe born water was available only to a limited section of the population in

urban centers such as Colombo and Kandy. Thus, it is oblivious that water-borne diseases

would have been a critical issue for the country. Water-borne diseases such as dysentery,

cholera, typhoid and hepatitis were the major causes of hospital morbidity, reflecting the





inadequate availability of safe of water and sanitation facilities. One of the key priories of the

government of the country after the independence was to address the drinking water issue and

governments paid increased attention to the provision of safe water and sanitation facility.

From 1948 to 1960 the responsibilities of water supply were given to the Public Works

Department (PWD) which came under Ministry of Transport and Works. Major issues which

limit the expansion of water supply in the country during this period were: lack of funds, lack

of engineering and technical skills, lack of planning and a shortage of materials. The Choksy

Commission Report (1960) recommended a central water resources board. The report

explained “the best approach to improving the community water supplies and drainage in Sri

Lanka is to place all responsibility for the development and management of Water Supplies,

Sewerage and Surface Drainage Schemes in a single Agency of the Central Government.

With the increase in water supplies the Island and with the increasing work envisaged in the

future the time is ripe for the setting up such a central authority and also the drawing up of a

Water Act to cover the supplies of portable water as distinct from water for irrigation and

power”. Department of Water Supply and Drainage (DWSD) was formed in March 1961

under the Ministry of Local Government as a solution to the above burning issues which limit

the expansion of water supply related activities. The objectives of department was to

provision of wholesome water to at least 80% of the population in the country and to raise the

standard of health of the nation by prevention of the spread of water born diseases in rural and

urban areas. Due to the fact that shortage of trained and experienced personnel for Drainage

Section of DWSD much progress was not able to make.

National Water Supply and Drainage Board (Sri Lankan Water Board) was established

under the National Water Supply and Drainage Board Law no 2 of 1974 with effect from 1st

January 1975 under the Ministry of Irrigation, Power, and Highways. On 1st January 1975, the

minister, by order in terms of clause 57(i) of the Act, transferred the undertaking of the

Department of Water Supply and Drainage to the WB.

6. Measurement of Variables

Moullin (2002) defined performance measurement system (PMS) as evaluating how well

organizations are managed and value they deliver for customers and other stakeholders. The

definition covers both financial and non-financial perspective and it can be assumed that

information generated by performance measurement system is expected to use for

communication and motivational purposes. The measurement scale developed by Hall (2008)

was used to measure performance measurement with the 9-item scale (see Table 3). This scale

measures the extent to which a Performance measurement system describes the important

parts of the organization’s s operations and integrates measures with strategy and across the

value chain. Respondents were asked to indicate a 5-point Likert scale 1 (strongly disagree) to





5 (strongly agree) the extent to which each of the nine characteristics was provided by

performance measurement system of Sri Lankan Water Board. Results from Hall (2008), it

shows that the performance measurement system is unidimensional and exhibits satisfactory

reliability and validity.

Table 3: Items used to Measure PMS Construct

Item

1 Broad range of performance

2 Fully documented form

3 Diverse set of measures

4 Consistent and mutually reinforcing

5 Information on different dimensions

6 Links together the activities

7 Variety of information

8 Effect of activities

9 Range of measures to cover critical areas

The research frame work developed by Franco-Santos et al, 2012 has classified

consequences of performance measurement into three components: people behavior ( here

after employee behavior), organizational capabilities and performance (individual, team,

organization, inter-organization). This study focuses only on organizational performance and

other components of performance are out of the scope of this study.

Employee Behavior comprises specific actions of reaction of employee to performance

measurement system as well as their underlying cognitive mechanism (Franco-Santos et al.,

2012). This includes psychological empowerment; role understanding and job satisfaction,

cooperation and coordination, decision making, and leadership and culture, Established scales

are used to measure psychological empowerment, and goal clarity. Psychological

empowerment is measured with Spreitzer’s (1995) 7-item scale. Respondent were asked to

indicate on a 5-point Likert scale from 1 (strongly disagree) to 5 (strongly agree). Role

understanding and job satisfaction is measured with 4 item scale drawn from Sawyer (1992).

Respondents were asked to indicate on a 5 –point Likert scale from 1 (very uncertain) to 5

very certain). Cooperation and coordination, decision making, and leadership and culture are

measured 7-item scale developed by the researcher by using existing literature. Respondent

were asked to indicate on a 5-point Likert scale from 1 (strongly disagree) to 5 (strongly

agree) see the Table 4. Thus 18-item sale is used to measure employee behavior in this study.





