Performance Budgeting

The Impact of Performance Budgeting on Public Management
D I S S E R T A T I O N
of the University of St. Gallen,
Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG)
to obtain the title of
Doctor Oeconomiae

submitted by

Utz Helmuth

from

Germany

Approved on the application of

Prof. Dr. Kuno Schedler

and

Prof. Dr. Isabella Proeller

Dissertation no. 3826

Difo-Druck GmbH, Bamberg 2011

The University of St. Gallen, Graduate School of Business Administration, Econom-
ics, Law and Social Sciences (HSG) hereby consents to the printing of the present dis-
sertation, without hereby expressing any opinion on the views herein expressed.

St. Gallen, October 26, 2010

The President:

Prof. Ernst Mohr, PhD

Acknowledgment
I am deeply grateful to a number of people who made this dissertation possible.
First of all, I would like to thank my thesis adviser Professor Dr. Kuno Schedler, who
had the confidence to take me under his wing, given my unique professional back-
ground. His extensive network within the Swiss administrations gave me the opportu-
nity to conduct my interviews and his profound knowledge of public management
challenged my research. Throughout each stage of my dissertation, he was always
willing to discuss new ideas. Furthermore, I would like to thank him for his personal
support of my application to study abroad.
I am also grateful to Professor Dr. Isabella Proeller who was willing to serve as my
second thesis adviser. After I learned about how she got the zebra coat in her living-
room, I knew that she would be the right person for the task! She proved not only to
be a successful game hunter, but also a highly committed adviser who devoted a lot of
time to my papers and offered manifold suggestions for improvement.
With her invitation to study at the Public Policy Institute at Georgetown University,
Professor Carolyn J. Hill, PhD made a dream of mine come true. She provided me
with the opportunity to discuss my research in the challenging atmosphere of a world-
class U.S. graduate school. Her questions and remarks leveraged my second paper to
the necessary level for IPMJ. Thank you for an inspiring time!
In this regard, I am very grateful to the Swiss National Science Foundation for the fi-
nancial support of my stay in Washington, DC.
I also would like to thank my interview partners from different Swiss administrations
who offered the necessary empirical insights to make this dissertation possible. Tho-
mas Dehne, Andrea Cristuzzi and Daniel Signer served as fantastic co-interviewers
and partners to scrutinize the data. My fellow PhD students Alexandra Collm, Labinot
Demaj, Mirco Gro, Dr. Stefanie Henkel, Dr. Peter Kolbe, Dr. Karin Kreutzer and Dr.
Lukas Summermatter all encouraged me with their fruitful comments at Kuno's PhD
seminars. I would like to mention all of my colleagues at IDT-HSG who gave me a
warm welcome in St. Gallen, as well as some much needed distractions. I deeply ap-
preciate the time both Dr. Olaf Bach and Dr. Lutz Reimers spent to critically discuss
my work. Their comments were usually very reasonable as well as helpful! Finally, I
owe a debt of gratitude to my Georgetown housemates, John and Ben, who both did a
great job of proofreading this thesis.
I owe Annette a great deal of thanks for tolerating my antics during difficult moments
and especially for supporting my research abroad. Last but not least, I would like to
say thank you to my parents who always encouraged me to do it my way!

St. Gallen, January 2011 Utz Helmuth

Table of Contents

I
Table of Contents
Table of Contents ............................................................................................................. I
List of Figures ............................................................................................................... III
List of Tables ................................................................................................................ IV
Abstract ...........................................................................................................................V
1 Introduction ............................................................................................................... 1
1.1 Research Gaps and Research Question ......................................................................... 2
1.1.1 Paper I: Insights from Neuroeconomics for Performance-Related Pay .............................. 2
1.1.2 Paper II: Performance Budgeting Analyzing Cases of Success and Failure .................... 3
1.1.3 Paper III: Public Managers' Interpretations and the Success of Performance
Budgeting ............................................................................................................................................. 3
2 State of the Science ................................................................................................... 5
2.1 Performance-Related Pay ............................................................................................. 5
2.2 Performance Budgeting ................................................................................................ 6
3 Methodology ............................................................................................................. 9
3.1 Research Design ........................................................................................................... 9
3.2 Data Collection and Analysis ..................................................................................... 10
4 Paper I: Revising the Fundamentals: Insights of Neuroeconomics for Economic
Foundations of Performance-Related Pay in Public Management ............................... 12
4.1 Introduction ................................................................................................................. 12
4.2 Economics of Monetary Incentive Schemes and Administrations ............................. 13
4.2.1 The Challenge of Coordination and Control ...................................................................... 13
4.2.2 Theoretical Streams ............................................................................................................ 14
4.3 Neuroscientific Basics ................................................................................................ 18
4.4 Findings of Neuroeconomics with Contribution to PRP ............................................ 20
4.4.1 Topic I: Intertemporal Choices ........................................................................................... 20
4.4.2 Topic II: Fairness Concerns ............................................................................................... 22
4.4.3 Topic III: Altruistic Punishment ........................................................................................ 24
4.5 Discussion of Potential Contribution to PRP .............................................................. 25
4.6 Concluding Remarks ................................................................................................... 26
5 Paper II: Better performance with performance budgeting? Analyzing cases of
success and failure in public administrations .............................................................. 28
Table of Contents

II
5.1 Introduction ................................................................................................................. 28
5.2 Performance Rationale ................................................................................................ 30
5.3 Hypotheses .................................................................................................................. 31
5.4 Research Design ......................................................................................................... 35
5.5 Findings ...................................................................................................................... 40
5.6 Discussion ................................................................................................................... 47
6 More Room to Maneuver - Better Performance? Public Managers'
Interpretations and the Success of Performance Budgeting ......................................... 51
6.1 Introduction ................................................................................................................. 51
6.2 An Interpretive Perspective on Performance Budgeting ............................................ 53
6.3 Research Design ......................................................................................................... 54
6.4 Findings ...................................................................................................................... 56
6.5 Performance Budgeting as a Change Process of Individual Interpretations ............... 59
6.6 Discussion ................................................................................................................... 66
6.7 Conclusions ................................................................................................................. 69
7 Discussion and Conclusions ................................................................................... 73
7.1 Reflections on the Quality and Validity of the Research Design ............................... 73
7.2 Summary of the Results .............................................................................................. 76
7.3 Contribution and Implications .................................................................................... 77
7.4 Results in the Context of all Papers, the Political and Administrative Systems and
the Environment .................................................................................................................... 79
7.5 Limitations and Directions for further Research ........................................................ 83
7.6 Final Conclusions ....................................................................................................... 85
Appendix ....................................................................................................................... 86
References ..................................................................................................................... 87
CV ............................................................................................................................... 101
List of Figures

III
List of Figures
Figure 1: Overview of the Research Questions and Research Objectives...................... 4
Figure 2: Examples of asymmetric information in the public sector ............................ 14
Figure 3: Neuroeconomics as synthesis of research ..................................................... 18
Figure 4: Beta and delta systems competing in intertemporal choices. ........................ 21
Figure 5: Emotional evaluation of unfair offers in the Ultimatum Game .................... 23
Figure 6: Assumed causal mechanisms of performance budgeting (PB) ..................... 32
Figure 7: Causal mechanisms of performance budgeting (PB) as found in the cases . 46
Figure 8: Different types of managers based on their interpretations of performance
budgeting ............................................................................................................ 58
Figure 9: Isabella's model of evolving interpretations of events in change processes 60
Figure 10: Causal model of performance budgeting in the context of other findings
of this dissertation and the extended literature. ............................................................ 80

List of Tables

IV
List of Tables
Table 1: Performance-related pay / monetary incentives in the public sector.
Examples from 20 countries. ........................................................................................ 16
Table 2: Typological table of performance budgeting ................................................. 41
Table 3: Public managers' interpretations of triggering events during performance
budgeting reform ........................................................................................................... 63
Table 4: Status of papers ............................................................................................... 86

Abstract

V
Abstract
This dissertation intends to enhance our understanding of how public managers re-
spond to and make sense of performance-related pay and performance budgeting. De-
spite the impressive dissemination of these two incentives around the globe, their per-
ception by the affected recipients remains underexplored.
The dissertation consists of three papers. The first part attempts to integrate recent
findings in neuroeconomics about human decision-making into NPM theory. Based on
a literature review, it discusses three core neuroeconomic findings and their potential
effects on performance-related pay. These include hyperbolic discounts of future re-
wards, fairness concerns and the phenomenon of altruistic punishment. All these types
of behavior would be irrational in the sense of traditional economic modeling of hu-
man decision-making. Neuroeconomics now provides the possibility to understand and
model these behaviors. The paper discusses subsequent revisions of performance-
related pay schemes that consider these findings.
The second and third paper investigate performance budgeting as an incentive which
should lead to both a shift from input to outcome orientation and more freedom to
manage. Applying a qualitative research design, the papers are based on semi-
structured interviews with Swiss public managers.
The second paper investigates why performance budgeting reforms sometimes fail. It
proposes and tests a causal model about the perceived reform outcome. Success factors
which can be associated with a positive outcome are a high level of market orientation
of a department, a compliant parliament and a high level of perceived freedom. Whe-
reas the latter corresponds with predominant budgeting theories, the findings about the
influence of the market orientation contribute to an expanded budgeting theory which
integrates context-dependency.
The last paper explores possible factors with an impact on public managers' sense-
making processes. Furthermore, it investigates how the resulting mental models influ-
ence the level of acceptance of performance budgeting. Findings suggest that forma-
tive personal experiences strongly influence public managers' interpretations of the
reform. Specific factors in the public sector seem to hamper the convergence of mental
models among public managers as well as among public managers and politicians. The
paper concludes that in addition to the design aspects of a budgeting reform, divergent
reform outcomes can also be explained by different reform interpretations.
Overall, the findings of this dissertation enrich our understanding of the impact of per-
formance incentives on public managers. It thus contributes to the debate how to better
use them.
Introduction

1
1 Introduction
During the last two decades of 20
th
century, management incentives have become a
well established phenomenon in the public sector (Grning 2000). More and more
countries started to implement management concepts from the private sector into their
administrations (Aucoin 1990; Behn 1995). They attempted to generate value-for-
money by improving the "three E's": efficiency, effectiveness and economy (Starks
1991). Proponents associate the implementation of these concepts with higher public
sector performance (Hood 1995; Osborne and Gaebler 1992; Paterson 1988). They
argue that the public sector would benefit more from the experiences of the private
sector to survive in a competitive environment than from traditional concepts of admi-
nistrational science.
The performance of the public sector can be investigated on different levels of aggre-
gation (Pollitt and Bouckaert 2004). This dissertation analyzes the success of perfor-
mance incentives from an individual perspective of the affected public managers. It
focuses on the effects of two particular incentives, performance-related pay and per-
formance budgeting, and discusses possible room for theoretical improvement. Both
incentives are widely used in Switzerland and many other countries around the globe
with slightly different designs (OECD 2005a; OECD 2008; Kllner 2006; Proeller
2006; Reichard 1992).
Within Switzerland, most cantons claim to evaluate the individual performance which
serves as a pre-condition for performance-related pay (Widmer, Schmid, and Prey
2001). The federal government introduced performance-related pay in 2001, with bo-
nuses up to 20 % of base salary (BPV 2001; ENSI Personalreglement 2008).
The establishment of performance budgeting also varies. Today, 23 selected federal
agencies ('FLAG-mter') work with performance measurement and budgeting (EFD
2010). At the cantonal level, 49 departments use performance budgeting (Rieder and
Widmer 2007) and at the municipal level about 11 % of the Swiss cities used this in-
strument in 2005 (Steiner and Ladner 2006).
Introduction

