1 Introduction

Performance measurement systems (PMSs) are an important aspect of management control systems (MCSs) (Merchant & Van der Stede, 2007) with the ability to promote organisational outcomes (Ho et al., 2014; Pollanen et al., 2017; Teeratansirikool et al., 2013), capabilities (Bedford et al., 2019; Henri, 2006; Micheli & Mura, 2017), and employee feelings (Lau & Amirthalingam, 2014; Marginson et al., 2014) and behaviour (Burney et al., 2009; Sholihin & Pike, 2010). Previous studies examining the influence of performance measures on employee behaviour have emphasised the effect of the use of financial and/or non-financial measures with mixed findings reported (Graf et al., 2019).Footnote 1 However, Su et al. (2015) posit that it is not sufficient to merely investigate the existence of controls without examining the way in which they are used. Further, Abernethy et al. (2010) argues that what differentiates one control from another is not their technical characteristics but the way in which management use them. Accordingly, given that the “different uses of performance measures (diagnostic versus interactive) may create different, and potentially opposing [outcomes]” (Marginson et al., 2014, 65), grounded in Simons’ (1995) levers of control framework, this study aims to extend the performance measurement literature by considering the relationship between the interactive and diagnostic use of financial and non-financial performance measuresFootnote 2 with a specific managerial behaviour, creativity.Footnote 3

Relatively few studies have considered the influence of the use of controls on creativity (Moulang, 2015; Speklé et al., 2017a, 2017b) and hence, there are calls for future research on the effect of control systems on creativity (Moulang, 2015). Our focus on creativity, which is defined as the production of novel and useful ideas by individual employees, is pertinent as it represents a form of individual behavioural expression rather than a personality trait (Amabile et al., 1996), and hence, it is considered to be an important managerial behaviour of increasing relevance (Lu et al., 2019; Moulang, 2015). Further, creativity can lead to organisational innovation through facilitating the development of new products and processes (i.e. innovation), thereby enabling the achievement of long-term survival and competitive advantage (Moulang, 2015; Speckbacher, 2017). Hence, organisations are expected to leverage on their human capital (Raffer, 2018; Uddin & Arif, 2016) and encourage managerial creativity in order to cope with the challenges of the contemporary business environment e.g. uncertainty and the disruptions arising due to increasing technological evolution (Belenzon et al., 2018; Maier & Reimer, 2018).

While recent management accounting literature has advocated the role of performance management systems (including PMSs) in enhancing creativity (Adler & Chen, 2011; Brüggen et al., 2018; Davila et al., 2009; Kachelmeier et al., 2019; Klein & Speckbacher, 2020; Speckbacher & Wabnegg, 2020; Speklé et al., 2017a, 2017b), there is limited empirical understanding of the mechanisms through which performance measures promote creativity (Speklé et al., 2017a, 2017b). Two exceptions here are studies by Speklé et al., (2017a, 2017b) and Moulang (2015) who examined the association between Simons’ (1995) levers of control, empowerment, and individual level creativity. Moulang (2015, 519) concluded that “interactive performance measurement system use impacts on creativity through …. psychological empowerment” while Speklé et al., (2017a, 2017b, 73) reported that the “intensity of use of a levers of control system of controls is positively associated with both empowerment and creativity”. This study aims to extend this research by examining the mediating role of an alternative psychological mechanism, specifically the perceived fairness of performance appraisal,Footnote 4 on the association between top management’s interactive and diagnostic use of financial and non-financial performance measures with individual managers’ (middle and lower level) creativity.

Our focus on the mediating role of the perceived fairness of performance appraisal is pertinent as perceived employee feelings (individuals’ psychological state) are recognised as mediators of the effect of organisational systems (i.e. in our study, PMSs) on employee behaviour (i.e. in our study, creativity) (Covaleski et al., 2003; Venkatesh & Blaskovich, 2012), and hence, the perceived fairness of the performance appraisal system is thought to be an important mechanism which can explain the effect of the interactive and diagnostic use of performance measures on creativity. This line of research follows the dominant theoretical perspective informing psychology studies which posits that individuals’ psychological states are influenced by stimuli which subsequently affect their behaviour. Specifically, in our study we find that top management’s interactive use of financial and non-financial performance measures exhibits a positive effect on middle and lower level manager’s perceived fairness of their performance appraisal system, with both types of measures positively associated with interpersonal and informational fairness, and the interactive use of financial performance measures also found to be positively associated with distributive fairness. Alternatively, we find that top management’s diagnostic use of financial (non-financial) measures is negatively (positively) associated with manager’s perceived fairness of performance appraisal, specifically procedural (distributive and interpersonal) fairness. In turn, drawing on “organisational justice literature [which] suggests that fairness has important effects on many aspects of organisational members” including their behaviour and performance (Lau, 2015, 143), we find that manager’sFootnote 5 perception of the fairness of their performance appraisal generally exhibits a positive association with creativity, with three of the four dimensions of fairness (distributive, interpersonal and informational) found to be positively associated with creativity.Footnote 6 This is consistent with the organisational identification theory which posits that when employees identify with their organisation, they will exhibit behaviour that is in the best interests of their organisation (Foster et al., 2010). Specifically, manager’s perception of the fairness of their performance appraisal will endear them to identify with issues and problems in their organisation and hence, they will be more willing to find creative solutions to organisational problems (Lau & Moser, 2008).

Therefore, the study aims to examine the association between the interactive and diagnostic use of performance measures with creativity and the mediating role of a specific employee psychological state, manager’s perception of the fairness of their performance appraisal, on this association. The remainder of the paper is organised as follows. First, the next section discusses the main constructs of the study, and the plausible relationships between the constructs. The following section then outlines the research method adopted in the study, followed by the analysis and results section, and the final section which discusses and presents the implications of the findings, the limitations and directions for future research.

