European Accounting Review

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The Periodic Review of Performance Indicators:

An Empirical Investigation of the Dynamism of
Performance Measurement Systems

Jean-François Henri

To cite this article: Jean-François Henri (2010) The Periodic Review of Performance Indicators:
An Empirical Investigation of the Dynamism of Performance Measurement Systems, European
Accounting Review, 19:1, 73-96, DOI: 10.1080/09638180902863795

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Published online: 08 Apr 2010.

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European Accounting Review
Vol. 19, No. 1, 73– 96, 2010

The Periodic Review of Performance

Indicators: An Empirical
Investigation of the Dynamism of
Performance Measurement Systems

JEAN-FRANÇOIS HENRI
Université Laval, Québec, Canada

ABSTRACT The aim of this study is to examine one attribute of performance

measurement systems (PMS) that is not widely addressed in the management
accounting literature, namely the dynamism of PMS. This attribute refers to the
periodic review of performance indicators by organizations. Based on contingency
theory and using survey data from a sample of manufacturing firms, this study
examines whether the association between the dynamism of PMS and organizational
performance is contingent on the level of external and internal changes. The results
suggest three main conclusions. First, even though the current business environment is
characterized by fast changes, manufacturing organizations do not appear to revise
their PMS to a great extent. Second, while periodic revisions of performance
indicators are beneficial, these revisions may not necessarily be appropriate at all times
and in all circumstances as the need for dynamic PMS varies depending on the degree
of external and internal change. Third, an absence of dynamic PMS may be more
harmful in a context of higher levels of change than to have dynamic PMS even if
they are not required.

Introduction
The aim of this study is to examine the association between one attribute of
performance measurement systems (PMS) that is not widely addressed in the
management accounting literature, namely the dynamism of PMS, and organiz-
ational performance. This attribute refers to the periodic review of performance

Correspondence Address: Jean-François Henri, École de Comptabilité, Université Laval, Québec,

Canada, G1K 7P4. E-mail: Jean-Francois.Henri@ctb.ulaval.ca

0963-8180 Print/1468-4497 Online/10/010073–24 # 2010 European Accounting Association

DOI: 10.1080/09638180902863795
Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA.
74 J.-F. Henri

indicators by organizations in order to update the content of their PMS. In

the current business environment characterized by fast changes in customers,
technologies and competition, organizations need to continuously be current to
survive and prosper (Danneels, 2002). As time passes and a firm’s competitive
environment and strategic direction changes, performance indicators must be
re-evaluated to ensure their relevance and appropriateness, to continue to
reflect issues of importance to the business, and to contribute to the achievement
of better alignment among strategies, actions and measures (Dixon et al., 1990;
Kennerley and Neely, 2002, 2003; Lynch and Cross, 1991; Malina and
Selto, 2004).
The dynamic (as opposed to static) nature of PMS is important considering that
performance indicators have a limited lifetime (Meyer and Gupta, 1994). In other
words, performance indicators tend to decline over time in their ability to
discriminate good from bad performance. As limitations become visible and
are exploited, existing indicators need to be deleted, modified or replaced by
new ones. A lack of dynamism may lead PMS to reflect old priorities and incon-
sistent measures, and limit the capacity of performance indicators to capture a
range of performance outcomes.
Most of the studies examining the dynamism of PMS come from the operation
management literature (e.g. Bititci et al., 2000; Bourne et al., 2000; Kennerley
and Neely, 2002, 2003; Waggoner et al., 1999; Wisner and Fawcett, 1991) and
the economics literature (e.g. Courty and Marschke, 2003; Dye, 2004). A signifi-
cant body of research in the management accounting literature has investigated
various attributes of performance indicators. Attributes include integrativeness
(Chenhall, 2005), subjectivity (Ittner et al., 2003a; Moers, 2005), common and
unique measures (Lipe and Salterio, 2000), alignment with strategy and value
drivers (Ittner et al., 2003b), comprehensiveness (Ullrich and Tuttle, 2004),
verifiability (Moers, 2006), measurement quality (Ittner et al., 2003b), precision
and sensitivity (Banker and Datar, 1989; Moers, 2006). However, scant attention
has been devoted to the dynamism of PMS (a notable exception is the study of
Malina and Selto, 2004).1
Various arguments have been made to encourage the regular update of PMS
(Bourne et al., 2000; Kennerley and Neely, 2002, 2003; McMann and Nanni,
1994); Vitale and Mavrinac, 1995. Those claims promoting the importance of
periodic revisions of performance indicators rely on the implicit assumption
that such reviews are valuable for the organization. For instance, Lingle and
Schiemann (1996) suggest that industry leaders distinguish themselves by
using an effective measurement approach, including regular updates of their
PMS. While the link between periodic reviews and organizational performance
has not been supported by empirical evidence, it is also assumed that such
changes within PMS are desirable regardless of the context. Indeed, while peri-
odic revisions of performance indicators demonstrate numerous benefits, they
may not necessarily be appropriate at all times and in all circumstances. In
other words, as organizations face different needs in terms of dynamism of
 The Periodic Review of Performance Indicators 75

PMS, more revisions may not always be better. In particular, changes in the
business environment and strategic direction are commonly recognized as
important drivers of change within PMS (e.g. Bititci et al., 2000; Forza and
Salvador, 2000; Lynch and Cross, 1991; Wisner and Fawcett, 1991). Those
external and internal forces promoting changes within PMS reflect the need for
periodic reviews. Therefore, this study examines whether the association
between the dynamism of PMS and organizational performance is contingent
on the level of external and internal change.
Using survey data from a sample of manufacturing firms, the results suggest
that the association between the dynamism of PMS and organizational perform-
ance is a function of the match between the levels of change and the periodic
reviews of performance indicators. Furthermore, it may be more harmful to not
have a dynamic PMS in a context of higher levels of change than to have a
dynamic PMS even if it is not required. Considering the scant attention
devoted to the dynamism of PMS in the management accounting literature
combined with the importance of the periodic review of performance indicators
for practitioners, this paper contributes to the development of knowledge related
to PMS by describing dynamism as an important attribute of PMS, like integra-
tiveness, alignment and measurement quality. The remainder of this paper is
organized as follows. The next section describes the theoretical framework and
presents our research hypothesis. The section after presents the methodology,
including a sample definition, data collection and measurement of constructs.
The results of the analyses are presented, followed by a discussion of the
results and the conclusions of this study.