2
1.1 Research Gaps and Research Question
spond to and make sense of performance incentives. Organizations use incentives to
match management and employees' interests (Milgrom and Roberts 1992). From a lea-
dership perspective, it is important to consider that employees adjust their commitment
according to the incentive scheme in an organization. Schedler and Proeller argue that
"a lack of awareness of these circumstances has led to a situation whereby it creates
incentives that entice people to act in an inefficient rather than performance-oriented
way" (Schedler and Proeller in Press, Ch. 10).
Incentives can be classified as material or non-material incentives. Schedler attributes
base salary, benefits and bonuses to material incentives and human resources devel-
opment, training, leadership, regulation of working hours, job design and responsibili-
ties to non-material incentives (1993). According to this definition, performance-
related pay is a material incentive that rewards appropriate behavior and goal attain-
ment. On the other hand, performance budgeting is a non-material incentive which
delegates responsibilities from top-level management to mid-level managers and sub-
ordinates. In addition, it provides managers with more financial flexibility and holds
them accountable for their results (OECD 2005b).
In the following section, I will outline the research gaps and give a short introduction
to the research questions which drive each of the three papers of this dissertation.
1.1.1 Paper I: Insights from Neuroeconomics for Performance-Related Pay
Scholars in public management often refer to economic findings to support the intro-
duction of performance-related pay in their field (Aucoin 1990; Budus and Grning
1998). They tend to base their assumptions on an economic model that features a tradi-
tional understanding of human behavior (homo oeconomicus). Recent developments in
experimental economics, and especially in neuroeconomics, have not yet been reflect-
ed in the theoretical discussion in the field of public management. Based on new neu-
roscientific imaging techniques and an advanced experimental design, this subfield of
economics investigates how humans perceive and process information. It presents
fresh perspectives and an improved model of actual human behavior in incentive-like
situations (Camerer, Loewenstein, and Prelec 2005a). Paper I discusses how these re-
Introduction

3
cent theoretical developments might affect the rationales that underlie monetary incen-
tives in the public sector.
1.1.2 Paper II: Performance Budgeting Analyzing Cases of Success and Failure
The second and third paper investigate the impact of performance budgeting on leader-
ship and management of public sector organizations. Paper II intends to enlarge our
understanding of possible factors that influence the outcome of performance budgeting
reforms. It aims to develop a corresponding causal model and tests it with cases gener-
ated from interviews with public managers. The paper seeks to detect potential drivers
and organizational factors which determine the behavior of public managers exposed
to performance budgeting in specific contexts (typological sets). Examples for those
drivers might be the quality of the project management, governance structures, the col-
laboration of administrations with legislative bodies or the tasks and structure of a de-
partment.
1.1.3 Paper III: Public Managers' Interpretations and the Success of Performance
Budgeting
Proponents argue that a higher degree of managerial freedom and accountability, com-
bined with performance measurement, leads to better results (McGill 2001). Although
the behavior of managers is a critical part of this theory, the literature on new budget-
ing systems in the context of public sector reforms concentrates on their financial,
technical and institutional aspects (Grizzle and Pettijohn 2002; Melkers and Willough-
by 2005; van der Hoek 2005). However, as Moynihan argues, the allocation of re-
sources is "abstract and inherently subjective" (2008, 97). Research lacks a deeper un-
derstanding of how public managers evaluate performance budgeting reforms.
To address this issue, paper III investigates how individuals interpret these reforms.
The key questions addressed are which possible factors have an impact on these sense-
making processes and how the resulting mental models influence an acceptance of per-
formance budgeting as a major public management reform.
The following box summarizes the research questions and research objectives of this
dissertation.
Introduction

4

Figure 1: Overview of the Research Questions and Research Objectives

Research Questions and Research Objectives

Paper I: Insights from Neuroeconomics for Performance-Related Pay
Research Questions:
Do findings in neuroeconomics affect monetary incentives in the public sector?
What might public management research be able to learn from neuroeconomics to improve
performance-related pay systems?
Objective:
Identification of possible lessons to improve theories for performance-related pay in the
public sector.

Paper II: Performance Budgeting Analyzing Cases of Success and Failure
Research Questions:
Which causal mechanisms might explain the success and failure of performance budgeting
reforms from the perspective of public managers?
Which individual and external/contextual factors have an impact?
Objective:
Identification of possible typologies determining success and failure of performance budget-
ing. Contribution to a possible causal model.

Paper III: Public Managers' Interpretations and the Success of Performance Budgeting
Research Questions:
How do public managers interpret performance budgeting?
Which possible factors have an impact on these sense-making processes?
How might the resulting mental models influence an acceptance of performance budget-
ing?
What options do leaders have to master change?
Objective:
Description of how public managers perceive performance budgeting in order to contribute to
an understanding of the reform process.
State of the Science

5
2 State of the Science
Moynihan declares the beginning of the 21
st
century as an "era of governance by per-
formance management" (2008, 3) with a focus on effectiveness. Public managers have
to justify the outcomes they produce (ibid). To reach this normative goal, many differ-
ent ideas and concepts are discussed. According to the research questions addressed in
my three papers, in the following I will concentrate this introduction to the existing
research on performance-related pay and performance budgeting.
2.1 Performance-Related Pay
Monetary incentives have been on research agendas for a long time. However, their
role changed frequently depending on the profession of the involved scholars and the
then-predominant idea of man.
At the beginning of the 20
th
century, Frederick W. Taylor introduced the concept of
scientific management (1911). He favored wage incentives to improve (industrial)
workers' performance. Meanwhile, our understanding of the employer-employee rela-
tionship has changed. The Human Relations Movement integrated 'irrationalities' of
actual human behavior in theoretical concepts (Wren 2005). The movement included
Abraham Maslow's theory of self actualization (1943) and later Herbert A. Simon's
highly influential publications about decision-making under bounded-rationality in
organizations (1947, 1959). Douglas McGregor's 'X-Y theory' offers a still popular
comparison of this movement with Taylorism (McGregor 1960).
During the last few decades, incentives have also been widely discussed in economics.
New Institutional Economics and related works about moral hazards covered questions
of asymmetric information and transaction costs with a focus on individual actors
(Akerlof 1970; Arrow 1963; Coase 1960; North 1990; Williamson 1975). Behavioral
economics and finance investigated anomalies of human behavior in decisions involv-
ing risk and uncertainty (Kahneman and Tversky 1979).
The Principal-Agent Theory became a useful vehicle to formalize incentives between
employers and employees (Jensen and Meckling 1976). Starting with the idea of a con-
tractual relationship between a principal and an agent, the theory focuses on discretio-

6
nary options for both parties in situations of limited information and control. It propos-
es the provision of incentive structures that bring together the agent's and the princip-
al's interests.
Meanwhile, lessons from the Principal-Agent Theory have become popular in man-
agement science as well. Examples are industrial organization (Holmstrom and Mil-
grom 1994; Milgrom and Roberts 1992) and personal economics, which investigates
monetary incentives and tournaments (Backes-Gellner, Lazear, and Wolff 2001; La-
zear and Rosen 1981). In the field of public management Public Choice Theory and
Managerialism brought these ideas to administrations (Hood 1993, 1995; Niskanen
1968, 1971; Paterson 1988).
But scientific progress challenged some of the economic theories. Innovative tech-
niques of experimental design and neuroscience gave researchers new options. They
generated new models to understand human decision-making in economic situations
that do not completely correspond with the model of the homo oeconomicus. Exam-
ples are the types of cooperative behavior individuals exhibit, including fairness (Bol-
ton and Ockenfels 2000; Camerer, Loewenstein, and Prelec 2004; Fehr, Klein, and
Schmidt 2007; Fehr and Schmidt 1999) and trust (Falk and Kosfeld 2006; Fehr, Fisch-
bacher, and Kosfeld 2005; Zak 2006), instead of solely maximizing their own profits
according to incentives.
So far, public management theorists have not substantially discussed or adopted these
ideas - though they challenge some of their theories' underlying fundamentals.
2.2 Performance Budgeting
Performance budgeting follows the rationale that a relaxation of input controls and an
increased flexibility improves managers' performance as long as results are measured
and managers are held accountable for their results (OECD 2005b).
First, on a general level, management research on such non-monetary, intrinsic factors
of motivation in the field of organizational behavior is inspired by findings in psy-
chology and sociology (Wren 2005). It concentrates on factors like collaboration with-
in organizations and opportunities for individual development. An early influencing
work was Herzberg's two-factor theory (1968). He highlighted the importance of job

7
design and work content for (intrinsic) motivation in addition to "hygiene factors".
More recent research includes the self-determination theory (Deci and Ryan 1985). It
considers a low degree of heteronomy as crucial for intrinsic motivation and qualities
such as creativity, self-regulation and flexibility in a work context. Furthermore, goal-
setting theory states that goals have a directive as well as an energizing function for
individuals (Locke and Latham 2002). They also affect persistence. Therefore, if the
managers performance assessment is based on specific outcome targets he/she should
perform better than in an organizational setting with unspecific output objectives.
Locke and Latham report from an effect size in meta-analyses of goal setting com-
pared with 'to do ones best' ranging from 0.42 to 0.80 (Locke and Latham 1990). The
rationales of performance management in the public sector can be linked to this theory
(Latham, Borgogni, and Petitta 2008). Besides these lessons from organizational
theory, performance budgeting grounds at the theoretical level on institutional eco-
nomics (Cothran 1993).
Finally, performance budgeting is part of the managerialism discourse. As an eclectic
concept, managerialism is influenced by a number of ideas from different disciplines
(Grning 2000). It follows the doctrine that the public sector is inefficient but can
transform itself to become more efficient by introducing new management concepts,
especially from the private sector (Gruening 2001; Moynihan 2008). Influencing prac-
titioners and researchers particularly adopted the idea that more freedom leads to better
performance and proposed corresponding budgeting reforms (Aucoin 1990; Kettl
1997; Osborne and Gaebler 1992). It has been argued that thinking in terms of costs
might increase among public servants (Boston, Pallot, and Martin 1996; Rieder and
Lehmann 2002). In addition, the flexibility and efficiency of administrations should
increase (Scott 2001) since they are able to allocate resources corresponding to current
needs rather than historical expectations that are represented in the estimates (Boyle
1991). In public management literature, research on new budgeting systems concen-
trates on the financial, technical and institutional aspects (Grizzle and Pettijohn 2002;
Melkers and Willoughby 2005; van der Hoek 2005).
Public managers face pressure due to both new budgeting formats and increased per-
formance expectations. Like a 'transmission belt,' they are responsible for the policy
outcome. Despite the fact that a central aim of performance budgeting reforms is ex-

8
actly the motivation of these public managers little research has been published on
their experiences and evaluations. My research concerns this gap.
Methodology