2 Literature review and hypotheses development

2.1 Performance measures

Performance measures are an integral part of a management control system, and they are broadly categorised into financial and non-financial measures (Gong & Young, 2016; Lau & Moser, 2008). Financial measures include profit, capital market returns, unit cost, and return on investment (Banker et al., 2000; Eccles, 1991), and are considered to be narrow in focus, and aggregate in nature (Kaplan & Norton, 2001a, 2001b). They are also referred to as lag measures since they measure outcomes as opposed to the drivers of such outcomes. In contrast to financial performance measures, non-financial performance measures are broader in scope, and are more understandable and easier to relate to (Langfield-Smith et al., 2018). The use of non-financial performance measures is considered to promote favourable outcomes, given many of them are leading instead of lagging in nature.

This study relies on Simons’ (1995) Levers of Control,Footnote 7 focusing on how the interactive and diagnostic use of both financial and non-financial performance measures in the performance management process affects creativity. The interactive use of performance measures refers to the extent to which top management use financial performance measures (e.g. profit and standard costs) and non-financial performance measures (e.g. the number of innovations and employee/customer satisfaction ratings) to facilitate discussion and communication in meetings with middle and lower level managers, encourage continual challenge and debate of underlying data, and to help to tie the business unit together (Marginson et al., 2014). Alternatively, the diagnostic use of performance measures refers to the extent to which top management use financial performance measures (e.g. profits and standard costs) and non-financial performance measures (e.g. customer satisfaction rate, number of innovations and number of jobs reworked) to track middle and lower level managers’ progress towards goals, monitor results and compare outcomes to expectations (Marginson et al., 2014). The focus on the interactive and diagnostic use of performance measures is considered appropriate as they are mainly imposed on middle and lower level managers by the top management level (Bisbe et al., 2019). Further, the imposition of the levers of control on middle and lower manager levels also enables us to maintain consistency in the level of analysis throughout the study given the study’s other variables (i.e. creativity and perceived fairness of performance appraisal) are also applied at these levels.

The study focuses on the influence of the interactive and diagnostic use of performance measures on middle and lower level managers’ creativity. In addition, we examine the behavioural mechanism through which this effect transpires. Specifically, we examine the mediating role of the perceived fairness of their performance appraisal on the association between the interactive and diagnostic use of performance measures with creativity (see Sect. 2.3).

2.2 The association between the interactive and diagnostic use of performance measures with creativity

The organisational behaviour literature contends that freedom over one’s work facilitates creativity while control may hinder creative thought and output (Shalley et al., 2000; Speklé et al., 2017a, b; Zhou & George, 2003). However, PMSs, as an integral component of the MCS, possess the ability to influence employee behaviour (Burney et al., 2009; Sholihin & Pike, 2010) with the manner in which such performance measures are used (i.e. interactively or diagnostically) expected to influence employee behaviour including creativity (Henri, 2006; Journeault et al., 2016; Simons, 1995). In particular, the PMS literature indicates that the way in which employees perceive controls determines the effect of such controls on individual creativity (Akerlof & Kranton, 2008; Falk & Kosfeld, 2006; Shalley et al., 2004; Speklé et al., 2017a, 2017b). Accordingly, the following sub-sections discuss the nature of the associations between the interactive and diagnostic use of financial and non-financial performance measures with creativity.

2.2.1 The interactive use of performance measures

The interactive use of performance measures “expands opportunity seeking, focuses attention, forces dialogue and encourages creativity” (Moulang, 2015, 521). When financial or non-financial performance measures are used interactively the measures are less restrictive and incorporate employees’ opinions and preferences (Henri, 2006; Simons 1995), thereby positively influencing individual creativity. Specifically, given the interactive use of financial performance measures (such as profit, ROI, standard cost) or non-financial performance measures (such as customer and employee satisfaction rating, product quality) engages employees in discussion that stimulates challenging the existing and underlying assumptions and actions plans (Marginson et al., 2014), this will elicit employees to come up with new ideas and ways of operating. Accordingly, as individual creativity is about experimenting with and devising creative ideas and concepts by employees (Moulang, 2015), the interactive use of performance measures is expected to lead to improved creativity.

Furthermore, the inherent characteristics of the interactive use of financial and/or non-financial performance measures are consistent with the notion of creativity since the interactive use of performance measures emphasises organisational learning and opportunity seeking behaviour (Bisbe et al., 2007; Narayanan & Boyce, 2019; Simons, 1995). Specifically, given creative employees are those that engage in searching for innovative processes and improvements in their organisations (Moulang, 2015), consistent with goal setting theory (Marsh et al., 1995), the interactive use of performance measures will promote a mindset that encourages employees to engage in actions and efforts that will bring new paradigms to their organisations i.e. to be more creative. Hence, through encouraging greater discussion and debate, the interactive use of performance measures will encourage employees to be more proactive in solving problems and implementing action to manage strategic uncertainties (Bisbe et al., 2007; Narayanan & Boyce, 2019; Simons, 1995).

In line with this discussion, we hypothesise that the interactive use of performance measures will be positively directly associated with creativity.

H1

The interactive use of financial and non-financial performance measures is positively directly associated with creativity.

2.2.2 The diagnostic use of performance measures

The diagnostic use of performance measures involves “rule based controls that aim to monitor outcomes and correct significant deviations from expected levels of performance” (Moulang, 2015, 521). As a more formal control, the diagnostic use of controls is generally held to be constraining and hence, incompatible with creativity (Davila et al., 2009; Davila et al. 2009), although its effect on employee behaviour is expected to differ based on the type of performance measures that are used to promote the achievement of objectives (Marginson et al., 2014). First, given the narrow nature of financial performance measures (e.g. return on investment and profit) (Kaplan & Norton, 2001a, b) the diagnostic use of such measures is expected to limit employees’ desire to innovate and be creative. In particular, as creative endeavours entail experimentation and risk taking (Moulang, 2015), such creative endeavours would be constrained in organisations where the priority is the achievement of pre-set financial goals and targets.