Theoretical Framework
Definition of Constructs
Dynamism of PMS
The dynamism of PMS is defined as the propensity of the organization to
revise its performance indicators to ensure their relevance and appropriateness
(Kennerley and Neely, 2002, 2003). It refers to an updating process that insti-
tutionalizes the need for continuously changing measures and ensuring evol-
ution in the measurement set (Dixon et al., 1990; Kuwaiti, 2004; Vitale and
Mavrinac, 1995). This update represents the last step in the ongoing process
for developing an effective PMS. It refers to the review necessary to ensure
that PMS are regularly updated and to the periodic re-evaluation of the appro-
priateness of the established performance indicators in view of the current
competitive environment (Forza and Salvador, 2000; Waggoner et al., 1999;
Wisner and Fawcett, 1991). The periodic review of performance measures
comprises the addition of indicators, the deletion of indicators, the changes
in the target and the changes in the definition of the indicators (Bourne
et al., 2000).
76 J.-F. Henri

External and internal sources of change

The changes occurring in the external environment refer mainly to the modifi-
cations in the competitive environment, regulation and technology. Those
changes influence the managers’ perceived environmental uncertainty (PEU),
i.e. the top managers’ perceived inability to predict accurately an organization’s
external environment (Milliken, 1987; Tymon et al., 1998). Thus, PEU is used in
this study to reflect the changes in the external environment, as perceived by
managers.
Not only do changes occur in the external environment of the firm but also in
the internal environment through its strategic direction. Following the resource-
based view of the firm, to reach a market position based upon lowest cost or
differentiation, firms must develop specific capabilities (Amit and Schoemaker,
1993; Barney, 1991; Barney et al., 2001; Teece et al., 1997; Wernerfelt,
1984).2 Because firms reaching both types of market positions may periodically
revise their PMS, this study refers to the notion of the capability to reflect the
changes in the strategic direction of the firm. More specifically, innovativeness
and learning orientation are examined because they are strategic capabilities
associated with both differentiation and low cost strategies (Hult and Ketchen,
2001; Ward et al., 1996; Porter, 1985). Furthermore, both capabilities lead to
continuous change and improvement throughout the organization, compromising
the relevance and appropriateness of performance indicators.
Innovativeness is a concept that refers to the organization’s openness to new
ideas, products and processes, and its orientation toward the generation, develop-
ment and implementation of different types of innovation pertaining to all parts of
the organization and all aspects of its operation (Damanpour, 1991; Hurley and
Hult, 1998). Learning orientation refers to the importance devoted by the organ-
ization to the development of insights, knowledge and associations among past
actions, the effectiveness of these actions, and future actions (Fiol and Lyles,
1985).

Association between Dynamism of PMS and Organizational Performance

The contingency theory is used to argue that the association between the dyna-
mism of PMS and organizational performance is contingent on the level of exter-
nal and internal change. The contingency theory differs from universal
organizational theories that maintain that there is ‘one best way’ to organize,
i.e. maximum organizational performance results from the maximum level of a
structural variable (Donaldson, 2001). Different organizational methods are not
equally effective and the best way to organize depends on the nature of the
context of the organization (Galbraith, 1973; Lawrence and Lorsch, 1967;
Schoonhoven, 1981). In other words, the essence of the contingency theory is
that organizational performance results from the fit between characteristics of
the organization and the contingencies reflecting the situation of the organization
(Donaldson, 2001).
 The Periodic Review of Performance Indicators 77

However, from an economic perspective, the endogenous choice of dynamic

PMS raises a potential problem in assessing the association between periodic
reviews of performance indicators and organizational performance. According
to Ittner and Larcker (2001, p. 398), ‘if all organizations in the sample are
optimizing with regard to the accounting systems choice, there should be no
association between organizational performance and the observed (endogenous)
choice, once the exogenous determinants of the choice are controlled in the
structural model.’ Therefore, given the assumption of equilibrium, there is no
variation in performance explained by optimal versus suboptimal accounting
systems choices (Luft and Shields, 2003).
Both contingency and economic theories offer alternative perspectives. The
traditional contingency theory assumes that management knows what a fit for
its organizational should be (Donaldson, 2001). While this assumption may be
unrealistic, the neo-contingency theory suggests that organizations will much
more typically move toward a fit, but attain only a quasi-fit. In other words,
the gap between the actual level of accounting systems and the level required
to fit its contingencies is not completely eliminated; thus it is possible to
provide evidence for the performance effects of accounting systems. The econ-
omic-based research proposes a similar alternative to the view that ‘all firms
are optimizing all the time’. As mentioned by Milgrom and Roberts (1992), a
position that can be more easily defended is that people dynamically learn and
that organizations adapt, and thus there is at least ‘fossil evidence’ available
for testing theories. As firms move toward their optimal accounting systems, a
cross-sectional sample will consist of observations distributed around the
optimal choice (Ittner and Larcker, 2001). Following that view and assuming
that at any point in time some firms will be ‘off-equilibrium’, we argue that
the match between dynamic PMS and the level of external and internal change
is associated with performance differences. This expectation stems mainly
from the trade-off between the benefits and costs of the periodic review of
performance indicators.
The dynamism of PMS could potentially be beneficial for organizations in
various ways. As time passes and the firm’s competitive environment and stra-
tegic direction changes, performance indicators must be re-evaluated to ensure
their relevance and appropriateness (Kennerley and Neely, 2002, 2003). There-
fore, performance indicators continue to reflect issues of importance to the
business, and to contribute to the achievement of better alignment among
strategies, actions and measures (Dixon et al., 1990; Lynch and Cross, 1991;
Malina and Selto, 2004). Furthermore, the performance indicators that are period-
ically revised may be more effective to (i) monitor organizational goals and the
implementation of plans; (ii) signal current priorities and focus organizational
attention towards issues of importance to the business; (iii) provide guidance
to managers during the decision making process; (iv) support education and
learning throughout the organization; and (v) improve external communication
with stakeholders (Simons, 1990; 2000). In addition, performance indicators
78 J.-F. Henri