9
3 Methodology
The following section aims to serve as a short introduction in the methodology as well
as in the general research design used for this dissertation. More specific information
about these issues is presented in each paper.
3.1 Research Design
The first paper follows an explorative literature review. I started with a focus on em-
pirical studies about where and how monetary incentives are applied in the public sec-
tor. Then I proceeded with the question how key public management scholars explain
the rationale of performance-related pay. It appeared that those authors often referred
to economic literature. However, these economic sources usually dated to the 1960s
and 1970s and did not reflect current economic research. I shifted my focus to recent
findings in neuroeconomics about human behavior in principal-agent-like situations in
which incentives were used. Neuroeconomics tries to incorporate recent neuroscientif-
ic findings of human behavior into economic models. Applying a snowball sampling
strategy I started my research in four leading economic and scientific journals: Ameri-
can Economic Review, Econometrica, Journal of Economic Literature and Science.
From these sources, I expanded my research to explore a broader set of literature. In
this paper, I contrast theoretical assumptions of performance-related pay schemes in
the public sector with these recent economic findings and discuss possible implications
for the public sector.
Paper II and III developed from interviews on performance budgeting. Though they
are based on the same data set, they differ greatly in perspective and methodology.
Paper II intends to improve our understanding of organizational and individual success
factors that influence the outcome of performance budgeting reforms. Based on a lite-
rature review of rationales for performance budgeting it proposes a two-level causal
model (Goertz 2006). Then, corresponding hypotheses are generated and tested with
data from the interviews. To structure the qualitative data, the paper uses typological
sets (George and Bennett 2005).
With typological theorizing, it assumes on the ontological level the existence of causal
mechanisms and the possibility to identify and verify their implications (George and
Methodology

10
Bennett 2005). In this sense, it stands in the tradition of scientific realism adopted to
social science (Boyd 1973; Little 1998). Despite the fact that data is based on percep-
tions of public managers, it accordingly presupposes the existence of an external reali-
ty with rules that can be explored.
Following an interpretive perspective (Daft and Weick 1984), paper III explores public
managers' sense-making activities on performance budgeting reforms. This theoretical
approach comes from organizational sciences and deals with the production of mean-
ing. From an interpretive perspective, facts do not speak for themselves. Instead, orga-
nizational change can be conceptualized as a fluid, social process of interpretations
(Weick 1993) where individuals personalize the same event with different mental
models (Ford and Baucus 1987). Methodologically, the interpretive perspective fol-
lows a subjective ontology, where reality is a product of individual awareness and con-
struction (Hatch and Cunliffe 2006).
3.2 Data Collection and Analysis
The empirical material of my dissertation draws upon a two-year research project that
investigated the effects of performance budgeting on public sector managers. The par-
ticipating interviewees all hold management positions in the Swiss public sector on the
municipal or cantonal level. As a consequence of budget reforms, they are now re-
sponsible for a performance budget for their organization or department. Furthermore,
the participating managers held office before the changes in the budgeting system, al-
lowing them to compare the old and the new system. With approximately five years of
experience in the new system, they are still able to remember the transition phase and
the situation before that.
The semi-structured interviews were conducted with the goal to see the research topic
from the perspective of the interviewee, and to understand how and why he or she
comes to have this particular perspective (King 1994, 14). Ideally, the interviewees
would provide insights into their sense-making processes in terms of frames (Weick
1995) or mental models (Rouse and Morris 1986) as a construct of individuals to
make sense out of the world around them (Denzau and North 1994, 4). The research
project covered 31 interviews with male and female volunteers. They were told that
they were participating in a university research project about performance budgeting.
Methodology

11
Strict confidentiality was promised. The interviews had a strong narrative character,
allowing the interviewees to detail their personal experiences with performance bud-
geting and the consequences it had for them. Questions were asked to trigger the narra-
tions (Mason 2003), covering topics such as biography, perceived flexibility, degrees
of freedom in the organization, self-conception and evaluation of steering processes
and new budgeting procedures.
The interviews were carried out in the Swiss-German dialect, allowing a feeling of
comfort for the interviewees and to reduce distances between interviewers and inter-
viewees. Interviews lasted around one and a half hours, were tape-recorded and tran-
scribed. However, with an emphasis on the exploration of the effects of performance
budgeting, the sample was not representative in a quantitative sense, nor did it aim to
be given the qualitative nature of the research (Silverman 2003).
To improve the soundness of the interviews, all narratives were scrutinized by an
additional researcher who had access to the interview transcripts (Marshall and Ross-
man 1995). Furthermore, interviews were supplemented by a document research for
triangulation and controlling purposes (Forster 1994; Miles and Huberman 1994). This
covered internal material about the introduction of performance budgeting from the
participating organizations. Internal material was carefully examined with a perspec-
tive on the concept and a possible organizational story reflecting the change in the
budgeting system.


12
4 Paper I: Revising the Fundamentals: Insights of Neuroeco-
nomics for Economic Foundations of Performance-Related
Pay in Public Management

4.1 Introduction
Besides other influences, some major theoretical fundaments of the New Public Man-
agement (NPM) movement can be found in the schools of institutional economics and
public choice theory. Based on the idea that rational and self-maximizing bureaucrats
behave in their own interest rather than in that of their political leaders (rent-seeking),
incentive structures, such as performance-related pay (PRP) have been designed to
bring both sides together. Over the years, scholars tried to customize these economic
ideas to the needs of the public sector. However, only little research in public man-
agement deals with the question whether these economic fundamentals are still up-to
date in the economic scientific community. This paper concentrates on recent findings
in the upcoming field of neuroeconomics where researchers use new neuroscientific
methods to analyze economic behavior. It focuses on the question what public man-
agement research can learn from neuroeconomics to improve performance-related pay
systems and contracts.
Especially those results concerning intertemporal choices and social behavior of fair-
ness and altruism are contrasting neoclassical theory-based recommendations of public
choice theory which advocate competition among bureaucracies and performance re-
lated pay.
In other words, the question is whether the opening of the black box brain through
neuroscience will indeed lead to results that have the potential to enlarge the theoreti-
cal foundation of another science as the Harvard evolutionary biologist Edward O.
Wilson once claimed by stating that it is in biology and psychology that economists
and social scientists will find the premises needed to fashion more predictive models,
just as it was in physics and chemistry that researchers found the premises that up-
graded biology. (Wilson 1998)

13
The article is organized as follows: After giving a short introduction in traditional
theoretical approaches (section 1) and neuroscientific basics (section 2), I will bring up
current neuroeconomic research (section 3), discuss its potential implications for PRP
(section 4) and conclude with some evaluating remarks (section 5).
4.2 Economics of Monetary Incentive Schemes and Administrations
4.2.1 The Challenge of Coordination and Control
The above mentioned problem of rent-seeking arises in situations of asymmetric in-
formation (Milgrom and Roberts 1992). Suppose a Principal-Agent relationship where
the principal wants the agent to do something. The relationship between both is cha-
racterized by asymmetric information of three types: the principal does not know all
the agents relevant attributes (hidden characteristics), the principal is not able to ob-
serve the agents action completely (hidden action) and is not able to evaluate the ob-
served agents action correctly in all manners since the principal might not have the
same information as the agent (hidden information). In other words, there is a principal
who wants his agent to do somethingbut she has not the capabilities to overview
what the agent is doing in detail: maybe the principal has too many agents to overview
or the agent being an expert in his job has specific knowledge.
A problem arises if the agent takes advantage of the fact that the principal has fewer
information at his disposal (moral hazard). That represents the basic economic down-
side of asymmetric information. Thus it is not only to cope with the challenge of coor-
dinating an organization but also to bring the interests of the bureaucrats (agents) clos-
er to the interests of the representative government (principal).
But this problem is by far not limited to the relationship between public administra-
tions and their political leaders. The same problem arises within administrations.
These organizations are by themselves often characterized by specification. Hundreds
or even thousands of processes within administrations have to be coordinatedoften
in more than one place. Of course, in an organization no one is capable of processing
all this information and able to oversee each single process. Furthermore, people are

14
working very specialized. So the challenge is to coordinate all these processes and em-
ployees (Milgrom and Roberts 1992, p. 17).
Although organizations try to solve this by developing standard operating procedures
and strategies, there is still a situation of asymmetric information between the worker
and his superior.
Note that this problem may emerge in all situations structured similar to those men-
tioned above, e.g. supplying, contracting out and public-private-partnering. However,
for the purpose of this article we will focus on the relationship between the public
manager and lower level civil servants (fig. 1).

Figure 2: Examples of asymmetric information in the public sector
4.2.2 Theoretical Streams
The idea of asymmetric information between a principal and her agent due to incom-
plete information is an economic paradigm. Following ideas initially published by Ro-
nald Coase (1937) that contracts are imperfect later led on to (New) Institutional Eco-
nomics (North 1990), Principal-Agent Theory (PAT) (Jensen and Meckling, 1976) and
Industrial Economics (Milgrom and Roberts 1992)to mention only a few.
Principal Agent
Parliament Minister/Secretary
Administration
Suppliers, Contractors,
Private Partners
Public Manager
lower level
Civil Servants
Asymmetric
Information

15
In times of growing requests of public services contrasted by public budgets with li-
mited growth options due to economic decline, those ideas have been adopted in pub-
lic management in the seventieths of the last century (Aucoin 1990). With Public
Choice Theory and Managerialism two fundaments of New Public Management still
have a lasting impact on the organization of current public administrations (Budus
and Grning 1998).
One of the most visible results of these schools of thoughts can be found in defining
services, measuring results and establishing accountability of agents for their perfor-
mance in combination with the implementation of adequate incentive structures. One
common example are incentive contracts which honor the agents effort with an extra
amount if it exceeds a previously defined level.
Times of considerable socio-economic pressure have led governments to adopt explicit
incentive structures in their administrations since the 1970s (OECD 2005a; Proeller
2006; Schedler 2003). Meanwhile performance-related pay schemes are widespread
within public administrations but differ in design as shown in Table 1.
The critical assumption of those incentive-related schemes is that people behave ac-
cording to the monetary incentives provided by the given scheme. This not only means
stable preferences over timeexpressed in a behavior that future rewards of PRP are
perceived rewarding already today. Furthermore that assumption includes self-
maximizing actors who are mentally capable to notice an offered reward. Thus if a
rewarding option is favorable in monetary terms, the actor will inevitably choose this
option. But is this really a realistic assumption?
In management science researchers were in doubt. Not only Herzberg (1968) intro-
duced the concept of intrinsic motivation as a complement to extrinsic motivation. In
the following, combined motivational concepts emerged until Frey came up with the
idea of a crowding effect: extrinsic incentives can crowd out intrinsic motivation (Frey
1994).
Indeed, there are strong empirical clues that neither pure incentives nor a simple ex-
trinsic plus intrinsic motivational concept is worth implementing (for an overview of
emotional influenced motivational concepts of consumer behaviour in this journal see
Grundey 2006). In contradiction to established economic theory, standard incentive

16
Australia Performance-related pay, not organized centrally.
Canada Standardized performance-related pay system including lump sum
bonuses of 10-25 % for top performer. Compensation for top level
managers is benchmarked against the private sector for compara-
ble positions.
Chile Standardized performance-related pay system consisting of a 5 %
range progression and lump sum bonuses of 10-25 %.
Czechia Performance-related pay with a share up to 20 % of base salary
(currently in implementation).
Denmark Performance-related pay (target: share of 20 % of base salary), not
organized centrally.
Finland Performance-related pay with an average share of 15 % of base
salary.
France Pilot project with 20 % performance-related bonuses.
Germany Introduction of bonuses and performance-related pay at the federal
level and in some German states. Currently share of 1 % / 4 %.
Target 10 % / 8 % of base salary (last figure for civil servants
with tenure).
Hungary Performance-related pay with a corridor of +30 % / -20 % of base
salary.
Italy Performance-related pay limited to senior level civil servants with
a share between 5 % and 15 % of base salary.
Korea Performance-related pay for top level employees with a share up
to 7 % of base salary for top 20 % performers. Lump sum bonuses
for mid and lower level employees with a bonus up to 100 % of
base salary for top 20 % performers.
Netherlands Performance-related pay.
New Zealand Performance-related pay, not organized centrally.
Norway Private sector oriented flexible pay.
Poland Facultative awards up to 3 % of base salary.
Spain Facultative bonuses, not organized centrally.
Sweden Performance-related pay.
Switzerland Performance-related pay consisting of merit increments and bo-
nuses with a share up to 15 % of base salary (core federal admin-
istration). Abolition of tenure.
United
Kingdom
Strong monetary incentives (most extensive in Europe), not orga-
nized centrally.
USA Performance-related pay, not organized centrally.
Table 1: Performance-related pay / monetary incentives in the public sector.
Examples from 20 countries.
(Adapted from Kllner 2006; OECD 2005a; Reichard 1992)