Furthermore, as financial performance measures have a short-term orientation, the diagnostic use of financial performance measures will stifle the propensity of employees to be creative, as experimenting with new ideas requires a longer time horizon for the benefits of creative efforts to materialise, while there is no guarantee that such creative efforts will be successful. Finally, the diagnostic use of financial performance measures and the accompanying excessive focus on meeting pre-set goals and targets may result in unattended dysfunctional outcomes such as data manipulation and constrain employees desire to engage in creative endeavours within their organisations. For instance, the creativity and innovation literatures indicate that an organisation “that relies on financial information alone is less innovative” (Yuliansyah & Razimi, 2015, 136) while the use of financial performance measures has the potential to undermine the potential benefits of creativity and hence, decrease the level of team creativity (Klein & Speckbacher, 2020).

Therefore, in line with this discussion, it is expected that the diagnostic use of financial performance measure will constrain individual creativity and we therefore hypothesise a negative direct association between the diagnostic use of financial performance measures and creativity.

H2a

The diagnostic use of financial performance measures is negatively directly associated with creativity.

While the diagnostic use of performance measures focuses on promoting the achievement of goals and targets and taking corrective actions when the outcomes deviate from the targets, the multidimensional and broad nature of non-financial performance measures (Sauermann & Cohen, 2010; Speckbacher & Wabnegg, 2020) is expected to promote desirable employee behaviour including creativity. Specifically, given non-financial performance measures include a range of metrics which involve changing or modifying existing work practices (such as the number of new or improved processes, and number of products under development), the diagnostic use of performance measures can contribute to increased creativity.

Similarly, given non-financial performance frameworks such as the balanced scorecard and performance pyramid (Abdel-Maksoud et al., 2010) encapsulate the achievement of employee related targets such as employee training and development, and since more skilled and knowledgeable employees tend to be more proactive and have the mindset and capacity to try and experiment new things, the diagnostic use of non-financial performance measures is expected to result in increased individual creativity. Finally, non-financial performance measures have a leading effect and focus on both the achievement of and improvements in processes and critical success factors (Marginson et al., 2014), such as the number of innovations, thereby encouraging employees to generate new ideas, improve methods and processes, and engage in other creative activities (Huber, 1998).

Therefore, we hypothesise that there will be a positive direct association between the diagnostic use of non-financial performance measures and creativity.

H2b

The diagnostic use of non-financial performance measures is positively directly associated with creativity.

2.3 The mediating role of the perceived fairness of performance appraisal on the association between the interactive and diagnostic use of performance measures with creativity

As previously discussed, we argue that the effect of top management’s interactive and diagnostic use of financial and non-financial performance measures on middle and lower level managers’ creativity is mediated by performance appraisal perceived fairness (as perceived by middle and lower level managers). This is grounded in the psychological perspective which posits that individuals’ psychological state (in our study, perceived fairness) intervenes the effect of organisational systems, such as the PMS, on employee behaviour (Covaleski et al., 2003; Venkatesh & Blaskovich, 2012). Specifically, middle and lower level manager’s perceived fairness of their performance appraisal mediates the effect of the PMS (i.e. top management’s interactive and diagnostic use of performance measures) on middle and lower level manager’s behaviour (i.e. creativity).

While we explain the specific nature of the mediating role of perceived fairness in respect to the influence of the interactive and diagnostic use of performance measures (financial and non-financial) on creativity below (see Sects. 2.3.1 and 2.3.2 respectively), the underlying assumption is that managers who perceive that the appraisal of their performance is fair (unfair), will be more (less) likely to be prosocial and reciprocate their organisation’s goodwill and hence, more (less) willing to find creative solutions to resolve organisational problems (Lau & Moser, 2008). This effect is grounded in social exchange theory “which highlights that in social systems, such as organisations, individuals develop reciprocity expectancies about what they give and receive, thereby influencing their cognition and behaviour” (Madrid & Patterson, 2016, 410). Hence, when middle and lower level managers perceive that their performance is appraised fairly, they are likely to be more creative. Similarly, organisational identification theory, which maintains “that employees who identify with the organisation will endeavour to accomplish the company’s strategic interest” (Foster et al., 2010, 402), suggests that managers that perceive that their performance is appraised fairly are more likely to identify with their organisation, leading them to engage in creative activities.

While the majority of studies have conceptualised perceived fairness (organisational justice) as a construct comprising two dimensions (i.e. procedural and distributive), Colquitt (2001) suggested and empirically validated perceived fairness as comprising four types including procedural, distributive, interpersonal and informational fairness. In the context of performance appraisal, procedural fairness relates to the procedures used to assess managers’ performance. To be procedurally fair, the procedures must be applied in a consistent, accurate, free of bias and ethical manner. Managers should be able to express their views and feelings during the procedure and appeal the outcomes arrived at through using such procedures (Colquitt, 2001). Hence, when middle and lower level managers are content that the procedures used to evaluate their performance are applied in a consistent and accurate manner and that their performance appraisal is free of bias and conducted in an ethical manner, they will perceive their performance appraisal system to be procedurally fair and more likely to devote energy towards creativity.

Distributive fairness relates to the outcomes of managers’ performance appraisal (e.g. offers of rewards, development recommendations etc.). To achieve distributive fairness, the outcomes of managers’ performance appraisal are expected to be appropriate, justified and reflect the effort that managers put into their work and the contributions they have made (Colquitt, 2001). When managers feel that they are rewarded fairly based on merit and their effort expended (i.e. distributive fairness), they are more likely to provide reciprocal services i.e. proactively improve organisational processes (Tan & Lau, 2012) through creative endeavours.

Interpersonal and informational fairness both relate to the top-level management responsible for evaluating managers’ performance. Specifically, interpersonal fairness refers to the extent to which middle and lower level managers feel that top management treats them with dignity and respect, and refrain from inappropriate remarks or comments, while informational fairness focuses on the manner in which the performance appraisal procedures are applied (Groen 2018) and is assessed as the extent of communication middle and lower level managers receive from top-level management in respect to the performance appraisal procedures (Colquitt, 2001). Middle and lower level managers will be more likely to identify with organisations that uphold moral and ethical values and treat them with dignity and respect, thereby leading to higher engagement in creative efforts in support of the strategic direction of their organisation. Further, in line with social exchange theory, the feeling that communication in the performance appraisal process is candid and tailored to meet the information needs of managers will inspire managers to reciprocate by being more proactive in addressing organisational problems through seeking creative solutions.