have a limited lifetime; as a result they tend to decline over time in their ability to
discriminate good from bad performance. Periodic reviews may prevent perform-
ance indicators from reflecting old priorities and inconsistent measures, and
enable PMS to capture a range of performance outcomes (Meyer and Gupta,
1994). In sum, appropriate accounting information supports the effective man-
agement of resources and contributes to organizational performance (Baines
and Langfield-Smith, 2003). More specifically, updated performance indicators
support resource management and performance by reviewing and reprioritizing
internal objectives, deploying changes within the organization, and ensuring
the maintenance of gains through improvement programs (Bititci et al., 2000).
Despite the potentially positive influence of the dynamism of PMS on
organizational performance, periodic reviews do not come without costs. Indeed,
dynamic PMS require human, technological and financial resources to periodically
refine performance indicators. Indeed, several activities have to be performed, such
as the analysis of current performance indicators before deletion or revision, the
identification of the information needs, the development and documentation of
new indicators, the adjustment to the information systems to enable the collection
of new or different indicators, etc. Furthermore, unnecessary changes may create
confusion and a possible lack of motivation among managers and employees, as
well as disrupt the collection of longitudinal data used to analyze trends and to
test causality implicit to the strategy.
The choice of periodically reviewing performance indicators (or not) is the
result of a trade-off between the benefits and costs discussed above. In other
words, there are circumstances whereby the benefits exceed the costs (i.e.
desirability of PMS dynamism) while in other cases the costs exceed the benefits
(i.e. non-desirability of PMS dynamism). The degree of external and internal
changes faced by firms represents one important circumstance that may influence
the need to periodically revise performance indicators. Those changes influence
the level of complexity faced by organizations by increasing the interaction
among numerous factors that must be considered simultaneously. This complexity
contributes to the global uncertainty faced by organizations, i.e. the difference
between the information required and the information that organizations already
possess (Galbraith, 1973).
The periodic review of performance indicators is likely to contribute to organ-
izational performance when the level of global uncertainty is high. In this context,
managers must deal with complex operations and business processes, unstable
product lines and changing technologies (Miller, 1988). As changes in the
frames of reference and central norms are needed, past practices are called into
question, new assumptions about organizations are proposed and changes in
strategic priorities are considered (Argyris and Schön, 1978; Van de Ven, 1986).
Managers need additional information to understand those changing situations
in order to reduce the information gap. Periodic reviews of performance indicators
may help reduce this uncertainty by ensuring an evolution in the measurement set,
improving the information that organizations possess to manage resources, and
 The Periodic Review of Performance Indicators 79

continuously maintaining the alignment among strategies, actions and measures.

In other words, dynamic PMS could act on the level of global uncertainty by
reducing the gap between the information required and the information possessed.
Therefore, in that situation, the benefits obtained from better information will
offset the costs required to obtain that information. In addition, as there are
many changes in the competitive environment and strategic direction, periodic
reviews should not create confusion or decrease motivation among organizational
actors. Instead, performance indicators could be used as a ‘selection process’ that
helps managers to create order, reduce ambiguity and provide a workable scheme
for taking action (Schreyögg and Steinmann, 1987). Periodic reviews support
managers and employees in making sense of the various changes faced by
organizations.
Conversely, periodic reviews of performance indicators are likely to hamper
organizational performance when the degree of external and internal change is
low. In this context, the levels of complexity and global uncertainty are low.
Hence, the gap between the information required and the information possessed
may not be sufficient to justify periodic revisions of performance indicators. In
this situation, the benefits obtained from having better information may not
offset the costs needed to get that information. In addition, as there are not
many changes in the competitive environment and strategic direction, periodic
reviews could create confusion by signaling different priorities and preferences,
reprioritizing internal objectives and deploying unnecessary changes. Unnecess-
ary revisions of indicators may decrease motivation among managers by imped-
ing the maintenance of gains obtained from past initiatives or by resetting targets.
They may also disrupt the collection of longitudinal data used for monitoring and
decision-making purposes in a context of low complexity.
Based on the above arguments, the following hypothesis is posited:

Hypothesis 1: The association between the dynamism of PMS and organ-

izational performance is contingent on the level of changes faced by the
firm.