17
contracts are inferior in the laboratory (Fehr, Klein, and Schmidt 2001) as civil ser-
vants report on their decline of motivation and the increase of envy through incentives
(Marsden and French 1998). Also, researchers observe the crowding effect in the U.S.
Federal Civil Service (Bertelli 2006). Thus subjects seem not always to follow an ex-
trinsic reward. What we need is a revision of the theoretical fundamentals of PRP
which incorporates these findings. In the following, we will take a look at some recent
findings in neuroeconomics in order to learn more about the decision-making process
and to find out which of these findings might be a fruitful completion of the PRP
schemes for the public sector.
To get a deeper understanding of the decision-making process, economic researchers
basically have two options: (i) interviewing individuals about their preferences and (ii)
observing their decisions. In the first example subjects are asked for the cardinal utility
they see in a specific good or they are asked about the relative utility of a bundle of
goods at the ratio of another bundle (ordinal utility) (Jungermann, Pfister, and Fisch-
er 2005, chapter 3).
The second example is backed by the theory of revealed preferences. Hereafter, prefe-
rences are revealed by the actual behavior (what you want is what you do, not what
you say). Repeating this observation with varying prices, indifference curves can be
derived which can be used to predict an individuals choices at a given prices.
However, the theory of revealed preferences does not reveal the emergence of these
preferences. The actual thinking, that is the individual decision-making in the brain,
remained a black box. The enrichment of economic theory by the observation of actual
behavior enhances the prognostic validity of theoretic predictions but still cannot open
the cover of the black boxsince scientists are not able to observe the actual process
in the working brain.
Neuroscience as an emerging and ambitious discipline now for the first time offers the
possibility to monitor the process of decision-making within a subjects brain. Instead
of just observing effects of certain stimuli on the outcome, the brains activities now
can be made visible by imaging techniques. In combination with methods of experi-
mental economics, the brain can be observed while making decisions. Or, to put it in
words of neuroeconomic pioneers Colin F. Camerer, George Loewenstein und Drazen
Prelec: Neuroscience is asking the brain, not the person (Camerer, Loewenstein, and

18
Prelec 2004, p. 573). By following this track, adherents hope to scale down the black
box in the future.
Applied in economicsknown as neuroeconomicsit is closely linked to experimen-
tal economics (Figure 3). A science, where economic researchers have longtime expe-
riences in observing a subjects behavior and modeling their strategies in strictly labo-
ratorial settings. Not surprisingly, first neuroeconomic research was the repetition of
well investigated phenomena of experimental economics like the ultimatum game
(Sanfey et al. 2003).

Figure 3: Neuroeconomics as synthesis of research
The figure compares experimental economic and neuroeconomic research paradigms. In both proce-
dures the researcher controls the environment and stimulates the participant. Neuroeconomics are dis-
tinguished from experimental economics by the fact that the brain activity of participants can be ob-
served as a reaction to the stimuli.
(Adapted from McCabe 2006)
4.3 Neuroscientific Basics
Historic neuroscience had to solely rely on neuropathology. For hundreds of years re-
searchers opened the cranium of the deceased and tried to find explanations about the
way we think and behave by describing and analyzing the brain's patterns. The still in-
use "Brodmann-Areas" are one example. Although more advanced three-dimensional
scales have been established meanwhilelocalization of specific interest is usually
also numeralized by respective Brodmann Areas (52 in sum).
Environment/Institution
Stimuli
Messages Brain Activity Observes
Behavior Computations Infers
Strategies Mechanisms Models
Researcher Controls
Economics
Experiments
Neuroscience
Experiments

19
First anatomical results about the functionality of specific regions of the brain could be
gathered by categorizing dysfunctions of humans with brain damages. Nevertheless
the potential of dead material to explain actual human behavior is rather limited.
Progress was made with the discovery of (medical) imaging techniques which were
able to show the working brain. Those can be divided in techniques (a) measuring
changes in electric currents and (b) those measuring changes in metabolism.
(a) Techniques measuring changes in electric currents:
Electroencephalography (EEG)
Single Neuron measurement
Magnetencephalography (MEG)

(b) Techniques measuring changes in metabolism:
Positron emission tomography (PET)
functional transcranial Doppler-Sonography (fTCD)
functional magnetic resonance imaging (fMRI)

The methods for measuring the change of electric currents are usually not be applied
for the neuroeconomic experiments discussed below due to small spatial resolution (i)
as well as from ethical (ii) and practical (iii) considerations. Methods of our particular
interest are Positron-Emissions-Tomography (PET) and functional Magnetic Reson-
ance Imaging (fMRI) which are both used to measure changes in the brain's metabol-
ism. Of course, even with these imaging techniques one can't visualize a specific
thought. But by comparing the level of brain activity in two situations they allow to
measure the significance of a stimulus. For example one can show that regions of the
brain which lead to an emotional response are overwhelmingly activated and "out-
shine" other regions which process logical responses. The influence of emotions like
anger, envy, trust, appreciation, gear and fear in decisions becomes visible and evi-
dent.

20
4.4 Findings of Neuroeconomics with Contribution to PRP
A complete consideration of all possible impacts of neuroeconomic research is well
beyond the scope of this article (Camerer et al. (2005a) and Kenning et al. (2005) give
a recommendable review on this). As already mentioned at the beginning, in the fol-
lowing we will focus on potential impact of neuroeconomics on monetary incentive
schemes. Section 1 showed that the ideas behind PRP are especially questioned when
emotions come into play and that actors behave not solely rationally self-maximizing.
In the following, we will take a look at some neuroeconomic findings to understand
what incentives induce in the brain and to learn what can be improved in PRP
schemes.
Fields of our interest are (i) intertemporal decisions when choosing between imme-
diate and delayed benefits, (ii) fairness concerns since empirical research shows that
they cause failure of established incentive contracts and (iii) altruistic punishment
which might be an interesting regulator in a group of agents.
4.4.1 Topic I: Intertemporal Choices
It is in the nature of performance-related pay that monetary rewards are some sort of
delayed compensation for todays non-consumption (of leisure-time, rewards from
shirking etc.).
Studies show that subjects are often discounting future rewards and prefer todays con-
sumption in favor of future rewards (McClure et al. 2004). This by itself is not irra-
tional since all the best-laid plans of mice and men often go awry and future events
are of higher risk than immediate consumption. However, Stuphorn (2005) reports on
hyperbolic discounts subjects often pursue, which discounts faster than a rational dis-
count function proportional to the referred risk. Subjects prefer smaller sooner rewards
instead of larger later ones. According to this hyperbolic discount, Stuphorn discusses
enhanced activation in the forebrain of birds. Furthermore, Spinella et al. (2004)
showed in a study with 235 randomly chosen people with no apparent behavioral dis-
orders that only slight dysfunctions of the brains frontal lobe system had measurable
effects on their economic behavior. Those participants with dysfunctions according to
the Frontal Systems Behavior Scale had lower incomes and preferred immediate re-
wards in favor of future larger rewards.

21
McClure et al. (2004) were able to show in a fMRI study the involved parts of the hu-
man brain. It seems that two systemsa system associated with dopamine releases
which is activated by decisions involving immediately available rewards and a sys-
tem associated with areas involved in cognitive processesare disputing whether to
accept or refuse an offered immediate monetary reward. McClure et al. even showed
that the relative engagement of the two systems is closely correlated with actors
choices for one specific alternative.
These findings suggest that when installing incentive schemes we are dealing with two
different groups. On the one hand a group consisting of people with a dominant sys-
tem who are more likely to be stimulated by a monetary incentive and on the other
hand a group consisting of people with a dominant system who will prefer imme-
diate compensation, such as leisure-time or shirking. Furthermore, rewards have to be
of a significant size, since subjects discount them hyperbolically.

Figure 4: Beta and delta systems competing in intertemporal choices.
In the experiment of McClure et al. (2004) subjects had to choose between an immediate and a de-
layed monetary reward. They show that two different brain systems are involved. It seems that with
midbrain areas (ventral striatum) as well as medial prefrontal cortex areas associated with immediate
dopaminergic rewards on the one hand and parts of lateral prefrontal and right posterior parietal cortex
on the other hand, two systems ( and ) in the brain are disputing whether to accept or refuse an of-
fered immediate monetary reward. Furthermore, choices even tend to reflect the relative activity in
both systems. When people choose the later, larger reward, activity tends to predominate in the cogni-
tive system.
(Figure adapted from Sanfey et al. 2006)
0.0
-0.05
0.05
Choose
early
Choose
late
areas
areas
N
o
r
m
a
l
i
z
e
d
s
i
g
n
a
l
c
h
a
n
g
e

22
4.4.2 Topic II: Fairness Concerns
However, people not only vary in their ability to be incited by future rewardsthey
also differ in their attitude towards fairness. Various theories of fairness concerns
emerged in economics over the last years since empirical evidence has shown that
about 40 % of subjects share fairness concerns in incentive settings (Bolton and Ock-
enfels 2000; Fehr, Klein, and Schmidt 2001).
Those fairness concerns of subjects in incentive settings are of major research interest
in order to improve performance-related pay schemes since they determine the degree
of agents shirking. To study the effect of different fairness concerns within a popula-
tion of principals and agents, Fehr et al. (2007) ran different types of employment con-
tracts against each other. In the experiment an incentive contract was defined as a con-
tract where an agent gets a binding explicit offer of an extra reward if his effort is
above a defined level. Thus, the principal can sanction an agents shirking by not pay-
ing off the reward. Nevertheless, the principal has to face that she is not able to moni-
tor the agent completely.
With a bonus contract, on the other hand, the principal does not invest in monitoring
and makes a non-binding promise to reward an agents performance at her discretion.
Although this seems to be a more risky contract from an agents perspective, it outper-
formed all other contracts offered in the experiment. Fehr et al. show that a classical
incentive contractwhich has also become popular in the public sector as illustrated
in Table 1is inferior
1
to a bonus contract: explicit incentive contracts which accord-
ing to self interest theory for the first time outperform all other contracts do not lead to
an optimum output in a moral hazard context. In contradiction to classical self-interest
theory, the elimination of intrinsic motivation of the fair employees more than com-
pensates the motivation of the selfish by an explicit incentive contract.
Interesting evidence comes from Ultimatum Games, originally developed in the late
seventies of the last century by Gth et al. (1982). In an Ultimatum Game one player
makes an offer to a second player at his discretion out of a certain budget. The second
player has to decide whether to reject or to accept the offer. Only in the latter case both
players can keep the money, otherwise both get nothing. Whereas economic theory

1
As sum of total earnings in terms of costs in monitoring agents and earnings in terms of working-level chosen
by self-regarding and other-regarding agents.