Table 4: Items used to Measure Employee behavior construct

Item Employee behavior

1 Ability Psychological

empowerment 2 Capabilities

3 Skills

4 Autonomy

5 Own decisions

6 Opportunity

7 Work area

8 Duties and responsibilities Role understanding

and job satisfaction 9 Overall objectives

10 Expected results

11 Positive evaluations

12 Improving corporation within the organization Cooperation and

coordination,

decision making, and

leadership and culture

13 Improve corporation outside the organization

14 Employee participation

15 Helps learning

16 Useful for self-monitoring

17 Lead to more participative and consultative leadership

18 Contributes to improve quality

Organizational Capabilities refers to strategy process, communication, strategy

capabilities, managerial practices, and corporate control (Franco- Santos et al., 2012).

Drawing on relevant literature that examine organizational capabilities (Ahn, (2001);

Chenhall, 2005; Cruz et al., (2011); De Geuser et al., (2009); Dossi and Patelli, (2010);

Gimbert et al., (2010); Jazayeri and Scapens, (2008); Kolehmainen, (2010); Lillis, (2002);

Malina and Selto, (2001); Marginson, (2002); Sandstrom and Toivanen, (2002); Butler et al.

(1997); Godener and Soderquist (2004); McAdamand Bailie (2002); Papalexandris et al.,

(2004); Tuomela(2005); Sandstrom and Toivanen (2002); Simon, (1995); Barney, (2001);

Cruz et al., (2011); Marginson (2002); Bisbe and Otley (2004); Johnston et al. (2002);

Godener and Soderquist (2004); Ahn (2001); Mundy (2010); Grafton et al.(2010); Wouters

and Wilderom (2008) Dossi and Patelli (2010); Kraus and Lind (2010); this instrument was

developed by the researcher including five constitutive theoretical properties or dimensions of

organizational capabilities: self monitoring and decisions making, learning organization,

participative and consultative leadership, strategy formulation and review process, translation

of strategy into operational terms organization’s strategy as a continuous process, strategic

objectives, communication process, and new ideas and innovation (see Table 5)

Table 5: Items used to Measure Organizational Capabilities Construct

Item

1 Effective mechanism

2 Strategy implementation

3 Encourage managers

4 Helping organization to aligning actions

5 Communication process

6 Development of new ideas





7. Data Analysis

The data analysis of this study is based on the relationship identified among the

independent, dependent, mediating variables. Statistical package for social science (SPSS)

version 18 were used to analyze the data on sorted out valid questionnaires. Firstly,

descriptive analysis was undertaken with the purpose of unfolding information embedded in

the data set, and identifying outliers and typing mistakes as well as checking for data

symmetry and normality. Finally, bivariate data analysis, linear regression, multiple

regressions were used in analyzing the data to test hypotheses identified in this paper. The

purpose of the bivariate data analysis is to understand the association between two

quantitative variables. This can be performed by viewing the two variables in a scatter plot

and quantifying the strength of association using correlation analysis. If an association was

noticed, both empirically and theoretically, a linear regression model can be applied to

explain how a change in one variable affects the value on the other.

7.1 Descriptive Statistics of Variables

Descriptive statistics of the study variables are given in Table 6. It was endeavored to

examine whether the performance measurement systems is more comprehensive. According

to the Table 6, it reveals that the performance measurement system of the organization is

more comprehensive since the mean value is closer to 4. Consequences of performance

measurement system comprise three components as employee behavior, organizational

capabilities and organizational performance. The mean values of these three components are

given in Table 6. It reveals that the consequences of performance measurement system are

positive since mean values of all there components are closer to 4 (mean values of 4.0, 4.0

and 3.6 for employee behavior, organizational capabilities and organizational performance,

respectively).

Table 6: Descriptive Statistics

Variable Mean Std. Deviation

PMS 3.9 .59

Employee behavior 4.0 .38

Organizational capabilities 4.0 .50

Organizational performance 4.6 .55

Source: Survey Data, 2014/2015

7.2 Relationship between Performance Measurement System and Employee Behavior

Table 7 reveals that there exist statistically significant moderate level positive correlations

between Performance Measurement System and Employee Behavior (r=.566, p= .000).

ANOVA results reveal that the linear combination of performance measurement system and

employee behavior is significantly related to each other (R2=.321, Adjusted R2=.317, F=

(1,206) 97.11, p=.000). This explains that performance measurement system is primarily

accounted for approximately 32% of the variance of Employee Behavior. Linear regression





results reveal that there exists positive relationship between Employee Behavior and

Performance Measurement System. As such, it reveals that performance measurement system

significantly contributes to the employee behavior (b=.566, p= .000). See Table 7.