Method
Data Collection
The data used in this study were collected in 2002 using a mail-survey approach
and were part of a larger research project related to PMS in manufacturing
firms. The survey implementation followed four steps: (i) pre-notification; (ii)
initial mailing; (iii) first follow up; and (iv) second follow up. The first step con-
sisted of a letter, phone call or e-mail to respondents to generate early interest.
A mail out package including the following three elements was then sent to
every contact name: covering letter, questionnaire, and business-reply envelope.
In some cases, the questionnaire was sent by fax or e-mail. The first follow-up
80 J.-F. Henri

was a postcard reminder three weeks after the initial mailing, while the second was
a phone call or replacement questionnaire three weeks after the first follow-up.
The target population consisted of 2175 top management teams of Canadian
manufacturing firms listed in the Scott’s database with primary and secondary
SIC codes in the range of 21 to 39.3 Furthermore, the firms were large enough
to ensure that organizational variables apply (Miller, 1987) and to ensure that a
formal PMS is in place (Bouwens and Abernethy, 2000). Thus, the firms selected
in the sample respect the following two criteria: (i) sales are at least $20 million
Canadian yearly; (ii) at least 150 people are employed. However, the lack of
contact names in the database in several cases reduced the number of usable
firms in the target population to 1692. Data were collected using a structured
questionnaire sent to the highest member of the ‘corporate’ top management
team (autonomous entity) or ‘local’ top management team (subunit) for which
the identity was revealed in the database.4 A total of 383 usable questionnaires
were received, for a response rate of approximately 24%.5 Appendix 1 presents
the statistics of the respondents in terms of position, experience, size (number
of employees) and industry classification.
To test whether respondents differed from non-respondents, a two-step analy-
sis was conducted. Respondents were first compared with non-respondents in
terms of sample characteristics (size, location, industry). Next, early and late
respondents were compared to detect any difference in the mean score of each
construct.6 Using chi-square statistics, no significant differences were found
between the size, location and industry of respondent firms and non-respondent
firms. A comparison of the means of the variables found no significant differ-
ences between early and late respondents. Hence, the analysis did not reveal
any systematic differences between respondents and non-respondents.

Survey Instrument and Validation of Constructs

Based on the work of Bourne et al. (2000), a four-item instrument was developed
to measure the dynamism of PMS. The respondents were asked to indicate on a
seven-point Likert-type scale how often during the last 12 months each of the fol-
lowing events took place: (i) performance indicators were deleted from the
measurement system, (ii) performance indicators were added to the measurement
system, (iii) changes occurred in the performance targets, and (iv) changes
occurred in the definition of the performance indicators. A higher mean score
indicates a more dynamic PMS.
The instrument of Govindarajan (1984) is used to assess PEU. The respondents
are asked to assess on a seven-point Likert-type scale the predictability or unpre-
dictability of eight environmental factors. The higher the mean score, the more
uncertain the firm’s perceived environment. Following the work of Hurley and
Hult (1998), the five-item instrument developed by Burke (1989) is used to
measure innovativeness. A higher mean score indicates more innovativeness
within the firm. The learning orientation is measured using the four-item
 The Periodic Review of Performance Indicators 81

instrument developed by Hult (1998). A higher mean score indicates a more

learning-oriented firm. The innovativeness and learning instruments ask the
respondents the extent to which each item describes their organization. Each
item ranges on a seven-point Likert-type scale.
Organizational performance is measured using an instrument employing three
indicators: (i) sales volume; (ii) return on investment; and, (iii) profits. Respon-
dents are asked to rate on a seven-point Likert-type scale the performance of their
organization against initial expectations for the past twelve months. An average
score is calculated for the three items whereby a higher mean score indicates
superior organizational performance. As several authors argue (e.g. Dess and
Robinson, 1984; Venkatraman and Ramanujam, 1987), in terms of consistently
providing valid and reliable performance assessment, neither objective nor
subjective measures are superior.
Lastly, the control variables are measured as follows. First, we control for the
mean industry performance. This variable is computed as the mean value of
organizational performance for the observation’s two-digit industry (excluding
the performance of the observation’s own value). Size is measured using the
natural log of the number of employees.
Appendix 2 shows the questionnaire items and the measurement analyses.
Several tests used to assess construct validity have been conducted and they all
reflect satisfactory results. Specifically, a series of confirmatory factor analysis
(CFA) was conducted using a first-order model (i.e. dynamism of PMS, PEU,
and organizational performance) or a second-order model (i.e. strategic capabili-
ties).7 This step tests whether or not the items used to measure each construct
exhibit sufficient validity. In addition, Cronbach Alphas have been calculated
for each construct. For every construct, all first- and second-order loadings
were significant (p , 0.01); the Cronbach Alpha coefficients exceeded the
common cut-off level of 0.70 (Nunnally, 1967) and the goodness-of-fit indices
generally respected the recommended threshold values,8 except for CFI of
environmental uncertainty, which almost reached the threshold.
Furthermore, several other procedures and tests have been conducted to
establish the reliability and validity of the constructs. First, the questionnaire
was pre-tested in three steps. Several academics were asked to revise the
questionnaire. Subsequently, three top managers were interviewed. They were
asked to complete the questionnaire and to provide comments on its form and
content. Lastly, the questionnaire was completed by a group of MBA students.
Adjustments were made in terms of wording and presentation. Second, to
assess inter-rater reliability for survey items, duplicate surveys were sent to a
second member of the top management team in the firms that originally returned
the questionnaire. Despite the size of the validation sample, which is not as large
as expected (21 firms), we were able to conduct several analyses. Based on the
satisfactory level of inter-rater agreement and the absence of differences
between the firms having one versus those having two respondents, the same
pattern of agreement can be assumed to exist in the sample.9
82 J.-F. Henri

Results
Descriptive Statistics
Table 1 presents the descriptive statistics and the correlation matrix for the main
constructs (Panel A) and specifically for each type of periodic review (Panel B).
Globally, the results suggest that performance indicators are not reviewed exten-
sively by top management teams (mean of 3.69/7). More specifically, while new
performance indicators are added to some extent (mean of 4.49) and new targets
fixed (mean of 4.06), less attention is devoted to discarding old indicators (mean
of 2.43) or to changing the definition of a performance indicator (mean of 3.73).
Interestingly, not only is the difference between the mean score of the deletion
and addition of indicators important (2.43 vs. 4.49) but the median also differs
substantially (2 vs. 5). While 78% of the scores of the deletion item range
between 1 and 3, 74% of the score of the addition item range between 4 and
7. This suggests that more performance indicators are added than deleted. In
other words, as time passes, the number of indicators within the PMS increases.