23
predicts that the second player should accept every offer greater than zero, unfair of-
fers are rejected frequently across a wide variety of different cultures (Camerer and
Fehr 2006). Keeping the second players behavior in mind, the first players offer is
usually around 40 % of his given budget, whereas the majority of second players ac-
cept this offer. Unfair offers are rejected in general (Bazerman 2006).

Figure 5: Emotional evaluation of unfair offers in the Ultimatum Game
The figure compares the relative brain activity of two areas when subjects accepted and rejected unfair
offers in the ultimatum game. A rejected unfair offer is associated with a higher activation of the r.
anterior insula, whereas the r. dorsolateral prefrontal cortex (DLPFC) represents the constant desire for
money. Or, in other words: if the activity of the r. anterior insula was higher than the activity of the r.
DLPFC, an offer was rejected.
(Adapted from Sanfey et al. 2006)
Results are now questioned again in the light of neuroscience. In a fMRI study Sanfey,
Rilling et al. (2003) studied the emotional evaluation of an incentive in the Ultimatum
Game. They associated unfair offers with higher activation of specific areas within the
brain, such as the anterior insula which is integrated in the emotional response system,
especially with negative emotions. The activation of the right side dorsolateral prefron-
tal cortex (DLPFC)responsible for cognitive processes, such as goal maintenance
represents the wish to make as much money as possible, even out of unfair offers. The
activation of the anterior cingulate cortex (ACC) reflects the conflict between both
areas. Sanfey, Rilling et al. now report on a similar effect as McCube et al. mentioned
Unfair offers
0.0
1.0
R. anterior insula R. DLPFC
Offer accepted
Offer rejected
C
o
n
t
r
a
s
t

v
a
l
u
e
s

24
above: the relative activation of both regions of the brain is directly associated with
subjects choices.
It should also be noted that source matters. The rejection of unfair offers is closely
connected to human unfair offers (Sanfey et al. 2003). Instead, unfair offers from a
computer caused significant lower activities in the right and left anterior insula com-
pared with human unfair offersindicating that fairness concern seems to be a crucial
part of social interaction. A fMRI study by Rilling, Gutmann et al. (2002) indeed iden-
tifies cooperative behavior between human beings even with non-relatives as itself
rewarding.
4.4.3 Topic III: Altruistic Punishment
Recall that a principal will never be able to observe the behavior of all her agents
completely. Smart principals therefore choose a bonus contract as described in the pre-
liminary paragraph and save monitoring efforts. Mohnen et al. show experimentally
that principals can rely on another potential compensation for their non-control within
a group of agents based on agents inequity aversion (2007). When their contributions
are observable, peer pressure within teams of agents reduces free-riding and enhances
working efficiency. In a PET study, de Quervain et al. (2005) could show that agents
even punish if it is costly for them. They call this phenomenon altruistic punishment.
This is an effect where individuals punish norm violators also if they meet only once.
Remember: from an economical perspective this is a strongly irrational behavior. Yet,
de Quervain et al. could show that this punishment is perceived highly rewarding for
the punishing agent in terms of activation of his dorsal striatum. People seem to invest
in punishment like in other things they spend money onperceiving the punishment
of norm violators as deeply rewarding as a good concert or a good meal.
For bonus contracts these findings might implicate that they work even better in
groups of agents. In situations where agents are not closely monitored by their princip-
als, but are in interaction with and under observation of other agents, peer pressure and
altruistic punishment might be an effective regulator of free riding in terms of agents
shirking. Since the neuroeconomic investigation of corporative group behavior of
agents has so far been limited technically, this area might be a field of fruitful future
research once those limits will have been solved.

25
4.5 Discussion of Potential Contribution to PRP
These findings challenge present PRP schemes in the public sector. From a neuros-
cientific point of view they question the existing model of cause and effect relation-
ships of a monetary incentive and the resulting behavior. Concerning PRP some as-
pects are of particular interest.
At first, we have to remark that not all civil servants will behave according to mone-
tary incentives. Neuroeconomics can now help to understand this phenomenon by pro-
viding a physical explanation for at least some of them: it seems that people who are
not responding to incentives in the predicted way may tend to have a different
processing in their frontal lobes. Therefore, in-use motivational concepts proposing
sociological explanations for a non-response to monetary incentives should be ques-
tioned. Some hints of a genetic dependency of neural processes underlying personality
differences in behavior are brought up by Cohen et al. (2005). They show that the in-
dividual configuration of a specific dopamine receptor gene is associated with the acti-
vation of the brain's reward system during a gambling task.
Second, people not only differ in terms of their neural processing of monetary incen-
tives, but also in their attitudes towards fairness. The implementation of bonus con-
tracts might fulfill the role of the golden medium in this respect for PRP schemes. Re-
search into present PRP contracts in the public sector is ambiguous in terms of motiva-
tion, productivity morale and other effects (Bertelli 2006; Kllner 2006; Marsden and
French 1998). Incorporating social behavior, bonus contracts seem to fit better to how
people really are. A benefit is that principals do not have to rely on control to todays
extent. Behn already warned against the risk of a roll back to command-and-control
hierarchies inhabiting principal-agent models in the public sector (Behn 1995).
Furthermore, the findings of Fehr et al. (2007) rely on large bonuses: roughly 40% of
the agents total compensation was paid in the form of a bonus. With irrational hyper-
bolic discounting, neuroeconomics now indeed suggest to offer large bonuses. Al-
though that even in the public sector it is understood that rewards should be significant
(Kllner 2006), that meant an enormous extension of todays performance-related
shares of total income (see Table 1). This might provoke envy and resistance by the
affected civil servants. And: even on the basis of todays comparably small extent of

26
performance-related pay opponents evoke the supposed overemphasis of the motiva-
tion-effect through this sort of compensation within the public sector (Reichard 1998).
Another conflicting point might be that bonuses are in discretion of the principal. Bo-
nus contracts might result in sharp income differences within a group of agents. Even
if the principal tries to behave fairly and keeps her promises, bonus contracts might
provoke legal conflicts especially in anti-discrimination and equalization law. Take for
example the anti-discrimination legislation of the U.S. with the establishment of the
Equal Employment Opportunity Commission or more recently the European Un-
ions directives concerning the implementation of the principle of equal treatment
between persons irrespective of racial or ethnic (2000/43/EC), the establishment of
a general framework for equal treatment in employment and occupation
(2000/78/EC) and the implementation of the principle of equal treatment for men and
women as regards access to employment, vocational training and promotion, and
working conditions (2002/73/EC). These legislations require a very careful handling
of bonuses in order not to be associated with arbitrariness.
However, from an organizational perspective it seems to be interesting how the fortifi-
cation of a principals leadership bonus contract evokes: allocating substantial rewards
on her discretion, a principal handling these contracts must be decisive and of sophisti-
cated talent. So political leaders should be aware that introducing substantial bonus
shares in times of budgets limited in growth might be worthwhile in the long run, but
could cause extensive troubles they have to sit out in the short run.
4.6 Concluding Remarks
Economics could continue to chug along, paying no attention to cognitive neuroscience. But, to ig-
nore a major new stream of relevant data is always a dangerous strategy scientifically.
(Camerer, Loewenstein, and Prelec 2004, p. 573)
This article proposes to integrate neuroeconomic findings in the public management
context as scholars of law already started in their discipline (Chorvat, McCabe, and
Smith 2004). Although there areat least so farno specific neuroeconomic study
groups on civil servants, there is no systematic reason that they are stronger pecuniary
motivated than private sector employees. Instead, it has often been argued that em-
ployees in non-profit organizations are rather intrinsic motivated and other-regarding,

27
such as recent research convinces for volunteering charity projects and blood donation
(Houston 2006). Hence, there is no evidence why neuroeconomic findings about in-
centive reactions of humans discussed in this paper should not be transferred into the
theoretical discussion of public management. If the assumptions of purely rational act-
ing and self-maximizing bureaucrats are not valid anymore, incentive structures in
PRP schemes have to be revised.
The findings discussed in this article suggest that people are and will be diverse not
only from their observable behavior but also from their hardware in terms of their
neuroscientific processing. Even normally behaving subjects may have slight dysfunc-
tions of the frontal lobes evoking that those persons are not able to follow performance
related (deferred) incentives. Furthermore, the integration of fairness concerns of a
remarkable share of employees seems to be an imperative. Bonus contracts might be a
possible origin to work with. However, the discussion showed that they too are not
free from any problems in practical implementation.
Economic theory is by far not the only input to public management theory. Yet, it is an
important one. Therefore, the public community should not ignore the development of
economic sciences. In times when public sector is facing increasing demand on its
output coming along with a smaller headcount, a motivated workforce becomes even
more a critical success factor. In return, public management theory might be fruitfully
enriched.


28
5 Paper II: Better performance with performance
budgeting?
Analyzing cases of success and failure in public
administrations

5.1 Introduction
In several attempts public administrations intended to increase performance during the
New Public Management (NPM) movement (Hood 1995). Among those ideas are a
greater cost-efficiency through market orientation of public sector organizations, the
implementation of performance measurement, a higher degree of managerial freedom
and accountability, customer orientation, reorganization of business processes and
budgeting reforms (Gruening 2001; Kettl 1997; Pollitt and Bouckaert 2004).
Result-based management, as introduced in New Zealand (Richardson 2000), the US
and other countries emphasizes outcomes or results as opposed to inputs or processes
(John et al. 1994). Managers are held accountable for these results (Radin 2006). In
order to perform this crucial role, managers had to be granted reasonable room to ma-
neuver. These doctrines assumed a direct link between the increase of managers dis-
cretion and the better performance of public sector organizations (Moynihan 2008) as
the example of the National Performance Review (Clinton 1993) shows. The initiative,
which was led by then Vice President Al Gore included several mechanisms permit-
ting managerial flexibility and claimed to empower managers to perform (National
Performance Review, 1993, 41, 27). Further initiatives during the Clinton presidency
as the Government Performance and Results Act (GPRA) and those to follow as the
Bush administrations Presidential Management Agenda (PMA) and Program Assess-
ment Rating Tool (PART) continued to highlight goals and output orientation (Hill and
Lynn 2009).
One of the most prominent instruments to give public managers more freedom to man-
age is the results based or performance budgeting. In a move from ex ante to ex post
controls the attention shifts from inputs to outputs or even outcomes. Input controls
are relaxed and managers and/or organizations are given flexibility to improve perfor-

29
mance. In return they are held accountable for results measured in the form of outputs
and/or outcomes as the OECD describes the development on a global perspective
(2005, 58). In order to accomplish this aim, many legislative bodies replaced a line-
itemized budget with a budget, in which a net sum of expenses is devolved to the ad-
ministrative entities combined with performance objectives (Schedler 2003). These
consolidated appropriations might apply to a whole budget or be restricted to opera-
tional costs (OECD 2007).
Concepts and names differ from country to country. One-line budgeting (Hood
1991), devolved-budgeting (Scott 2001), 'lump-sum budgeting (Jones and Thomp-
son 1986; Rubin 2006) 'entrepreneurial budgeting' (Cothran 1993) or performance
informed budgeting (Joyce 2003) are all common names for concepts that share key
features. In the following, I will use the term performance budgeting and refer to its
definition by the OECD. It defines performance budgeting broadly as a form of bud-
geting that relates funds allocated to measurable results (OECD 2005b, 59).
Despite differing names, performance budgeting initiatives have common characteris-
tics across several countries. According to the OECD's International Database of
Budget Practices and Procedures (2008) 20 out of 30 OECD member countries use
consolidated budgets in the form of lump-sum appropriations for at least some of their
executive organizations or agencies. Among those are Australia, Canada, France, Italy,
United Kingdom and the United States. In 23 member countries these administrative
units can carry over, or transfer unexpected revenues or unused budget expenditures
at the end of the year onto next year's projects. Public managers are able to keep sav-
ings from efficiency gains that they have realized in order to finance other expendi-
tures in 22 OECD countries. In return the vast majority of 24 countries uses non-
financial output and/or outcome measures to hold their managers accountable. 14
countries even directly link expenditures to performance goals or objectives within
their budgets. Some of these instruments of performance budgeting and enhanced ma-
nagerial flexibility can be actually found in emerging and developing countries though
they are not so widespread and tend to include a fewer degree of freedom (OECD
2008; McGill 2001). Accordingly, Hatry argues that the enhanced flexibility might not
be appropriate for countries lacking the necessary legal and ethical controls (2006).