In response to Groen’s (2018) call to include the four types of fairness, so as to reduce omitted variable bias, we adopt this multidimensional measure of perceived fairness developed by Colquitt (2001). However, acknowledging that the consideration of the association between the use of performance measures, perceived fairness, and creativity is in its infant stage, we do not develop hypotheses in regard to the mediating effect of each of the four types of perceived fairness. Rather, we develop hypotheses in respect to the general role of perceived fairness in mediating the association between the use of (interactive and diagnostic) performance measures (financial and non-financial) with creativity and allow the data analysis to inform us of the role of specific types of perceived fairness which is then discussed in the conclusion.

2.3.1 The interactive use of performance measures

The interactive use of performance measures enables employees (middle and lower level managers in this study) to engage in discussions and/or debates in respect to the use of performance measures (Simons, 1995), thereby eliciting a positive perception of fairness in respect to the procedures and mechanisms used to evaluate their performance. In particular, the interactive use of performance measures provides middle and lower level managers with a sense of autonomy in respect to how their work is performed and appraised (Moulang, 2015), thereby enhancing their perception of the fairness of their performance appraisal, and subsequently enhancing the likelihood that they will reciprocate the goodwill provided through engaging in activities that benefit their organisation, for example, the exploration of new ideas (i.e. creativity) (Moulang, 2015). Hence, we argue that perceived fairness will positively mediate the association between the interactive use of performance measures (both financial and non-financial) with creativity due to the positive influence of the interactive use of performance measures on manager’s perceived fairness of their performance appraisal system.

This relationship can be explained in respect to each of Colquitt’s (2001) four dimensions of perceived fairness. For example, through providing middle and lower level managers with the opportunity to discuss and debate the use of specific financial and non-financial measures, and hence, express their views and feelings about the performance appraisal procedures, the interactive use of both financial and non-financial measures (by top management) is expected to enhance middle and lower level managers’ perceived feeling of procedural fairness. Further, distributive fairness, i.e. manager’s perception of the equity and equality in the distribution of outcomes that commensurate their efforts (Colquitt, 2001; Groen, 2018), is likely to be higher when top management’s interactive use of performance measures is higher as middle and lower level managers are given the opportunity to discuss and explain how and why targets are (not) met with their superiors, possibly leading to the revision of target outcomes and/or greater understanding when evaluating and rewarding them. In addition, through encouraging dialogue and discussion (Simons, 1995) and involving employees in decision making processes, the interactive use of performance measures will enable middle and lower level managers to feel more empowered, thereby enhancing their feeling of a sense of dignity and respect, essential traits of interpersonal fairness (Colquitt, 2001). Finally, in considering middle and lower level managers’ viewpoints and providing adequate explanations of decisions by top management, the interactive use of performance measures will facilitate the continual exchange of information between different levels of management (Cools et al., 2017), leading to higher perceived informational fairness. For instance, Simons (2000, 304) here refers to interactive control systems as creating “a positive informational environment that encourages information sharing and learning”.

Therefore, we expect that the interactive use of performance measures (financial and non-financial) will enhance perceived fairness, which will in turn exhibit a positive influence on creativity. Accordingly, we hypothesise that perceived fairness will positively mediate the association between the interactive use of performance measures and creativity.

H3

The perceived fairness of performance appraisal will positively mediate the association between the interactive use of financial and non-financial performance measures and creativity.

2.3.2 The diagnostic use of performance measures

As the perceived fairness of the performance appraisal system is expected to exhibit a positive association with creativity, the mediating role of perceived fairness on the association between the diagnostic use of performance measures (financial and non-financial) with creativity is inherently dependent upon the effect of the diagnostic use of financial and non-financial performance on the perceived fairness of the appraisal system. As was the case in respect to the direct hypothesised associations between the diagnostic use of performance measures and creativity, the effect of the diagnostic use of performance measures on perceived fairness is expected to differ based on the nature of the types of measures used (i.e. financial or non-financial).

First, since financial performance measures are generally perceived to be constraining in nature (Tan & Lau, 2012), top management’s use of financial measures in a diagnostic manner may reinforce this constraining effect, as such measures are limited and narrow in nature, and do not capture nonmonetary metrics (e.g. customer satisfaction rates) (Lau & Moser, 2008) which are more controllable by middle and lower level managers. Further, when such measures are used diagnostically as the basis of monitoring, controlling and rewarding middle and lower level manager’s performance, their efforts may not be completely reflected (Tan & Lau, 2012), which is likely to result in feelings of unfairness in respect to how their performance is appraised i.e. distributive fairness.

In addition, as middle and lower level managers are either not involved in setting metrics and/or the measures do not reflect their effort, the diagnostic use of financial performance measures will result in them being more likely to perceive procedural fairness in a negative way. Finally, given financial performance measures are limited in scope (Abdel-Maksoud et al., 2010), the diagnostic use of such measures in a top-down autocratic fashion may have a detrimental effect on middle and lower level managers’ perceptions of interpersonal fairness. Specifically, the imposition of a narrow set of financial performance measures could result in middle and lower level managers feeling neglected and undervalued in the performance setting and appraisal process, resulting in an adverse perception of interpersonal fairness (Colquitt, 2001).

Hence, the diagnostic use of financial performance measures is expected to exhibit a negative effect on perceived fairness. In conjunction with the expected positive effect of perceived fairness on creativity, this leads us to hypothesise that perceived fairness will negatively mediate the association between the diagnostic use of financial measures with creativity i.e. the diagnostic use of financial performance measures will exhibit a negative effect on creativity through perceived fairness as the higher diagnostic use of financial performance measures leads to lower perceived fairness and hence, lower creativity.

H4a

The perceived fairness of performance appraisal will negatively mediate the association between the diagnostic use of financial performance measures and creativity.

