Headquarters-subsidiary interdependencies and the design of performance evaluation and reward systems in multinational enterprises
Faculty of Applied Economics
European accounting review
, p. 391-424
University of Antwerp
ABSTRACT This study investigates the impact of headquarterssubsidiary interdependencies on performance evaluation and reward systems in multinational enterprises. Headquarterssubsidiary interdependencies refer to the extent to which headquarters and subsidiaries depend on each other to accomplish their tasks. When headquarterssubsidiary interdependencies are present, it becomes more difficult to reward the performance of subsidiary managers because these interdependencies induce noise on subsidiary-level accounting performance measures, while at the same time high levels of goal alignment between headquarters and subsidiary managers are required. Based on survey data from 82 foreign subsidiaries operating in Belgium with headquarters in 14 different countries, our partial least squares path modelling results show that as headquarterssubsidiary interdependencies increase, headquarters use more participative performance evaluation and consider more the effects of uncontrollable factors on subsidiaries performance when rewarding subsidiary managers. More importantly, while prior research suggests that interdependencies induce noise on unit-level accounting performance measures, our results indicate that participative performance evaluation may mitigate the noise so that headquarters still rely on subsidiary formula-based compensation using accounting measures to reward subsidiary managers.