Overall Association between Dynamism of PMS and Organizational

Performance
As aforementioned, various claims have been made to encourage the regular
update of PMS considering their value for organizations. In order to examine
these claims, we first examine the association between dynamism of PMS
and organizational performance. The correlation matrix (Table 1) suggests a posi-
tive and significant association between these two variables (0.268; p , 0.01).
Furthermore, Table 2 presents the results of OLS regressions examining the
association between periodic reviews of performance indicators (globally and
specifically for each type) and performance, controlling for PEU, strategic
capabilities, industry, and size. While each regression is statistically significant
(p , 0.01), it reflects moderate explanatory power (between 0.055 and 0.113).
The results suggest that, on average, the periodic reviews of performance
indicators are positively and significantly associated with performance (0.197;
p , 0.05). The same results are also observed for each type of review
(p , 0.05). In terms of control variables, industry and size are positively and
significantly associated with performance for each type of performance review.
While no association is observed between strategic capabilities and performance,
PEU is negatively associated with performance ( – 0.085; p , 0.10).

Influence of the Level of Changes on the Association between the Dynamism of

PMS and Organizational Performance
We have argued that the association between the dynamism of PMS and organ-
izational performance may be contingent on the level of external and internal
changes. To test this hypothesis we use the approach described by Ittner and
 The Periodic Review of Performance Indicators 83

Table 1. Descriptive statistics and correlation matrix

Environmental Strategic Periodic Organizational

uncertainty capabilities reviews performance
Panel A: Global statistics
Descriptive statistics
No. of items used 8 9 4 3
Theoretical range 1–7 1–7 1– 7 1– 7
Minimum 1.60 1.40 1.0 1.0
Maximum 7.0 7.0 7.0 7.0
Mean 3.35 5.44 3.69 4.79
Standard deviation 0.89 0.82 1.27 0.99
Median 3.30 5.50 3.75 4.90
Correlation matrix (Pearson)
Environmental uncertainty 1.0
Strategic capabilities –0.075 1.0
Periodic reviews 0.119 0.163 1.0
Organizational performance 0.016 0.334 0.268 1.0
Type of periodic reviews
Deletion of Addition of Changes Changes in
indicators indicators in Targets definition
Panel B: Detailed statistics
Descriptive statistics
Theoretical range 1–7 1–7 1– 7 1– 7
Minimum 1.0 1.0 1.0 1.0
Maximum 7.0 7.0 7.0 7.0
Mean 2.43 4.49 4.06 3.73
Standard deviation 1.46 1.70 1.72 1.78
Median 2.0 5.0 4.0 4.0
Correlation matrix
Deletion of indicators 1.0
Addition of indicators 0.37 1.0
Changes in targets 0.33 0.51 1.0
Changes in definition 0.37 0.52 0.52 1.0

Correlation is significant at the 0.01 level (2-tailed),  Correlation is significant at the 0.05 level
(2-tailed)

Larcker (2001) and Ittner et al. (2002). Assuming that at any point in time some
firms will be ‘off-equilibrium’, performance differences are examined (see the
discussion earlier). Basically, this approach assesses in two steps the extent to
which organizational performance is associated with deviations from ‘optimal’
practices. In the first step, we hypothesize and estimate a model for the periodic
reviews of performance indicators. Using a logit model, we estimate the
probability that organizations review extensively their performance indicators
as a function of the level of external and internal changes.10 The residuals for
 84
J.-F. Henri
Table 2. Results of OLS regressions examining the association between dynamism of PMS and organizational performance

Periodic reviews Deletion of indicators Addition of indicators Changes in targets Changes in definition
Variable (n ¼ 383) (four types) (type 1) (type 2) (type 3) (type 4)
Intercept 2.032 2.354 2.509 2.263 1.910
Dynamism of PMS 0.197 0.102 0.080 0.124 0.146
PEU 20.085 20.058 20.079 20.057 20.075
Strategic capabilities 0.075 0.081 0.086 0.085 0.085
Industry 0.344 0.333 0.308 0.311 0.356
Size 0.266 0.301 0.278 0.267 0.286
Adjusted R2 0.113 0.058 0.055 0.091 0.112
(p , 0.01) (p , 0.01) (p , 0.01) (p , 0.01) (p , 0.01)

Note 1: Dependent variable: Organizational performance.

Note 2:  Significant at the 0.10 level  Significant at the 0.05 level  Significant at the 0.01 level (two-tailed).
 The Periodic Review of Performance Indicators 85

Table 3. Results of the logit model predicting the dynamism of PMS

Periodic Deletion of Addition of Changes in Changes in

reviews indicators indicators targets definition
Variable (n ¼ 383) (four types) (type 1) (type 2) (type 3) (type 4)
Intercept 21.556 21.082 23.005 20.675 22.085
PEU 0.291 20.032 0.335 0.040 0.076
Strategic capabilities 0.113 0.169 0.328 0.101 0.237
Pseudo R2 0.022 0.006 0.046 0.003 0.012
(p , 0.05) (p . 0.10) (p , 0.01) (p . 0.10) (p . 0.10)

Note 1: Dependent variable: Dynamism of PMS (dichotomous variable where 1¼ mean

score . median, and 0 ¼ mean score , ¼ median.
Note 2:  Significant at the 0.10 level  Significant at the 0.05 level  Significant at the 0.01 level
(two-tailed).

each observation estimate the distance between the practices of the firms and the
‘optimal’ practices as represented by the systematic model. These residuals are
assumed to reflect the over-investment or under-investment of the organization
in the dynamism of PMS. Table 3 presents the results of the logit model
predicting the dynamism of PMS.
Overall, consistent with Kennerley and Neely (2002, 2003), firms facing a
higher level of PEU (proxy for external change) are more likely to make periodic
reviews of performance indicators (0.291; p , 0.05). However, no significant
association is observed between strategic capabilities (proxy for internal
change) and periodic reviews. Some notable differences are observed for each
type of periodic review. First, PEU is only specifically associated with the
addition of performance indicators (p , 0.01). In addition, strategic capabilities
are associated with the addition of performance indicators (p , 0.05) and
changes in definition (p , 0.10). No association is observed with either PEU
or strategic capabilities for the deletion of indicators and changes in targets.
In the second step, OLS regressions are conducted using residuals from the
logit model. Separate variables are computed for positive and negative residuals
to allow for potential difference between over- and under-investment in periodic
reviews of performance indicators.