Alternatively, as previously discussed, middle and lower level managers will view the broader coverage involved with the use of non-financial performance measures more favourably, even when they are used diagnostically by top management. This is supported by previous research which provides evidence of the positive effect of the diagnostic use of controls, for example Sakka et al. (2013) who found that the diagnostic use of MCS was positively associated with project performance when task uncertainty was low, and Songini et al. (2013) who found that the diagnostic use of MCSs was positively related with the implementation of a cost leadership strategy. Specifically, top management’s diagnostic use of non-financial performance measures will promote middle and lower level managers’ feelings of procedural fairness as through focusing on a variety of performance metrics the use of non-financial performance measures is more likely to include measures that are controllable by middle and lower level managers and therefore, more accurately reflect their efforts (Lau & Moser, 2008). Further, since non-financial performance measures comprise internal and external measures, and have a long and short term focus, the use of such measures is more likely to be considered to be unbiased and hence procedurally fair (Colquitt, 2001), even if used diagnostically.

Similarly, as non-financial performance measures are broader and reflect various aspects of manager’s responsibilities (Abdel-Maksoud et al., 2010; Lau & Moser, 2008), top management’s diagnostic use of such measures may lead to stronger feelings of distributive fairness. Specifically, when middle and lower level managers perceive that their outcomes are determined based on multiple measures, it is more likely that specific measures will be used that reflect the effort they have put into their work, and hence, they will consider the performance appraisal process to be fairer (Burney et al., 2009; Colquitt, 2001). Finally, top management’s diagnostic use of non-financial performance measures may also exhibit a positive effect on interpersonal fairness as middle and lower level managers may be more likely to perceive that their supervisors are treating them fairly by considering the various aspects of their performance.

Therefore, we expect that the diagnostic use of non-financial performance measures will exhibit a positive effect on perceived fairness, which in turn will exhibit a positive effect on creativity. Hence, we hypothesise that perceived fairness will positively mediate the association between the diagnostic use of non-financial performance measures with creativity, with the diagnostic use of non-financial performance measures expected to exhibit a positive effect on creativity through perceived fairness as the higher diagnostic use of non-financial performance measures leads to higher perceived fairness and in turn, higher creativity.

H4b

The perceived fairness of performance appraisal will positively mediate the association between the diagnostic use of non-financial performance measures and creativity.

3 Method

3.1 Data collection

The data for this study was collected using the survey research method, due to its ability to assess the variables of interest and generate a representative sample, thereby enabling the generalisation of the study’s findings. The questionnaire was administered to middle and lower level managers from the manufacturing industry in Australia. These management levels were chosen given the variables of interest needed to be assessed at the individual level of analysis, and to avoid possible respondent bias that may arise when top-level management assesses organisational systems and processes. The questionnaire was administered by Qualtrics, a global data collection company, due to the ability of the company to target the respondents of interest and generate a high response rate (Wilke et al., 2017). Out of the 656 questionnaires administered, 220Footnote 8 usable responses were received, representing a 33.5% response rate.

Non-response bias was tested by splitting the sample in half and using an independent sample t-test to compare the mean scores of the variables, including the control variables (organisational size, educational level and environmental uncertainty), between the early respondents and the late respondents. There were no statistically significant differences, thereby assuring the representativeness of the study sample (Anderson & Young, 1999). To assess common method bias, Harman’s (1976) single factor test was utilised, with the results showing that the percentage of the variance explained (34.60%) by the factor with the highest Eigenvalue was less than 50%, thereby indicating that common method bias was not a concern (Podsakoff et al., 2003).

The demographic profile of the respondents (see Table 1) shows that 82.3% of the respondents were middle level managers with the remaining respondents being lower level managers. The respondents had a variety of educational qualifications with the majority holding a postgraduate degree (57.2%) or undergraduate degree (25.5%). The responding organisations were of different sizes with 59.5% of the responding organisations small (less than 100 employees), 26.8% medium (between 100 to 999 employees) and 13.6% large (1000 employees and above).

Table 1 Profile of respondents

3.2 Variable measurement

The measures were adapted from established scales. The construct validity and unidimensionality of the scales were first assessed by estimating the psychometric properties of each scale using exploratory factor analysis in SPSS. The measurement model was then estimated to further assess the validity and reliability of the measures.

3.2.1 The interactive and diagnostic use of performance measures

The interactive and diagnostic use of financial and non-financial performance measures was assessed using an 11-item scale adapted from Marginson et al. (2014). This measure was specifically designed to capture the extent of the interactive and diagnostic use of both financial and non-financial performance measures and hence, has a narrower focus than the interactive and diagnostic use of performance measurement system defined in Simons’ (1995) framework. Respondents were asked, on a 5-point scale with anchors of 1 “Not at all” and 5 “To a great extent”, to indicate the extent to which they agreed that their business unit (i.e. top management) was using financial and non-financial performance measures interactively (seven items) and diagnostically (four items). Factor loadings from the result of the exploratory factor analysis indicated that all four (seven) items for the diagnostic (interactive) use of performance measures loaded onto distinct factors in respect to both financial and non-financial performance measures, thereby confirming the unidimensionality of the scales. These items (see Appendix) were subsequently used in conducting confirmatory factor analysis (CFA) for each of the four variables. The goodness-of-fit indices (see Appendix) indicated that the measurement models for all four variables fitted the data well.Footnote 9

3.2.2 Perceived fairness of performance appraisal

The four types of perceived fairness (procedural, distributive, interpersonal and informational fairness) were assessed using an established scale developed and validated by Colquitt (2001), using a 5-point scale with anchors of 1 “Not at all” and 5 “To a great extent” (see Appendix). The results of the exploratory factor analysis indicated that all of the items loaded onto the four perceived fairness dimensions. These items were subsequently used in the CFA, with the results showing that the measurement models of distributive, interpersonal and informational fairness fitted the data well. However, based on the CFA result, three items of procedural fairness were removedFootnote 10 due to low loadings, with the remaining four items subsequently used to measure procedural fairness. The measurement model of these four items indicated a good model fit (see Appendix).

