Uncertainty as a Determinant of Performance Measurement and Compensation Systems: A Review of the Literature

Abstract

The objective of this chapter is to synthesise empirical research studying the design and use of performance measurement and compensation systems (PMCS) in complex settings, specifically when decision makers face uncertainty. We analyse recent papers in the accounting literature that investigate the influence of uncertainty on PMCS and organise our findings around two questions: (1) What is the influence of uncertainty on specific elements of PMCS design or use? and (2) What aspects of PMCS design or use are associated with specific types of uncertainty?

A difficult problem for many organisations is the challenge of managing in an increasingly complex and turbulent environment. Thompson (1967, p. 159) identified uncertainty as the ‘fundamental problem for complex organisations and…coping with uncertainty [a]s the essence of the administrative process’. However, we still do not have a good understanding of the sources of uncertainty, how individuals respond to uncertainty and how organisations can design systems and processes to support managers operating in uncertain environments.

Keywords: performance measurement, compensation systems, uncertainty