. The positive residuals from the logit model refer to the firms that review
performance indicators extensively but the predicted probability of review is
less than one. The variable used is based on the value of that positive residual,
or zero if the residual is negative. The expected coefficients are negative as
firms having dynamic PMS but having low predicted probability of review
are expected to be associated with lower performance.
. The negative residuals from the logit model refer to the firms that do not review
performance indicators extensively but the predicted probability of review is
greater than zero. The variable used is based on the value of that negative
86 J.-F. Henri

residual, or zero if the residual is positive. The expected coefficients are

positive as firms not having dynamic PMS but having high predicted prob-
ability of review are expected to be associated with lower performance.

Table 4 presents the results of the regressions examining the association between
the positive and negative residuals and performance, controlling for PEU, stra-
tegic capabilities, industry, and size. While each regression is statistically signifi-
cant (p , 0.01), it reflects moderate explanatory power (between 0.05 and 0.09).
The results suggest that the association between dynamism of PMS and organiz-
ational performance is a function of the fit between the level of changes and the
periodic reviews of performance indicators. Thus, the results provide support for
hypothesis 1. More specifically, the coefficient of the ‘negative residuals’ vari-
able is positive and significant (1.874; p , 0.01) while the coefficient of the
‘positive residuals’ variable is negative and significant, but to a lesser extent
( – 1.066; p , 0.10). This suggests that lower performance is associated with
firms that (i) do not review extensively performance indicators when the model
predicts they should, and to a lesser extent, (ii) review extensively performance
indicators when the model predicts they should not be doing so. The same results
are observed for each type of performance indicator, except for the changes in
definition whereby no significant association is observed. Lastly, while no associ-
ation is observed between PEU and performance, strategic capabilities, industry
and size are positively associated with performance.

Conclusion
The aim of this study was to examine one attribute of PMS that is not widely
addressed in the management accounting literature, namely the dynamism of
PMS. Following a contingency approach, this study has specifically investigated
the extent to which the association between periodic reviews of performance indi-
cators and organizational performance is contingent on the level of external and
internal changes. Based on a sample of 383 manufacturing firms, the results
suggest three main conclusions.

(i) Despite the fast changes in the current business environment and organiz-
ational requirements, the limited lifetime of performance indicators and
the various claims encouraging the regular update of PMS, it appears that
manufacturing organizations do not update their PMS regularly. While
some effort is being devoted to the addition of new indicators and to the
change of targets, not much attention is directed towards the deletion of
indicators and changes in the definition of indicators.
(ii) Periodic reviews of performance indicators can be beneficial for organizations
by ensuring evolution in the measurement set, improving the information that
organizations possess to manage resources, and continuously maintaining the
Table 4. Results of OLS regressions examining the association between dynamism of PMS prediction model residuals and organizational
performance

Periodic reviews Deletion of indicators Addition of indicators Changes in targets Changes in definition
Variable (n ¼ 383) (four types) (type 1) (type 2) (type 3) (type 4)

The Periodic Review of Performance Indicators

Intercept 3.290 3.800 2.877 5.576 2.667
Positive residuals 21.066 22.038 20.825 25.661 0.024
Negative residuals 1.874 3.613 1.686 6.806 1.386
PEU 20.050 20.055 20.021 20.038 20.042
Strategic capabilities 0.101 0.146 0.141 0.114 0.118
Industry 0.325 0.299 0.324 0.347 0.335
Size 0.292 0.301 0.287 0.256 0.297
Adjusted R2 0.077 0.050 0.056 0.084 0.090
(p , 0.01) (p , 0.01) (p , 0.01) (p , 0.01) (p , 0.01)

Note 1: Dependent variable: Organizational performance.

Note 2:  Significant at the 0.10 level  Significant at the 0.05 level  Significant at the 0.01 level (two-tailed).
Note 3: The ‘positive residuals’ variable is based on the value of the positive residual from the logit model, or zero if the residual is negative. The expected
coefficients are negative as firms having dynamic PMS but having low predicted probability of review are expected to be associated with lower performance.
The ‘negative residuals’ variable is based on the value of the negative residual from the logit model, or zero if the residual is positive. The expected coefficients
are positive as firms not having dynamic PMS but having high predicted probability of review are expected to be associated with lower performance.

87
88 J.-F. Henri

alignment among strategies, actions and measures. While periodic revisions

of performance indicators reflect numerous benefits, they may not necessarily
be appropriate at all times and in all circumstances as the need for dynamic
PMS vary depending on the degree of external and internal changes. In
other words, the association between the dynamism of PMS and organiz-
ational performance is contingent on the degree of changes.
(iii) Although the association between the dynamism of PMS and organizational
performance is a function of the match between the level of changes and the
periodic reviews of performance indicators, it may be more harmful to not
have a dynamic PMS in a context of higher level of changes than to have
dynamic PMS even if it is not required. In other words, the costs of not
having updated performance indicators (i.e. indicators that are less relevant
and appropriate; less alignment among strategies, actions and indicators;
indicators reflecting less ability to discriminate good from bad performance)
appear to be greater than the costs of unduly reviewing performance indi-
cators (i.e. human, technological and financial resources to periodically
refine indicators; potential confusion and lack of motivation among
managers and employees; disruption in the collection of longitudinal data).