Table 7: Regression Results of Standardized Estimates a

Model

Standardized

Coefficients

Beta(β) t Sig.

Collinearity Statistics

Tolerance VIF

1 (Constant) 16.750 .000

Performance

Measurement System

.566 9.858 .000 1.000 1.000

a. Dependent Variable: Employee Behavior

Source- Survey Data, 2014/2015

7.3 Relationship between performance measurement system and organizational capabilities

Table 8 reveals that the correlation between Performance Measurement System and

Organizational Capability is moderately positive and the relationship is statistically

significant (r=.457, p= .000). In addition, according to ANOVA results, performance

measurement system is significantly related to organizational capability (R2=.209, Adjusted

R2=.205, F= (1,206)54.439, p=.000).

Linear regression results given in Table 8 reveal that there exists positive relationship

between Organizational Capability r and performance measurement system. This explains that

performance measurement system is primarily accounted for approximately 20% of the

variance of Employee Behavior. As such, it reveals that performance measurement system

significantly contributes to the employee behavior (b=.457, p= .000).

Table 8: Regression results of standardized estimates a

Model

Standardized

Coefficients

Beta (β)

t Sig. Collinearity Statistics

Tolerance VIF

1 (Constant) 11.276 .000

Performance Measurement System .457 7.378 .000 1.000 1.000

a. Dependent Variable: Organizational Capability

Source- Survey Data, 2014/2015

8. Discussion and Conclusion of Consequences of Performance Measurement System

It is hypothesized that consequences of performance measurement system comprise three

components as employee behavior, organizational capabilities and organizational

performance.

8.1 Impact of Performance Measurement System on Employee Behavior

The result indicates there exist statistically significant moderate level positive correlations

between Performance Measurement System and Employee Behavior. ANOVA results reveal

that the linear combination of performance measurement system and employee behavior is

significantly related to each other. This explains that performance measurement system is





primarily accounted for approximately 32% of the variance of Employee Behavior. Linear

regression results reveal that there exists positive relationship between Employee Behavior

and Performance Measurement System. As such, it reveals that performance measurement

system significantly contributes to the employee behavior. These findings are consistent with

Hall (2008), Cousins et al. (2008), Cruz et.al. (2011), Dossi and Patelli (2010), Kolehmaien

(2010), Hall (2010), and Grafton et al. (2010). Thus, performance measurement system

should be designed and implemented in a way that enhances employee behavior specially

employees’ participation, psychological empowerment, and goal commitment. Further,

performance measurement system contributes to increase the understanding of individuals

regarding what is expected from them at work.

8.2 Impact of Performance measurement system on and organizational capabilities

Results reveal that the correlation between Performance Measurement System and

Organizational Capabilities is moderately positive and the relationship is statistically

significant. In addition, according to ANOVA results, performance measurement system is

significantly related to organizational capability. Linear regression results reveal that there

exists positive relationship between Organizational Capabilities and performance

measurement system. This explains that performance measurement system is primarily

accounted for approximately 20% of the variance of Employee Behavior. As such, it reveals

that performance measurement system significantly contributes to organizational capabilities.

According to the literature, Organizational capabilities include strategy process,

communication, strategic capabilities, managerial practices and corporate control (Frantos-

Santose et al., 2012). The main role of management control systems is to supply the

information required to reduce uncertainty (Davila, 2000). Numerous researchers claimed that

performance measurement system played an important role in assisting an organization to

gain organizational capabilities including competitive advantage (Fitzgerald, et al., 1991;

Kaplan and Norton, 1992; Simons, 200; Malina and Selto, 2001; Chenhall 2005; Cambell, et

al., 2006; Cruz et al. 2011; Gimbert et al. 2010; Mundy, 2010; Grafton et al. 2010 and

Kolehmaien, 2010). However, the finding contradicts with Kraus and Lind, 2010. They

challenge the results of previous research. According to them, performance measurement

system is little relevance to the organizational capabilities. It is very essential to effecting

costing system which provides accurate and reliable water costing information. This costing

information (i.e. water cost unit) is preprinted on the face of Sri Lankan Water Board invoice

issued to the customer. The objective is to say that the board supply water at a price which is

lower than the cost. This has two perspectives: Provision of such information on the face of

the water bill answers the claim against Sri Lankan Water Board in relation to the inefficiency

and ineffectiveness. Secondly, this may look at from the political perspective: that is to





convince the public and create a mental picture among the public that the government is

welfare oriented through the water supply endeavor too.

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