3.2.3 Creativity

Creativity was assessed using an 8-item scale adapted from Moulang (2015) with the respondents asked to indicate, on a 5-point Likert scale with anchors of 1 “Strongly disagree” and 5 “Strongly agree”, the extent to which they agreed with each of the items. The results of the exploratory factor analysis indicated that all of the items loaded onto one factor, indicating the unidimensionality of the scale. Hence, all 8 items (see Appendix) were used in estimating the measurement model, with the goodness-of-fit indices (CMIN/DF 1.238; CFI 0.993; GFI 0.972; AGFI 0.949) indicating that the model was a good fit.

3.2.4 Control variables

To control for the effect of industry on the variables of interest, responses were sought from a single industry, the manufacturing industry. Additionally, organisational size, proxied as the natural logarithm of the number of full-time employees, educational level, based on the respondents’ qualifications as shown in Table 1, and environmental uncertainty, were used as control variables. Environmental uncertainty was measured using a 3-item scale, adapted from Su et al. (2015), with respondents required to indicate the extent to which they agreed with each item relating to their organisation on a 5-point Likert scale with anchors of 1 “Strongly disagree” and 5 “Strongly agree”. The exploratory factor analysis result indicated that all of the items loaded onto a single factor. A measurement model of these items (see Appendix) was assessed, with the goodness-of-fit indices (CMIN/DF 4.902; CFI 0.978; GFI 0.985; AGFI 0.913) indicating a good model fit.

4 Results

4.1 Descriptive statistics

The descriptive statistics of the variables including the mean, standard deviation, and the maximum and minimum values for the variables are reported in Table 2. The results indicate a high levelFootnote 11 of agreement in respect to the distributive (4.063), interpersonal (4.149) and informational (4.053) perceived fairness of performance appraisal, while procedural fairness (2.958) was perceived to be low. Regarding the use of performance measures, the results indicate that the responding organisations top management used both financial performance measures and non-financial performance measures more diagnostically. Finally, the mean scores reflected a high extent of creativity (4.128) and a low extent of environmental uncertainty (3.762).

Table 2 Descriptive statistics (n = 220)

4.2 Measurement model

As shown in Table 3, the Cronbach alphas for the ten variables ranged from 0.719 to 0.908, thereby exceeding the 0.7 recommended cut-off (Nunnally, 1978). Hence, the reliability of all of the study’s variables was assured. Further assurance of the constructs’ reliability was provided by the composite reliability scores which all exceeded the 0.7 threshold (Yoon et al., 2013).

Table 3 Results of Cronbach alpha, composite reliability and average variance extracted

In addition, as the average variance extracted (AVE) scores reported in Table 3 exceed the recommended cut-off (0.5), the convergent validity for all of the variables was assured (Fornell & Larcker, 1981). Furthermore, since the standardised factor loadings (see the CFA results in the Appendix) of all of the items exceed 0.5 (Fornell & Larcker, 1981), this provides further assurance of convergent validity. Finally, discriminant validity was assessed using the recommended approach of comparing the square root of the AVE of each latent construct with the correlation between the other constructs (Chin, 1998). As the correlation matrix (see Table 4) shows that the square root of the AVE of each latent construct is greater than the correlations between the other constructs, support is provided for discriminant validity. Additionally, Table 2 shows that the variance inflation factors (VIF) for all of the variables are less than 10, with the highest being 3.702, thereby indicating that there are no problems in respect to multicollinearity (Jou et al., 2014).

Table 4 Correlations and square root of AVE between all the constructs

4.3 Structural equation modelling

A Covariance-based Structural Equation Modelling (CB-SEM) was used to analyse the collected data and to test the associations between top management’s interactive and diagnostic use of performance measures, with middle and lower level manager’s perceptions of performance appraisal fairness and creativity using AMOS 25 software. CB-SEM has several advantages over other techniques including Partial Least Squares Structural Equation Modelling (PLS-SEM) and hierarchical regression (Cheung & Lau, 2008). First, it provides a better statistical tool to examine variables with multiple indicators. Second, when relationships among variables are examined, measurement errors in the model can be controlled for, thereby providing unbiased estimates of mediation effects (Baron & Kenny, 1986). Finally, it depicts a clear model where all relevant paths can be included and examined, without omitting any variables (Baron & Kenny, 1986). The model was estimated based on the default maximum likelihood estimation technique, given its ability to account for both normality and non-normality of data (Hayashi et al., 2007) in estimating the structural relationships among the study’s variables.

Following Anderson and Gerbing’s (1988) recommended approach, a revised model was estimated by deleting all of the statistically insignificant paths from the initial model until all of the remaining paths were statistically significant.Footnote 12 The final model, reported in Table 5 and depicted in Fig. 1, demonstrated a good fit, with all of the four goodness-of-fit indices (CMIN/DF = 1.427; CFI = 0.995; GFI = 0.980; AGFI = 0.930) exceeding the recommended cut-offs.

Table 5 Results of the structural equation model (SEM)
Fig. 1
figure 1

Results of the mediation structural equation model (SEM)

4.3.1 The association between the interactive and diagnostic use of performance measures with creativity

Table 5 and Fig. 1 reveal a significant positive association between the interactive use of non-financial performance measures and creativity (β = 0.156, p = 0.006) while no significant association was identified between the interactive use of financial performance measures and creativity. Therefore, H1 is partially supported. In addition, the diagnostic use of financial performance measures was found to be significantly positively associated with creativity (β = 0.219, p = 0.000), and hence H2a, which hypothesised a negative association, is not supported. Finally, while H2b is not supported, due to the lack of a significant direct positive association between the diagnostic use of non-financial performance measures and creativity, as discussed in the next section, we find evidence of an indirect effect through perceived fairness.