This study contributes to the management accounting literature in several ways.

First, considering the scant attention devoted to the dynamism of PMS in the
current literature, this study documents – using a large sample – the extent to
which managers of manufacturing firms manage the revision of their PMS.
Second, despite the limitations of a cross-sectional design to fully capture the
construct of dynamism of PMS, this study presents empirical evidence providing
initial understanding of the impact of this attribute and the context in which it
operates. Lastly, this paper contributes to the development of knowledge
related to PMS by positioning dynamism as an important attribute of PMS,
like integrativeness, alignment and measurement quality (e.g. Chenhall, 2005;
Ittner et al., 2003b).
This study also has important implications for management practices. It depicts
PMS as an ongoing process that has to be managed continuously and not only
during the implementation phase. Managers should be aware of the importance
of periodic reviews of performance indicators if they want to avoid sending con-
flicting and inconsistent signals to employees. PMS is a powerful communication
device that has to be managed with caution. Organizations are encouraged to
develop systematic updating processes in order to stimulate the use of PMS
and achieve their full potential. However, these processes do not come without
costs and managers are encouraged to consider the need for periodic reviews
of performance indicators based on the levels of external and internal change.
This study is subject to potential limitations in terms of internal and external
validity. First, the construct of dynamism of PMS is limited by the cross-sectional
design of this study. It is also limited by the measurement instrument to a period
 The Periodic Review of Performance Indicators 89

of 12 months. However, changes in PMS may occur over a longer period of time
and not be completely captured by the instrument. Longitudinal and qualitative
approaches will be necessary to provide complementary evidence. Second,
PEU and strategic capabilities are two proxies for external and internal
changes. They may not completely reflect the degree of changes that can
occur. Third, two potential contingency variables (i.e. external and internal
changes) and four types of dynamism (i.e. addition, deletion, targets, and defi-
nition) have been investigated. However, other correlated omitted variables
could influence simultaneously the dynamism of PMS as well as the effect of per-
iodic reviews of performance indicators on performance, such as organizational
factors (e.g. change in leadership, culture, climate, structure, etc) and technologi-
cal factors (e.g. the information systems functionality and capacity). Other types
of dynamism include the change in weights of importance attached to the indi-
cators, a change in the frequency of reporting, and a change in the format of pres-
entation. Fourth, using the survey method to collect data creates a potential for
bias due to common response. Several techniques have been used to reduce or
minimize its effect (Doty and Glick, 1998). In terms of measurement techniques,
the questionnaire reflects different response formats, various scale anchors, and
variations in the wording of items. In terms of data sources, a validation
sample has been developed by seeking the participation of a second respondent
within the firms that have originally returned the questionnaire.

Acknowledgments
The author would like to thank Maurice Gosselin, Sylvie Héroux, Claude Laurin,
Alfred Seaman, and Nicole Thibodeau for their insightful comments and sugges-
tions, as well as the two anonymous reviewers.

Notes
1
Although few accounting studies have explicitly examined the review of performance indi-
cators, many have implicitly addressed this attribute when referring to the feedback process
of control systems. Indeed, the feedback process involves changes in objectives and actions,
as well as changes in the control systems (e.g. Ittner and Larcker, 2001; Otley, 1999). While
not focusing on the review process to ensure that PMS are regularly updated, this framework
suggests that the control systems may also be subject to re-evaluations and modifications.
2
Capabilities are the organizational and strategic routines by which firms synthesize and acquire
knowledge resources, and achieve new resource configurations (Eisenhardt and Martin, 2000;
Kogut and Zander, 1992).
3
In this study, ‘firm’ is a fully autonomous entity or a subunit of a larger firm. In all cases, firms
appeared as separate entities in the database.
4
Following other upper echelon studies (e.g. Carpenter and Fredrickson, 2001), a top manage-
ment team is defined as the top two tiers of an organization’s management team, which
include CEO/general manager, chief operating officer (COO), chief financial officer (CFO),
and the next highest management tier of a firm (senior vice-presidents).
90 J.-F. Henri

5
The response rate was calculated as the percentage of the number of usable returned question-
naires to the number of questionnaires sent, after adjusting for the firms that had closed, ended
manufacturing activities or moved, or for which the contact person had left the organization.
6
Early respondents correspond to the first 10% of all respondents ranked following the reception
date of the completed questionnaire. Late respondents correspond to the last 10% of all
respondents.
7
The results of the second-order CFA suggest that innovativeness and learning orientation are
two first-order constructs that relate to a second-order construct labeled strategic capabilities
(see Appendix 2). Thus, the mean score of innovativeness and learning orientation are com-
bined into one variable (strategic capabilities).
8
The indices used to assess the model are among the most frequently reported, namely NNFI
(non-normed fit index), CFI (comparative fit index), and RMSEA (root mean square error of
approximation). The threshold values recommended are (i) NNFI . 0.90 (Tabachnick and
Fidell, 2001), (ii) CFI . 0.95 (Hu and Bentler, 1995), and (iii) RMSEA , 0.l0 (Browne and
Cudeck, 1993).
9
To assess the inter-rater agreement, an average deviation (AD) index is calculated (Burke et al.,
1999). For all the constructs in the validation sample, the AD is estimated at 0.35 and ranges
from 0.27 to 0.49 for each construct. Compared with the criterion for acceptable inter-rater
agreement and practical significance estimated at 1.2 (Burke and Dunlap, 2002), these
results are quite satisfactory. The criterion is approximated as c/6, where c is the number of
response options for a Likert-type item. A series of t-tests was carried out to determine
whether the mean ratings provided by the first respondent for each construct were significantly
different from the mean ratings from the second respondent. The results do not reflect signifi-
cant differences for any construct (p . 0.05). Moreover, t-tests and chi-square analyses were
carried out to compare the mean ratings and sample characteristics (size, industry, location)
of the firms with two respondents with those of the firms that have one respondent. No signifi-
cant differences were found for all constructs and sample characteristics (p . 0.05) except for
size. Indeed, the firms that have two respondents appear to be smaller.
10
As mentioned by Ittner and Larcker (2001), this model is based on numerous assumptions: (i)
the model is assumed to be the same for each firm, (ii) the model exhibits the correct functional
form, (iii) the model has predictor variables that are measured without errors, and (iv) the model
includes all relevant predictor variables. Furthermore, the choice of logistic regression is three-
fold (Tabachnick and Fidell, 2001). Unlike multiple-regression, logistic regression has no
assumptions about the distributions of the predictor variable and it cannot produce negative pre-
dicted probabilities. In addition, logistic regression is especially useful when the distribution of
responses of the dependent variable is expected to be nonlinear with one or more independent
variable.