30
Switzerland, however, shows a certain propensity to apply NPM (Schedler and Felix
2000). This paper analyzes empirical data from Swiss public administrations which
use performance budgeting in the following way: First, these organizations receive
lump-sum type consolidated appropriations. Second, these units are allowed to allocate
at least parts of possible unexpected revenues or unused budget at the end of the year
on next years projects at their own discretion (carry over). Third, their duties and
responsibilities are reformulated in outputs enabling ex ante negotiations on a scope
of services as well as on pricing discussions between administrations and legislative
bodies. Fourth, the managers are held accountable for the outputs.
The paper intends to enlarge our understanding of factors that influence the outcome
of performance budgeting reforms as perceived by public managers. I will propose a
causal model that integrates three contextual factors and two individual factors. This
model will be tested with cases generated from interviews with public managers. The
aim is to identify potential underlying causal mechanisms in order to improve our
knowledge about the perceived outcome of performance budgeting reforms in specific
contexts (typological sets).
5.2 Performance Rationale
Proponents of performance budgeting note there are several advantages associated
with its use by public sector organizations. Overall, it has been discussed that budget
formats and procedures influence policy outcomes (Lynch and Lynch 1997) or in other
words, the performance of the administration. This link, however, is not a direct one.
Managers in public administrations, who are responsible for the implementation of
policies, function as a type of transmission belt. In this sense, the managers are pivotal
to state performance, which is why their role in budgeting is important. First, as a re-
sult of performance budgeting, some argue that thinking in terms of costs becomes
more salient among public servants (Boston, Pallot, and Martin 1996; Rieder and
Lehmann 2002). If performance budgets include consolidated appropriations, the flex-
ibility and efficiency of administrations will improve (Scott 2001), since administra-
tors are able to allocate resources that correspond to current needs rather than rely on
historical expectations that are represented in the estimates (Boyle 1991). Second, pro-
ponents argue that the motivation of employees should be improved by increased re-

31
sponsibility (Moynihan 2008), which is expressed via slogans like "let the managers
manage!" (Kettl 1997). As Scott (2001, 257) points out, the enhanced flexibility of
lump-sum type consolidated appropriations can be identified as an empowering model:
"By giving people the power to make decisions, individuals are motivated and use
their initiative and innovate, to the good of the organization."
This second notion goes along with psychological motivational theory in two aspects.
On the one hand, the self-determination theory highlights a low degree of heteronomy
as crucial for intrinsic motivation and qualities such as creativity, self-regulation and
flexibility in a professional context (Deci and Ryan 1985). This would support the
room-to-maneuver argument. On the other hand, the transformation from input-based
control to outcome-based control can be linked to goal setting theory. This theory
states that for individuals, goals have a directive, as well as an energizing function and
affect persistence (Latham, Borgogni, and Petitta 2008). Therefore, if the assessment
of a managers performance is subject to the achievement of specific outcome targets,
he/she should perform better than in an organizational setting with unspecified output
objectives. Locke and Latham report from an effect size in meta-analyses of goal set-
ting compared with 'to do ones best', ranging from .42 to .80 (Locke and Latham
1990) respectively.
However, these psychological theories fail to explain two aspects. First, they offer no
satisfactory explanation of the variance of individual opinions towards new forms of
budgeting and their corresponding behavior. For the most part, not every public man-
ager seems to be as motivated as proponents of performance budgeting claim. Second,
those theories do not explain how these differences evolve. This paper seeks to contri-
bute to this discussion by addressing the question which organizational contexts and
individual factors may cause these different outcomes.
5.3 Hypotheses
To analyze the interplay of the different factors, I use a two-level theoretical concept
(Goertz 2006). A two-level concepts allows one to differentiate between factors that
directly influence public managers as well as factors with indirect influence. Goertz
proposes to structure these kind of theories in a basic level and a secondary level. The
basic level contains the main causal variables and the outcome variable. They are the

32
building blocks and hence those essentials of a two-level theory a typical summary
[] will focus on. (Goertz and Mahoney 2005, 501). The variables on the secondary
level are less central to the core argument. But they should not be seen as indicators or
measures for the basic level. Rather, these variables play a key theoretical role to ex-
plain why basic-level causal variables have the effects they do. Both levels are linked
by a causal mechanism with the causal arrow going from the secondary level to the
basic level. In this sense, secondary level variables serve as causes of causes (Goertz
and Mahoney 2005, 503). Figure 6 showcases the assumed causal relationships of per-
formance budgeting.

Figure 6: Assumed causal mechanisms of performance budgeting (PB)

The basic performance rationale reviewed above is that more room to maneuver leads
to better performance of public managers. Accordingly, I assume that the degree of
freedom public managers actually perceive enhances outcomes. The concept of per-
formance budgeting assumes that the degree of freedom is actually caused by two sec-
ondary factors (see secondary level on the left side of Figure 6). One source is an en-
+
+
+
+
AND
+
H2
H3
OR
H4
H5
Secondary level Basic level
Proper project
management
Prior career in
private sector
Perceived
freedom
Parliamentary
behavior
Social services/
redistribution
Sovereign
functions
Education/
recreation/ sports
Business-like
activities
Type of department
with PB
contextual factor
individual factor
+
+
+
H1
Perceived
reform
outcome

33
hanced flexibility in the respective department itself. In addition to that, freedom
comes from parliaments, which play according to the new rules of the game. That
means they limit themselves to strategic output control and stay away from input
oriented discussions about single budget positions.
Figure 6 emphasizes the causal mechanism assumed between the secondary level va-
riables type of department and parliamentary behavior on the one side and the basic
level variable freedom perceived on the other side. The assumption that the second-
ary level variables, department and parliament, both behave according to the con-
cept are considered as necessary conditions that are only jointly sufficient for the basic
level variable of perceived freedom. This is characterized with an AND in Figure 6.
In other words, public managers would not perceive significant freedom if they are
only supported by either their parliament or only enjoy sufficient flexibility within
their departments.
Besides examining this potential causal relationship of flexibility and performance I
consider two other factors, which affect the outcome. Those are on the one hand the
way the introduction of performance budgeting is managed and on the other hand a
prior career in the private sector the public manager can build on. Because they would
directly influence the outcome they belong to the basic level variables on the right side
of Figure 6.
Reflecting the discussion about the theoretical model of performance budgeting I spe-
cify the following five hypotheses. A detailed definition of the variables and a discus-
sion how they were measured will be provided in the research design section. This in-
cludes a remark on other factors with potential influence on performance and how I
attempted to control for them.
Early research has questioned the all-purpose adequacy of NPM and performance
management reforms (Hood 1991; Thompson 1993). Nevertheless, these reforms
spread around the globe and can be found in many countries (OECD 1995; Pollitt and
Bouckaert 2004) and as a 'one-size-fits-all' approach (Radin 2006) in many differ-
ent branches of government (e.g. PART used for performance measurement in the
US). Performance budgeting doctrines as a major part of performance management
claimed to be a general applicable management concept for the public sector that leads
to better outcomes (Moynihan 2008). This would lead us to assume:

34
Hypothesis H
1
: In principle, departments of all types are equally suited for the use of
performance budgeting.

Performance budgeting requires a change in the behavior of the parliament. In coun-
tries with non-Westminster parliamentary systems, such as the United States or Swit-
zerland the parliament has significant influence over budget formulation and execution
(OECD 2008; Joyce 2003). The right of a parliament to control the budget was consti-
tutional for parliamentarianism and Western democracies (Kluxen 1983; Tilly 2003).
Bourdeaux showed in an examination of several US states the critical role of the inter-
play between legislators and executives in implementing performance budgeting re-
forms (2006). However, if consolidated appropriations, such as lump-sum grants, are
introduced, a parliament has to restrain from detailed input and focus on outcome tar-
gets and measures in order to enable public managers to perceive freedom. If it be-
haves uncooperatively performance budgeting shouldnt work, which is stated in H
2
:
Hypothesis H
2
: Performance budgeting leads to a higher degree of perceived freedom
only if the parliament behaves according to the rules.

As noted earlier, more managerial freedom and enhanced flexibility are key features of
many performance budgeting reforms (OECD 2008). Proponents ally several positive
outcomes with an enhanced flexibility like more efficiency (Cothran 1993; Scott 2001)
or higher motivation of managers (Deci and Ryan 1985; Perry and Wise 1990). The
third hypothesis reflects this central part of performance budgeting initiatives with an
emphasis on more freedom to manage:
Hypothesis H
3
: A higher degree of perceived freedom promotes a positive perceived
reform outcome.

Furthermore, the introduction of performance budgeting can also be regarded as a
change management project. It is well known that public management reforms can
cause resistance among affected workforce (Hill and Lynn 2009; Thomas and Davies
2005). Carnevale emphasizes the crucial role of change management and change

35
agents to achieve a common purpose in organizations in times of reforms (2003, 59).
When taking these arguments into consideration, I theorize that project management
and the way performance budgeting is introduced are important for public managers
and affect the perceived success of the reform:
Hypothesis H
4
: Problems with introduction and project management are associated
with a poor perceived reform outcome.

Finally, proponents of the NPM reforms associate better performance of public sector
organizations with the implementation of management concepts from the private sec-
tor (Gruening 2001; Hood 2000). On the other hand the public sector is associated
with a different culture and its own management tools (Houston 2006; Schedler and
Proeller 2007). If management concepts can be adopted from the private sector as pro-
ponents argue despite environmental differences I assume that managers with a
prior career in the private sector are better prepared to adopt the new management
concept and are more likely to perform well in the new system. This is reflected in the
following hypothesis:
Hypothesis H
5
: A prior career in the private sector enables public managers to better
work with performance budgeting and improves the perceived reform outcome.

