A Theory of Management Control Packages and Organizational Identity

This study aims to present the conditions under which an organization should use effort standards in addition to performance evaluations for management control (MC). Due to COVID-19, remote work has recently been encouraged worldwide; however, it may reduce organizational members’ sense of belonging or identity. It may be adequate to control using only performance evaluations in such cases. This study uses a mathematical model based on behavioral contract theory and focuses on the identities of organizational members and the standard-setting cost. Unlike previous studies using mathematical models, this paper obtains the following results. First, when the organization uses the effort standard in addition to performance evaluations for management control, the relationship between agent identity and principal expected utility has a U-shape, even decreasing principal expected utility as identity increases. This has implications for PMI in M&A and mid-career performance evaluation. Second, the study shows that taking advantage of members’ identities and setting effort standards is not always optimal for firms. Especially, as the noise in the performance measure decreases, the firm should not set effort standards. This study contributes to theory by elaborating on the significance of identity, demonstrating its reverse functionality in MC, and bridging the gap between empirical and analytical modeling studies. Moreover, empirical studies and field research on MC packages can be more fruitful by focusing on variables such as identity and noise in performance measures in multiple industries and on specific events such as mergers and acquisitions and internal promotions, and remote work.