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Appendix 1. Profile of the Respondents

Experience within the firm

Position % (average in years)
CEO / General manager 29% 18.4
COO 29% 14.6
Senior Vice-presidents 28% 13.2
CFO / VP finance 11% 10.5
Other 3% 10.0
Average 14.7

Number of Employees %
fewer than 499 66%
Between 500 and 999 18%
Between 1 000 and 4 999 13%
Between 5 000 and 9 999 2%
Between 10 000 and 19 999 1%
Average 796

Industry Classification %
20 Food and kindred products 8,4%
21 Tobacco manufactures 0,3%
22 Textile mill products 3,1%
23 Apparel and other textile products 4,2%
24 Lumber and wood products 10,4%
25 Furniture and fixture 4,2%
26 Paper and allied products 8,1%
27 Printing and publishing 1,8%
28 Chemicals and allied products 4,4%
29 Petroleum and coal products 1,6%
30 Rubber and misc. plastics products 3,9%
31 Leather and leather products 1,3%
32 Stone, clay, glass, and concrete products 3,1%
33 Primary metal industries 6,0%
34 Fabricated metal products 10,4%
35 Industrial machinery and equipment 10,4%
36 Electrical and electronic equipment 7,3%
37 Transportation equipment 7,3%
38 Instrument and related products 2,3%
39 Misc. manufacturing industries 1,3%
 The Periodic Review of Performance Indicators 95

Appendix 2. Questionnaire Items and Statistics of Measurement Analysis

1- Perceived environmental uncertainty (PEU)
Please indicate the extent that each of the following factors is predictable or
unpredictable in the context of your main business.
Scale: 1 ¼ highly predictable to 7 ¼ highly unpredictable

Items (first order construct) Confirmatory factor analysis Cronbach Alpha


Manufacturing technology 0.643 0.71
Competitors’ actions 0.805
Market demand 0.562
Product attributes/design 0.540
Raw material availability 0.740
Raw material price 0.645
Government regulation 0.691
Labor union actions 0.483
Goodness-of-fit of the model: x2 (17) ¼ 57.794 p , 0.001; NNFI ¼ 0.90;
CFI ¼ 0.939; RMSEA ¼ 0.079

Note: Significant at the 0.05 level  Significant at the 0.01 level.

2- Strategic capabilities
Please indicate the extent to which the following items describe your organization
Scale: 1 ¼ not descriptive to 7 ¼ very descriptive

Confirmatory factor analysis

Second-
First-order order Cronbach
Items (second order construct) loadings loadings Alpha
Innovativeness 0.366 0.72
People are penalized for new ideas 1.0
that don’t work (R)
Innovation is readily accepted in 2.615
program / project Management
Technical innovation (research results) 2.420
is readily accepted
Innovation is perceived as too 1.870
risky and is resisted (R)
Management actively seeks 2.372
innovation and ideas
Learning orientation 0.573 0.79
Ability to learn is the key 1.0
to improvement
Basic values include learning as 1.213
a key to improvement

(Continued)
96 J.-F. Henri

Continued
Confirmatory factor analysis
Second-
First-order order Cronbach
Items (second order construct) loadings loadings Alpha
Once we quit learning we 1.018
endanger our future
Employee learning is an 1.109
investment, not an expense
Goodness-of-fit of the model: x2 (26) ¼ 72.80 p , 0.001; NNFI ¼ 0.963;
CFI ¼ 0.973; RMSEA ¼ 0.067
 
Note: Significant at the 0.05 level Significant at the 0.01 level.

3- Periodic reviews of performance indicators

During the last 12 months, how often have each of the following events related to
your performance measurement system occurred?
Scale: 1 ¼ never to 7 ¼ regularly

Confirmatory Cronbach
Items (first order construct) factor analysis Alpha
Performance indicators were deleted from the 0.726 0.76
measurement system
Performance indicators were added to within the 1.218
measurement system
Changes occurred in performance targets 1.209
Changes occurred in the definition of performance 1.308
indicators
Goodness-of-fit of the model: x2 (2) ¼ 0.687 p . .001;
NNFI ¼ 0.998; CFI¼ 1.0; RMSEA ¼ 0.0001
 
Note: Significant at the 0.05 level Significant at the 0.01 level.

4- Organizational performance
Please rate the performance of your organization against initial expectations on
each of the following dimensions for the past 12 months.
Scale: 1 ¼ not at all satisfactory to 7 ¼ outstanding

Items (first order construct) Confirmatory factor analysis Cronbach Alpha


Sales volume 0.751 0.81
Return on investment 1.351
Profit 1.515
2
Goodness-of-fit of the model: x (1) ¼ 0.157 p ¼ 0.692; NNFI¼ 1.0;
CFI ¼ 1.0; RMSEA ¼ 0.0
 
Note: Significant at the 0.05 level Significant at the 0.01 level.