For hypotheses H
3
-H
5
equifinality is assumed. This means that there are no necessary
conditions and that multiple parameter values might lead to a sufficient outcome
(Goertz 2006). An example of equifinality in the theoretical model discussed above
would be two cases with a positive outcome but with only one manager having a prior
private sector career. In Figure 6 this is characterized with an OR.
5.4 Research Design
This paper combines a cross-case design of typological theory with methods of within-
case analysis (George and Bennett 2005). Typology theory defines independent va-
riables distinguished in different categories, for which multiple cases and their out-
comes can be linked. It not only supports the development of hypotheses about causal

36
relationships regarding how the variables operate individually, but it also provides
contingent generalizations about combinations or configurations of variables that
constitute theoretical types (George and Bennett 2005, 233). Each combination of
variables is called a type. Usually in a cross-case analysis many of these types may
be found. Typological theory is also open to equifinality, which states that in case
some variables are sufficient but not necessary for an outcome, the same outcome is
possible through different types of combinations of variables. Applied to performance
budgeting, typological theory can highlight the interplay of multiple factors that influ-
ence outcomes.
The underlying ideas of categorization in typological theory have a long tradition in
social science going back to Max Webers (1949) Idealtypus (ideal type) and Paul La-
zarsfelds property spaces (1937). The advantages include the addressing of com-
plex phenomena in a robust theoretical model with the abilities to show similarities
and differences across cases.
In the following this method is combined with methods of within-case analysis (Miles
and Huberman 1994) in order to explore deviant cases, which seem to have abnormal
types. The within-case analysis used in this paper to investigate and explain the deci-
sion process that leads to these deviant outcomes is influenced by techniques of
process tracing (George and McKeown 1985). The approach attempts to uncover sti-
muli as institutional arrangements that trigger behavior. George and Bennett later
coined this kind of intervention between independent variables and outcomes that link
causes and effects, causal mechanism (2005).
The empirical material of this paper draws upon a two-year research project that inves-
tigates the effects of performance budgeting on public sector managers. The participat-
ing interviewees all hold management positions in the Swiss public sector on the mu-
nicipal or canton (regional) level. As a consequence of budget reforms they are now
responsible for a performance budget with lump-sum type appropriations for their or-
ganization or department. Furthermore, the participating managers held office before
the changes in the budgeting system, allowing them to compare the old and the new
systems. With approximately five years of experience in the new system, they are still
able to remember the transition phase and the situation before that.

37
It is important to notice that this study focuses on how public managers perceive per-
formance budgeting. In terms of outcomes, perception is a proxy of how public organ-
izations actually perform applying the new system. However, frequently changing re-
sponsibilities within the accessible Swiss departments over time made it impossible to
conduct a longitudinal controlled comparison of departments applying performance
budgeting vs. traditional departments. This is a well-known problem in public man-
agement research (Pollitt and Bouckaert 2004). Besides these pragmatic reasons to use
perceptions of public managers there is also a good grounding in theory to do so. Be-
cause performance budgeting theories emphasize the motivation of managers by more
room to maneuver as shown earlier in this paper, these managers should be able to
give some insightful answers in interviews as to how performance budgeting actually
works.
The project involved interviews with 31 public managers who were asked to partici-
pate in a university research project about performance budgeting. The interviews had
a semi-structured character, covering specific areas but also allowing the interviewees
to outline their topics of interest. This research follows the perspective of public man-
agers. Due to specific requirements about data richness for the method used in this pa-
per, I cover a sample of 23 interviews or cases. I tried to encourage truthful responses
by assuring strict anonymity during the interviews. In order to further improve sound-
ness, all interviews were scrutinized by an additional researcher who had access to the
transcripts.
In addition to the variables reflected in the causal model of this paper performance
might be influenced by other factors as well. The US-based Governmental Accounting
Standards Board (GASB) proposed the following external and internal factors: (a)
budget and operational constraints; (b) economic, social, and demographic conditions;
and (c) actions of other organizations (GASB, 2009). To control for (a), the interviews
were supplemented by secondary data found in administrative documents for triangu-
lation purposes. This covered internal material about the introduction of performance
budgeting. These documents were carefully examined checking the selected perfor-
mance budgeting practices and with an emphasis on additional organizational circums-
tances in order to identify potential outliers. Interviews with performance measure-
ment comptrollers served as another source to control for the comparability of reform
models between the different jurisdictions. Second, economic and social conditions

38
were considered during case selection in order to prevent a distorting influence of
these factors. Third, the actions of other organizations were not systematically con-
trolled as they do not seem to have a logical influence on the model discussed here. In
addition, the transcripts of the interviews did not indicate any importance of this factor
for the research question of this paper.
During subsequent data analyses interviews were coded (Miles and Huberman 1994).
For the typological table the following codes were used: Y for agreement, N for
disagreement and Y/N for mixed or partial agreement. A Y was chosen when an
interviewee fully confirmed the variable throughout his/her interview, a N was cho-
sen in the opposite case. If an interviewee indicated mixed responses (e.g. with some
tasks I perceived more freedom, with others not) his/her answers were classified as
Y/N. The latter does not apply for prior career, of course.
The causal model introduced in the previous section consists of six variables (see Fig-
ure 6). On the secondary level, the independent variable, type of department with PB,
describes the kind of department involved. They are split into four categories in order
to control for different department shapes, which result from their varied responsibili-
ties. These categories are mutually exclusive for the sample I analyze. Business-like
activities' consist of departments with activities that can also be found in the private
sector like facility management, IT-Services and forestry management. Education,
recreation and sports includes the management of preschools, playgrounds, playing
fields and museums. Sovereign functions covers primary administrative activities
like treasury/taxation and official public register activities. Social services / redistri-
bution consists of activities, which feature caring and redistributive characteristics
like welfare. In order shown in Figure 6 these four categories reflect a decrease level
of market orientation.
Parliamentary behavior is the other independent variable on the secondary level. It
measures the extent to which parliaments behave according to the new rules of the
game as perceived by the affected public managers. The variable is of ordinal scale
with the value Y for behaving according to the concept, N for non-compliant par-
liaments, or Y/N for mixed response (in the middle of the scale).
Perceived freedom is a basic level variable, which is hypothesized to directly affect the
outcome of performance budgeting. In my model freedom perceived is an interme-

39
diate variable that remains dependent upon the two independent variables of type of
department and parliamentary behavior on the secondary level. Freedom perceived
is of ordinal scale with the values Y for more freedom perceived through perfor-
mance budgeting, Y/N for mixed response and N for no extra degree of freedom
perceived.
Proper project management measures the introduction and project management of
performance budgeting and is an independent basic level variable. It is assumed that
such a change management project can be perceived as a success or failure by public
managers. I applied an ordinal scale with Y for no problems perceived, Y/N for
mixed response and N for a poor project management.
Prior career in private sector is an independent basic level variable covering public
managers individual careers. If an interviewee stated that he/she has ever worked in
the private sector before, it was coded Y, otherwise N.
Perceived reform outcome indicates how public managers evaluate the success of the
introduction of performance budgeting. During the interviews, they were asked to
compare the reform outcome with the promises of the reformers. Working for approx-
imately five years in the new system the time frame of the evaluation was not short-
term. Dimensions of interest were improved efficiency and effectiveness as well as
how they are now able to fulfill their job in comparison to before. The variable is
linked to triggering questions in the interviews like "what was done right and wrong
with the introduction of performance budgeting?", "is there anything you would do
differently today?", "are there any stories of success or failure which come to your
mind when you think about operating performance budgeting?", "are you now better
able to fulfill your tasks?" or "do you think performance budgeting improved the effi-
ciency of your department?". At the end of the interviews, participants were invited to
give an overall judgment with the questions "did it work?" and "guess you wake up
and a wonder happened you find yourself in the perfect performance budgeting re-
gime. What would be different from today's?". The variable perceived performance
outcome is of ordinal scale with the values Y for a clear positive overall evaluation
of the reform in the eyes of the interviewees, Y/N for mixed response and N for a
failure of the reform.

40
An ordinal scale requires two conditions: A clear definition of data and an intersubjec-
tive agreement on the ranking of categories (Bradley and Schaefer 1998). The first
condition addresses the unambiguous definition of the indicator being measured as
well as of the scale categories. I chose a three-level scale to enable a clear definition of
categories and an unambiguous classification of the qualitative interviews. This scale
may restrain the discovery of some further detailed information in-between the three
categories but fulfills of Bradleys and Schaefers first condition, which was seen as
more important here. The rough classification also supports the intersubjective ranking
of the three categories as stated in the second condition. This sharper difference be-
tween the categories makes it easier to agree upon them. Given the narrative nature of
the interview data otherwise the criterion of intersubjective agreement would be in
danger.
5.5 Findings
Table 2 sums up the cases covered in this paper and shows the different types of com-
binations of variables observed in the cases.
In the following, I will discuss the findings for every hypothesis.
Hypothesis H
1
: In principle, departments of all types are equally suited for the use of
performance budgeting.
The outcome data in table 1 shows a solid tendency of rising perceived failure of per-
formance budgeting in departments with a low market orientation. Only two out of
fourteen cases in the first two types of departments fail to render successful outcomes,
with no clear negative outcomes in the business-like departments. Whereas in the latter
two departments, six out of nine outcomes are not positive. In departments with sove-
reign functions half of the outcomes are not positive and no positive outcome can be
found in departments with social tasks.
This raises the question of what prevents performance budgeting from working in de-
partments with these kind of tasks. Noticeable is the difference in freedom perceived
by public managers, which can be found in twelve out of fourteen cases in the first
group and only one out of nine in the latter two types. A within-case analysis of cases
D
4
, B
4
and A
5
should help to understand the reasons. In these cases the parliament

41
behaves according to the concept, which is seen as an important condition that perfor-
mance budgeting works (H
2
). D
4
claims that he mainly executes federal law. This
means that he does not perceive more room to maneuver. Instead he associates the in-
troduction of performance budgeting with more bureaucracy due to higher reporting
Set Cases IV:
Type of
department
IV:
Parliament
behaves
according
to concept
IMV:
Freedom
perceived?
IV:
Proper in-
troduction
& project
mgmt?

IV:
Prior career
in the pri-
vate sector?
DV:
Perceived
reform
outcome:
Did it
work?
1
E
1
D
1
A
1
C
1
Business-like Y Y Y Y Y
2 A
2
Business-like Y Y Y/N Y Y
3
B
1

B
2
Business-like Y/N Y Y Y Y
4 E
2
Business-like Y Y Y N Y
5 A
3
Business-like N N Y Y Y/N

6 E
3
Educ/Sports Y Y Y Y Y
7 C
2
Educ/Sports Y Y Y N Y
8 B
3
Educ/Sports Y N Y N N
9 D
2
Educ/Sports Y/N Y Y N Y
10 E
4
Educ/Sports Y/N Y Y Y Y

11 A
4
Sovereign fct. N N Y N Y/N
12 D
3
Sovereign fct. N Y/N Y/N Y Y/N
13 D
4
Sovereign fct. Y Y/N Y/N N Y/N
14 E
5
Sovereign fct. Y/N Y/N Y N Y
15 D
5
Sovereign fct. Y/N Y/N Y Y Y
16 D
6
Sovereign fct. Y Y Y N Y

17 B
4
Social Y Y/N Y Y Y/N
18 A
5
Social Y N Y Y N
19 C
3
Social N Y/N Y N Y/N
Table 2: Typological table of performance budgeting
IV: independent variable, IMV: intermediate variable, DV: dependent variable. Cases were anony-
mized (X
n
: X indicates the city or canton, n indicates the case within this jurisdiction).

42
standards. However, he welcomes the enhanced outcome orientation, which helps to
motivate his staff.
B
4
and A
5
agree that they have to focus on execution, which limits their degrees of
managerial freedom. However, B
4
remarks that her job provides more freedom than
her previous one and that she now has more possibilities to cooperate with other cities.
A
5
instead complains heavily about an increase in red tape and thinks that the project
is a comptrollers baby.
The strong limitations raised by these three managers challenge the assumption that
performance budgeting is adequate for departments of every kind. The other cases
seem to confirm these doubts. Many managers in the latter two groups claim that they
are just executing federal and regional law and have no influences on the caseload.
Furthermore, a within-case analysis shows that these departments tend to spend little
money on materials but a lot on compensation since they offer labor-intensive servic-
es. Head of departments however, at least in the Swiss context, seldom get the chance
to change compensation schemes or job charts. This is beyond their competence. Thus,
even with performance budgeting they often cant control for their demand side (ca-
seload) and for the largest portions of their expenses (compensation).
The outlier B
3
in the second group claims similar particularities for her tasks. A
3
how-
ever is of different nature. After repeated budget cuts his budget is squeezed out to an
extent that reduces his room for initiatives to a minimum.
These results question the claim of performance budgeting as a universal management
concept as stated in H
1
. The cases discussed in this paper suggest that the character of
duties has been underestimated so far. Tasks may shape departments in a way that
makes it very difficult for public managers to benefit from performance budgeting.