4.3.2 The mediating effect of the perceived fairness of performance appraisal on the association between the interactive and diagnostic use of financial and non-financial performance measures with creativity

Table 5 and Fig. 1 show the results in respect to the associations between the interactive and diagnostic use of performance measures with perceived fairness and between perceived fairness with creativity, with the bootstrapping with bias-corrected Confidence Intervals Method approachFootnote 13 used to test the significance of the observed mediating paths (see Table 6).

Table 6 Bootstrapped regression analysis of mediation effects

Table 5 and Fig. 1 show that there was a significant positive association between the interactive use of financial performance measures with three types of perceived fairness [interpersonal fairness (β = 0.240, p = 0.001); informational fairness (β = 0.227, p = 0.003); and distributive fairness (β = 0.303, p = 0.000)], each of which subsequently exhibited a significant positive association with creativity [interpersonal fairness (β = 0.190, p = 0.010); informational fairness (β = 0.172, p = 0.027); and distributive fairness (β = 0.155, p = 0.009)]. Table 6 shows that each of these mediating paths were significant [interpersonal fairness (CILB = 0.012, CIUB = 0.209, p = 0.011), informational fairness (CILB = 0.018, CIUB = 0.181, p = 0.011) and distributive fairness (CILB = 0.044, CIUB = 0.175, p = 0.005)] and since there is no observed direct association between the interactive use of financial performance measures and creativity, we can conclude that these three dimensions of perceived fairness fully mediate this association.

In respect to the interactive use of non-financial performance measures, Table 5 and Fig. 1 show a significant positive association with interpersonal (β = 0. 210 p = 0.014) and informational (β = 0.278, p = 0.000) fairness, which as indicated both exhibit a significant positive association with creativity. Table 6 indicates that both interpersonal (CILB = 0.005, CIUB = 0.153, p = 0.038) and informational fairness (CILB = 0.041, CIUB = 0.196, p = 0.007) significantly positively mediate the association between the interactive use of non-financial performance measures and creativity, with such associations representing partial mediations due to the observed direct significant positive association between the interactive use of non-financial performance measures and creativity.

The findings in respect to the interactive use of financial performance measures are stronger, with three dimensions of perceived fairness (distributive, interpersonal and informational) fully mediating the effect on creativity. Alternatively, two dimensions of perceived fairness (interpersonal and informational) partially mediate the effect of the interactive use of non-financial performance measures on creativity. Overall, these findings provide strong evidence of the mediating role of perceived fairness on the association between the interactive use of both financial and non-financial performance measures with creativity, thereby providing support for H3.

In respect to the diagnostic use of performance measures, Table 5 and Fig. 1 show that top management’s diagnostic use of financial performance measures was found to be significantly negatively associated with procedural fairness (β = − 0.263, p = 0.000), which in turn was found be to be negatively associated with creativity (β = − 0.205, p = 0.000). Hence, while the diagnostic use of financial performance measures results in less procedural fairness, given lower procedural fairness leads to higher creativity, the net effect here is positive i.e. the higher diagnostic use of financial performance measures will result in higher creativity through procedural fairness. Table 6 reveals that the positive mediating role of procedural fairness here was significant (CILB = 0.025, CIUB = 0.106, p = 0.003) with this mediating effect considered to be partial due to the observed significant direct positive association between the diagnostic use of financial performance measures with creativity. While the finding provides evidence in support of the mediating role of procedural fairness, the observed positive mediating role is in contrast to the negative mediating effect predicted in H4a. Furthermore, as the other three types of perceived fairness (i.e. procedural, informational and interpersonal fairness) do not mediate the association between the diagnostic use of financial performance measures and creativity, H4a is rejected.

The diagnostic use of non-financial performance measures was found to be positively associated with two perceived fairness dimensions, distributive fairness (β = 0.167, p = 0.003) and interpersonal fairness (β = 0.181, p = 0.002), which both exhibited a significant positive association with creativity. While Table 6 shows that the mediating effect of distributive fairness was not significant (as the lower bound and the upper bound [lower bound (LB) of − 0.09 and upper bound (UB) of 0.126] cross zero), interpersonal fairness exhibits a significant positive mediating effect on the association between the diagnostic use of non-financial performance measures (CILB = 0.025, CIUB = 0.135, p = 0.010) with creativity, thereby providing support for H4b. This mediating effect represents full mediation as there is no observed direct association between the diagnostic use of non-financial performance measures with creativity.

5 Discussion and conclusion

This study sought to examine the associations between top management’s interactive and diagnostic use of financial and non-financial performance measures with middle and lower level managers’ creativity, and the mediating role of a specific psychological mechanism, middle and lower level managers’ perceived fairness of their performance appraisal, on such associations.

We found evidence of significant direct positive associations between the interactive use of non-financial performance measures with creativity, and between the diagnostic use of financial performance measures with creativity. The finding in respect to the effect of the diagnostic use of financial performance measures is surprising and inconsistent with the majority of the literature which suggests that the diagnostic use of financial measures stifles creativity. However, this finding provides empirical support for Mundy’s (2010, p.501)) proposition that “diagnostic use is not simply a constraining influence on managers’ behavior, because monitoring processes highlight problems and motivate managers to achieve their goals, sometimes through novel means”.

In respect to the mediating role of the perceived fairness of the performance appraisal system, all four types of perceived fairness (as perceived by middle and lower level managers) were found to positively mediate the effect of either top management’s interactive or diagnostic use of financial or non-financial performance measures on middle and lower level managers’ creativity. Specifically, the positive effect of the interactive use of financial performance measures on creativity is positively fully mediated by distributive, interpersonal and informational fairness, while the positive effect of the interactive use of non-financial measures is positively partially mediated by interpersonal and informational fairness. In addition, interpersonal fairness positively fully mediates the effect of the diagnostic use of non-financial performance measures on creativity.

