A behavioural model of performance evaluation
A fundamental assumption within the Carnegie tradition of bounded rationality is that while individuals and organizations are goal-oriented they seldom act as rational optimizers seeking to determine the best possible alternative in the feasible set of alternatives but rather tend to rely on a satisficing heuristic (Simon 1955; March and Simon 1958; Cyert and March 1963). The key notion in this satisficing tradition is that of aspiration-based choice (Simon 1955; Bendor 2010), which is also a familiar concept in other theoretical traditions, including prospect theory (Kahneman and Tversky 1979) and theories of reinforcement learning (Bendor 2010).
The logic of these theories is that aspiration levels are fundamental to how choice problems are represented and understood because individuals and organizations anchor their self-evaluations on aspiration levels (Greve 2003). Thus, aspiration levels function as thresholds that partition all possible pay-offs into two (or more) disjoint sets, and they can be defined as ‘the smallest outcome that would be deemed satisfactory by the decision maker’ (Schneider 1992, p. 1053). While it is debated whether and under what circumstances satisficing leads to optimal or suboptimal outcomes, studies demonstrate that actors in a wide range of different contexts do show signs of satisficing behaviour (Bendor 2010).
Transferring this model of aspiration-based choice to how managers and their organizations interpret performance information, a central question is how actual performance relates to performance aspirations (Cyert and March 1963). As March and Simon (1958, p. 4) have already posited, ‘organizations focus on targets and distinguish more sharply between success (meeting the target) and failure (not meeting the target) than among gradations in either’. When performance feedback shows that performance falls short of aspirations, this provides a signal to the organization that some sort of change is required (Salge 2011). When managers are responsive to performance shortfalls, it is essentially an instance of organizational learning behaviour in which decision makers seek to adapt to environmental signals, internal or external to the organization (Simon 1956; Greve 2003). Such adaptation might arise simply from learning what the organization's real performance potential is or it could reflect political or social norm pressure to meet performance aspirations (Greve 2003).
Reflecting the prediction of organizational satisficing behaviour, a large number of almost exclusively private sector studies have demonstrated that performance feedback affects organizational search and change in a way that depends on aspiration levels, and these findings have been robust across many different private business sectors operating in competitive markets (for a review of this literature, see Greve 2003). The diagnosis that a performance problem exists has been found to increase resources spent on problemistic search for potential solutions to the problem. Conversely, performing above the aspiration level reduces the need for search. Similarly, performance relative to aspirations is argued to affect actors' risk tolerance and, consequently, their willingness to pursue risky organizational change (Greve 1998).
Prioritizing among competing goals
The focus of this article is on whether performance appraisal affects how managers prioritize between competing organizational goals. Public organizations typically pursue multiple objectives (Wenger et al. 2008), some of which relate to measured organizational outcomes while others do not. The concept of a goal variable makes it explicit that organizational performance as well as aspirations for a specific goal can vary over time and across organizations.
Somewhat surprisingly, the question of goal prioritization has received little attention in empirical studies (Greve 2008). Indeed, the above quote from March and Simon (1958, p. 4) continues, ‘organizations devote more attention to activities that are currently operating below their own targets than they do to activities that are achieving their targets’. This resonates well with work on a more general ‘negativity bias’, whereby negative information is given greater weight than equally strong positive information in a range of different information-processing tasks and decision outcomes (Lau 1982; Hood 2011).
Cyert and March (1963) further describe how decision makers deal with goals sequentially in such a way that only one goal at a time is given attention and that moving on to the next goal requires that performance on the first goal satisfies aspirations. The allocation of attention then constitutes an implicit prioritization of goals (Cyert and March 1963). Paying selective attention to goals can therefore also serve as a form of quasi-resolution of goal conflict among decision makers as trade-offs between goals need not be weighed directly against each other. Accordingly, in a study of insurance firms, Greve (2008) finds evidence supporting the expectation that managers pay sequential attention to goals of performance and firm size depending on performance relative to aspirations.
This effect is interesting as it can help us understand not only the types of effects that might arise from performance feedback—such as search, change, or different forms of performance information use—but also their more detailed direction in terms of organizational prioritization among specific goals. Consequences to goal setting and prioritization are particularly central to the study of public organizations as these are often pursuing multiple and democratically contested goals (Moynihan et al. 2011). Thus, while studies of private sector firms tend to focus on economic goal variables such as profits, costs, or growth (Greve 2003), it is generally more difficult to clearly state the goals of public service organizations (Chun and Rainey 2005; Pandey and Wright 2006).
Many different kinds of goals might be chosen, including efficiency, service quality, responsiveness, equity, and wider democratic outcomes (Boyne 2002a). Furthermore, most public organizations are deliberately created to pursue multiple goals, some of which might even be partly at odds with one another (Kelman and Friedman 2009). Under such circumstances, performance evaluation can be viewed as a strategy for choosing which among the competing goals to endorse or how to prioritize between them (Wenger et al. 2008). With the considerable discretionary powers that most public organizations possess (Brehm and Gates 1997), if performance information affects how goals are prioritized, this could have important democratic and broader distributional consequences.
This, of course, does not mean that organizations can pursue only one goal at any given time. As a matter of routine, most organizations simultaneously pursue a variety of different goals (Chun and Rainey 2005; Wenger et al. 2008). By letting different subunits function in parallel, the organization as a whole is able to engage in parallel processing of information and goals (Simon 1947). However, when our analytical lens moves upward in the organizational hierarchy, individual managers overseeing the implementation of multiple goals, perhaps through multiple subunits, will be subject to the limits of information processing resulting in sequential allocation of attention, which, at least implicitly, makes the prioritization of goals necessary.
Managerial priorities are rarely identical to how goals are prioritized throughout an organization, as shown in work on implementation problems and the discretion of street-level bureaucrats in human service organizations (Brehm and Gates 1997). Nonetheless, managers are often key to organizational goal setting, processes, and change (Wenger et al. 2008; Meier and O'Toole 2009), and they might affect these through a variety of different means, including formal orders, incentives, nurturing organizational cultures, allocating resources, and recruiting new personnel (Moynihan et al. 2012). Therefore, it can have a substantial impact on organizational operations if, indeed, performance feedback affects how managers perceive and prioritize organizational problems and goals.
Public sector performance pressures
In much of the original behavioural work on organizational decision making, the satisficing mechanism was understood as being generic to organizational behaviour (March and Simon 1958). Cyert and March (1963, p. 197) stated that, ‘If we view the concepts [of the theory] alone, it is clear that they are not intrinsically unique to the firm. The processes they stipulate are general decision processes.’ Nevertheless, a key question for the transferability of the private sector findings is whether goal achievement is less important for public managers compared to private managers and if they therefore choose to ignore performance information. Indeed, public and private organizations are often held to differ on a number of important characteristics related to ownership, funding, and control (Boyne 2002b; Meier and O'Toole 2011).
Being embedded in a political system, public organizations often face lower levels of goal clarity and additional operating constraints that might direct attention away from goal achievement and towards coping with conflicting demands and avoiding blame (Moynihan 2008; Hood 2011; Nielsen 2013). Focus on goal achievement in public organizations might also be reduced by a relative absence of performance-related incentives. To the extent that such differences exist, this could render the theoretical mechanism less important or even irrelevant for public organizations.
There are, however, compelling reasons to believe that these differences are exaggerated. The efforts to increase the use of performance incentives and quasi-market mechanisms in public sectors suggest that the approach is also important to understanding organizational behaviour in public organizations. In line with this, Salge (2011), in his study of innovative search behaviour in the British National Health Service, finds evidence of the same theoretical mechanism at work in performance evaluation. For most public organizations, though, competitive pressures and performance-related financial incentives play only a marginal or no role. Also, the bottom-line economic performance indicators available to private business firms will rarely have an obvious public sector equivalent. Nevertheless, the rapid spread of performance information systems marks increasing attention to how well public organizations perform (Moynihan 2008).
Although the presence of performance information cannot be equated with economic market pressures, recent work indicates that performance information increasingly plays a part in the political processes of budgeting and administrative regulation, if perhaps sometimes mainly for advocacy purposes (Melkers and Willoughby 2005; Moynihan 2008; Moynihan and Hawes 2012). Thus, increasing political pressure forces public organizations and their managers to focus on performance. This is also consistent with recent work on the importance of organizational reputation and support (Carpenter and Krause 2012). A very different source of interest in goal achievement might derive from pro-social motivation which appears to be present at greater levels in public than private organizations (Perry and Hondeghem 2008). In line with this, Moynihan and Pandey (2010) also find that public service motivation is positively associated with managers' use of performance information.
The aspiration-based mechanism involved in performance evaluation thus might well be relevant to public organizations more broadly, although this is ultimately an empirical question. But transferring the model still requires some adaptation due to differences in goal setting and how performance aspirations are formed in public organizations compared to private sector businesses.