However, while the use of specific performance measures exhibited significant positive associations with distributive, interpersonal and informational fairness, which in turn exhibited a significant positive association with creativity, the nature of the mediating role of procedural fairness is more complex. Specifically, the diagnostic use of financial performance measures exhibited a significant negative association with procedural fairness which in turn exhibited a significant negative association with creativity, and hence, procedural fairness positively partially mediates the effect of the diagnostic use of financial performance measures on creativity. The negative effect of procedural fairness on creativity is consistent with Baird et al. (2021) who found that procedural fairness was negatively associated with the effectiveness of strategic performance measurement systems (SPMS) and implies that employees act in a way which results in positive organisational outcomes (e.g. creativity) when procedural fairness is low. A potential explanation here is that employees that are disgruntled with the procedures used to evaluate their performance are more likely to express their disdain by engaging in alternative behaviour, and hence, are more likely to experiment with and implement novel ideas (i.e. be more creative). Future research could examine this possibility further and provide a more in-depth examination of how employees react to unfair performance evaluation procedures and the effect of procedural fairness on employee behaviour, including creativity.

Therefore, while perceived fairness (i.e. distributive, interpersonal and informational fairness) is generally perceived to influence creativity positively and hence, managers should endeavour to enhance the interactive use of financial and non-financial performance measures and the diagnostic use of non-financial performance measures in order to enhance employees perceived fairness of performance appraisal, our findings imply that low procedural fairness is desirable due to its influence in making employees more creative. Accordingly, and in line with the observed significant direct positive association between the diagnostic use of financial performance measures and creativity, despite its negative effect on procedural fairness, organisations should endeavour to enhance their diagnostic use of financial performance measures due to the subsequent positive influence that low procedural fairness has on creativity.

5.1 Theoretical implications

The findings make two significant contributions to the literature. First, the findings contribute to the extant performance measurement and performance appraisal literature (for example, Lau & Moser, 2008; Lau & Sholihin, 2005; Marginson et al., 2014; Tan & Lau, 2012) examining the behavioural effects of performance measures. In particular, through examining the influence of top management’s interactive and diagnostic use of performance measures on middle and lower level managers’ creativity, the findings extend and strengthen the literature that support the positive behavioural effect of controls on employees.

Secondly, the study highlights the important role of manager’s individual psychological state, specifically middle and lower level managers’ perceptions of the fairness of their performance appraisal system, in mediating the association between top management’s interactive and diagnostic use of performance measures and middle and lower level managers’ behaviour (i.e. creativity). The results have important theoretical implications for in line with Burney et al., (2009, p. 306) who claims that “employees [tend to] behave based on how they perceive the system”, the findings imply that the effectiveness of performance management and specifically PMSs in respect to the effects of such systems on employee behaviour (i.e. creativity), is inherently reliant on how fair the system is perceived to be in appraising manager’s performance. The findings also make an important contribution to the literature examining the mechanisms through which performance measures promote creativity (Speklé et al., 2017a, 2017b). In particular, in response to calls to consider employee reactions to performance measurement and appraisal processes (DeNisi & Smith, 2014; Sharma et al., 2016), we provide an empirical insight into the crucial role of manager’s perceived fairness of their performance appraisal in enhancing the effective use of PMSs (i.e. assessed as creativity in our study). Consequently, given our findings, from a theoretical perspective, it is recommended that future studies examining the effectiveness of alternative characteristics or traits of performance measurement systems should consider the mediating role of perceived fairness on such relationships.

5.2 Practical implications

From a practitioner’s perspective, the study’s finding in respect to the behavioural effect of the interactive use and diagnostic use of both financial and non-financial performance measures implies that when devising or using performance measures organisations should be cognisant that both types of performance measures (i.e. financial and non-financial) and both the diagnostic and interactive approaches to using them could be effective. Specifically, while financial performance measures are considered to be constraining and likely to be perceived to be unfair and stifle behaviour (Abdel-Maksoud et al., 2010) if use diagnostically, our findings suggest that organisations do not need to discard the use of traditional financial performance measures, given the positive association between the diagnostic use of financial performance measures and creativity. Additionally, the finding that the interactive use of non-financial performance measures promotes creativity suggests that while organisations do not need to abandon the use of their financial performance measures, they should embrace and invest in the use of non-financial performance measures, especially given their richness and broadness and potential to reflect different aspects of employee responsibilities and organisational priorities.

Further, the finding of the positive mediating role of manager’s perceived fairness of performance appraisal on the relationship between the use of performance measures with creativity also provides practitioners with an understanding of the intervening mechanism that can enhance the effect of performance measures in promoting intended behaviour, in particular creativity. Accordingly, through monitoring and adjusting their performance measurement system, top management can attempt to regulate middle and lower level managers’ feelings in respect to their perceived fairness of their performance appraisal system, thereby enabling top management to motivate middle and lower level managers to engage in positive behaviour. This may transpire through promoting the interactive use of financial and non-financial performance measures and the diagnostic use of financial and non-financial measures. In addition, in order to enhance the fairness of the performance appraisal system, as perceived by middle and lower level managers, top management should devote more resources to training supervisors in engaging in effective communication and interpersonal relationships, implementing transparent compensation schemes and performance appraisal systems, and emphasising a corporate culture that promotes equity and openness.

5.3 Limitations

The study has some limitations, particularly those typical to survey research studies. First, the assessment of top management’s use of financial and non-financial performance measures and middle and lower level managers’ perceived fairness of their performance appraisal may be subject to common method bias, although Harman’s (1976) single factor test (34.60%) suggests that such bias was not a problem. Nevertheless, future studies could consider sourcing data using multiple respondents and collecting the data regarding the use of performance measures and the perceived fairness of performance appraisal from different employees within the same organisation. Secondly, the study is limited to one type of managerial behaviour, creativity, and therefore future studies could consider the effect of the interactive and diagnostic use of performance measures and the perceived fairness of performance appraisal on alternative types of employee behaviour. Thirdly, as is the case in all cross-sectional studies, we can only assert associations and no claims can be made in regard to causality. Consequently, future studies could replicate this study using alternative approaches such as the experimental method or a longitudinal study. Finally, future studies could rely on the empirical findings provided in this study as a theoretical basis to further explore how the interplay between the interactive and diagnostic use of performance measures affects perceived fairness and the subsequent effect on creativity.