Performance information and aspiration levels
Because managers have to cope with uncertainty about what their organization's performance could or should be (March 1994; Greve 2008), they are left to form their expectations based on information cues that are available in the environment. Empirical studies show that how private organizations set their aspiration levels depends on an organization's or management's past experiences and other available information on what can reasonably be expected or required of its performance (Greve 2003). This information will often depend on organizational characteristics and context, and therefore aspiration levels are likely to differ across similar types of organizations.
In particular, studies point to historical information on an organization's own past performance and to social comparison with the performance of relevant other organizations as determinants of performance aspirations (Baum and Lant 2003; Greve 2003). These are referred to as, respectively, historical aspirations and social aspirations. Thus, with differing aspiration levels two organizations receiving fairly similar information on their own performance might interpret this information in very different ways. If one organization has increased its performance from P1 to P2, whereas another organization has dropped from P3 to P2, the first organization is likely to interpret this as a success, whereas the second organization will likely perceive the same score as a sign of failure and start searching for ways to improve future performance. Similarly, with two organizations performing at P2, they might interpret this performance differently depending on whether the organizations they usually compare themselves to perform above or below this point. A third source of aspiration levels can arise from the existence of pre-set performance targets (Boyne and Chen 2007), and these have therefore been termed coercive aspirations (Salge 2011). I will return to these in the final discussion.
How reference groups for social comparison are formed in practice is less clear. Private sector studies have pointed to elements of geographic and strategic proximity (Baum and Lant 2003). Geographic proximity is a kind of neighbourhood effect, whereas strategic proximity rests on a more refined selection of comparable organizations based on, for instance, size, industry, market, production methods, or performance (Greve 1998).
In a public sector setting, the relevant information sources that managers can use in setting performance aspirations are likely to differ depending on the type of organization. Some government agencies might be the only one of their kind, or they might have to look to agencies operating in other policy areas or in other countries to find comparable organizations. Public service organizations, in contrast, often have many organizations with which they can compare themselves. This is typically the case for organizations such as hospitals, police departments, or schools where administrative divisions are often based on geographic criteria (Gulick 1937). For these types of organizations, not only geographic but also strategic proximity will to some extent coincide with such geographically based administrative divisions, which might well make organizations compare themselves with other organizations within the same administrative unit, for instance, within the local or regional government, rather than to some national average.
There are further reasons for such comparisons. First, this is where information on performance and other characteristics of other organizations is often most readily available to managers and their superiors, perhaps even as elaborate bench-marking schemes or government reports. For the same reason, managers are likely to suspect that their superiors will compare them directly to their other agents performing similar tasks. In some cases, competition for clients between organizations within the administrative unit might be a third factor.
Social aspirations can also be influenced by other factors, and they probably are. For instance, schools might place greater weight on the performance of the schools that resemble them most in terms of, for instance, task difficulty, size, or type of location (Greve 1998). Furthermore, this more refined selection of reference groups might take place both within and outside the geographic boundaries of the administrative unit. This underlines that when studying the influence of aspiration levels, substantial knowledge of the empirical case is necessary. Formulated at a more general level, however, because managers pay sequential attention to organizational goals, how they prioritize among different goals is expected to differ systematically depending on organizational performance relative to aspiration levels (Cyert and March 1963; Greve 2008). When distinguishing between historical and social aspirations, the following two hypotheses arise:
Hypothesis 1: When performance relative to historical aspirations declines on a goal variable, managers' prioritization of that goal will increase.
Hypothesis 2: When performance relative to social aspirations declines on a goal variable, managers' prioritization of that goal will increase.
Before turning to the empirical test, it is worth noting what alternative expectations might look like. First, as noted above, goal achievement might not be a sufficiently pressing concern to public managers for performance information to have a detectable impact on managerial priorities, especially when no financial incentives are tied to performance achievements. Second, from a rational perspective, which also assumes information and search costs as well as uncertainty and risk, we should not expect aspiration levels to matter (Simon 1955; Cyert and March 1963). Rather, decision makers should act as optimizers and so, while their performance level might still be an important feedback mechanism, their responses should not be independently influenced by how performance relates to contextually contingent aspirations (March 1994; Greve 2003). This is particularly evident concerning the somewhat arbitrary nature of historical aspirations that reflect a continuously changing status quo (Kahneman and Tversky 1979). Finally, there might even be an opposite logic at work, according to which managers will focus on those goal variables that show improved and comparatively high performance in order to reinforce positive trends and nurture comparative advantages (Hunt and Morgan 1995). The hypotheses put forward are thus far from trivial.