Hypothesis H
2
: Performance budgeting leads to a higher degree of perceived freedom
only if the parliament behaves according to the rules.
Table 1 shows eleven conforming cases in the narrow sense where a parliament be-
haves according to the concept and managers perceive freedom or with the opposite
case (non-supportive parliament no freedom perceived). Within-case analysis pro-

43
poses that these managers indeed experience the conjunction between the behavior of
their parliaments and freedom. E
1
reports of more competences, discussions about
budgets become less emotional and less focused on incidentals (E
2
) and are loy-
al and concentrating on targets and outputs (C
1
). A
3
as a negative but confirming
case is of different nature. As mentioned before because of budget cuts through the
government and the parliament there is little freedom left for the manager.
However the results presented also question the assumption of a necessary condition of
proper parliamentary behavior and performance budgeting in order to perceive free-
dom (H
2
). Some managers perceive freedom without a clearly supportive parliament
(B
1
, B
2
, D
2
,

E
4
), while others do not perceive a higher degree of freedom even when
the parliament behaves appropriately (B
3
, A
5
) or are undetermined (D
4
, B
4
). To learn
more about the intervening steps of these contradictory cases I also investigated cases
B
1
, B
2
, D
2
and E
4
. It is assumed that cases from social and sovereign functions depart-
ments tend to be biased as discussed for the previous hypothesis. Hence within-case
analysis of cases from the latter departments is not considered as useful to investigate
deviant cases for Hypothesis 2.
It shows that all four managers face parliaments, which have problems restraining
themselves to control the managers via outcomes. Instead, the parliaments try to influ-
ence decisions on detailed aspects, undermining the concept of performance budget-
ing. To this effect, the managers blame the characteristics of the Swiss parliaments.
Accordingly, parliamentarians are all non-professional politicians who meet only in
their free-time and tend to have problems restricting themselves to the new system of
performance budgeting. This is why managers B
1
, B
2
, D
2
and E
4
complain about their
legislative bodies. However, all found workarounds to contain the parliaments influ-
ences on inputs to a certain extent. B
1
collaborates with his government executives to
handle the issue. B
2
is very convinced about his leadership skills and says, I would be
a bad manger if I wasnt able to lead the parliament. D
2
pooled budget titles to enjoy
a higher degree of freedom and complains about detailed control attempts of the par-
liament only in conjunction with heavy budget cuts. E
4
suffers more from detailed dis-
cussions concerning budget positions, which results from his specific responsibilities
for recreational and sports facilities. This is a very popular topic and sometimes par-
liamentarians have their own stake in a new facility. However, E
4
still enjoys freedom

44
especially due to fundraising, which became possible with performance budgeting.
There he can set his own priorities.
In sum, this case analysis partly disconfirms H
2
that a parliament has to behave ac-
cording to the concept in a narrow sense for a successful performance budgeting. The
underlying assumption might be reconsidered in a way that only intensive input based
control on detailed budget positions completely eliminates public managers possibility
to perceive freedom. In the perception of public managers within the data set of this
paper, the impact of their corresponding parliaments seems to be not of a binary na-
ture, but rather a gradual nature where an uncooperative parliament decreases their
motivation but does not necessarily block their freedom completely.

Hypothesis H
3
: A higher degree of perceived freedom promotes a positive perceived
reform outcome.
The perception of freedom strongly affects the perceived reform outcome. 19 out of 23
cases show the same value of the variables, freedom perceived and perceived reform
outcome. There is no fully disconfirming case with contradictory Y/N or N/Y combi-
nations of variables. This would support the theoretical assumption to give managers
more freedom to improve their performance. Process tracing tends to confirms the
causal relationship between these two variables. Managers who enjoy a positive out-
come mention the enhanced flexibility in purchasing due to the net sum they get (A
1
,
A
2
, B
1
, B
2
, C
2
, D
1
, D
2
, D
6
, E
1
, E
2
, E
3
, E
4
) and the results orientation of the approach
(A
1
, B
2
, C
1
, D
2
, D
6
, E
2
, E
4
) or even more freedoms with their job charts (A
1
, C
1
, D
1
,
D
2
, E
3
). On the other side, managers who do not perceive significant extra freedom
due to their job design, extended bureaucracy or parliaments behavior, believe that
performance budgeting does not work (B
3
, A
5
) or are indecisive about it (A
3
, A
4
). Fi-
nally, there is group of four managers who are ambiguous about perceived freedom
and the outcome (B
4
, C
3,
D
3
, D
4
). All in all these data supports H
3
and suggests the im-
portance of perceived freedom for a positive perceived reform outcome.

Hypothesis H
4
: Problems with introduction and project management are associated
with a poor perceived reform outcome.

45
Within the cases discussed in this paper, bad project management is not a main issue
for the involved managers. Only three managers have ambiguous feelings about the
introduction and project management of performance budgeting in their administra-
tions (A
2
, D
3
, D
4
). There is no case with poor and only one (A
2
) with indecisive project
management in combination with positive values for the other variables, which are
assumed to influence the outcome (a high degree of perceived freedom and a prior ca-
reer in the private sector).
A
2
reports about a difficult start of performance budgeting within his department,
which negatively affected the project at the beginning but has been solved by now. A
comparison between most similar cases of D
3
/D
5
and D
4
/E
5
, which differ only in the
value of project management and outcome, does not render an overwhelming impact
of project management. However, D
3
is convinced that the way the steering committee
for performance budgeting was organized constrained the switch from the pilot phase
to the everyday running of the system. But D
5
, whose department faces the same steer-
ing committee, did not complain about this fact. Like his colleague A
2
, D
4
also com-
plains about a difficult project kick off with excessive meetings. Today he still suffers
from increased red tape, which is one factor for him to criticize performance budget-
ing. E
5
does not complain about this aspect. Both other variables being equal, this is
one factor that seems to cause the different outcome of D
4
/E
5
. However, the limitations
of the influence of project management become evident in the cases with positive
project management and a medium or low degree of perceived freedom (B
3
, A
4
, B
4
,
A
5
, C
3
). If the perceived freedom is low enough then the perceived reform outcome is
not positive even if both project management and prior career have positive values
(A
3
, B
4
, A
5
).

Hypothesis H
5
: A prior career in the private sector enables public managers to better
work with performance budgeting and improves the perceived reform outcome.
14 out of 23 managers within the sample presented in this paper have worked in the
private sector. The influence of this factor for performance seems to be marginal. Data
show no case where the absence of a private sector career alone caused a negative or
indecisive performance outcome. Furthermore, only half of the negative and indecisive
perceived reform outcomes are associated with an absence of a prior private sector

46
career. And even five of nine cases without a prior private sector career have positive
outcomes. Within-case analysis and comparison of the pairs E
1
, D
1
, A
1
, C
1
/E
2
; E
3
/C
2
;
D
2
/E
4
and E
5
/D
5
of cases bring further insights as they differ only in the value of prior
private sector career and all have the same positive outcome. It shows that a prior
career in the private sector is not an issue for most managers (as E
1
, D
1
, A
1
, E3, D2, E
5

and D
5
). Only C
1
brought up his private sector experiences several times in the inter-
view to reason what and how he was doing now. Though without such an experience
E
2
regrets that he is not allowed to act with his department like a private company. C
2

(I am head of department to think entrepreneurial) and E
4
(like leading a private
company) also refer to some private sector ideal but without directly connecting it to
their current behavior. These insights make it a variable which can be of importance
for some managers, but it does not seem to be of predominating influence. Instead its
influence seems to depend on individual cognitive processes of reasoning.
Figure 7 summarizes these findings.

Figure 7: Causal mechanisms of performance budgeting (PB) as found in the
cases
-
OR
+
H2
Secondary level Basic level
Perceived
freedom
Parliamentary
behavior
Social services/
redistribution
Sovereign
functions
Education/
recreation/ sports
Business-like
activities
Type of department
with PB
+/-
+
+
H1
+++
(
+
)
H3
OR
H4
H5
+/?
width reflects
size of impact
Proper project
management
Prior career in
private sector
contextual factor
individual factor
+
+
+
Perceived
reform
outcome
M
a
r
k
e
t

o
r
i
e
n
t
a
t
i
o
n

47
5.6 Discussion
This paper intends to enlarge our understanding of factors that influence the outcome
of performance budgeting reforms from the perspective of public managers. It is im-
portant to mention that it suffers from two main limitations. First, perceived perfor-
mance is only a rough proxy of actual performance. However, as a central aim of the
reform is to enhance the function of management and manager's flexibility, manager's
perception of the reform outcome seems to be an acceptable operationalization.
Second, quantity and Swiss provenance of interviewees restrict generalizations of the
results to other contexts.
Keeping these general caveats in mind the cases analyzed in this paper suggest that
different contextual and individual factors are associated with the perceived outcome
of performance budgeting reforms. The impact of these factors, formalized as five va-
riables, seems to vary in size and direction. On the basic level, introduction and project
management are able to explain differences between cases to some extent. However, in
the data set discussed here, only a few managers complained about introduction or
project management. These results are surprising, as theoretical discussions in NPM
literature emphasize the likelihood of resistance to reforms and highlight the aspect of
change management (Carnevale 2003; Hill and Lynn 2009; Ormond and Lffler 1998;
Thomas and Davies 2005). But the small number of complaining managers restricted
the testing of this hypothesis almost completely to likely cases. This should be consi-
dered when looking at the results for Hypothesis 4.
A prior career in the private sector does not seem to necessarily mean that public man-
agers are more apt to generally perform better with performance budgeting. This may
be unexpected, as one would assume that those managers with prior work experiences
in the private sector would be more likely to work with management tools originating
from this professional sphere.
For the data set of this paper perceived freedom is the dominating variable on the basic
level, which heavily influences the reform outcome from the perspective of public
managers. This goes along with the prominent role of freedom to manage in respec-
tive NPM performance improvement concepts (The Treasury of New Zealand 1987;
OMB 2001; OECD 2008; Richardson 2000) as well as with criticism about its absence
in several US states (Moynihan 2006). Though not in the focus of the analysis of this

48
paper, more freedom to manage in addition provides learning possibilities for public
managers. Hence it may also promote capacity building of public sector organizations.
One example from my data is the early opening of an open air pool. Because of ex-
traordinary good weather, the interviewed responsible manager decided to start the
season three weeks earlier. Therefore, he had to defer other projects, deal with contrac-
tors and completely rearrange his own staff. The accomplishment this manager was
proud of weren't the additional revenues from early opening but rather the fact that he
had the managerial freedom to achieve this goal and provide a better service for his
customers.
Other than assumed, the findings also suggest a strong causal relationship between the
nature of tasks of a department and perceived freedom. The typological theory devel-
oped in this paper proposes that managers from agencies in the fields of business-like
tasks, education, recreation and sports tend to perceive more freedom and show a bet-
ter performance with performance budgeting than their colleagues from non-market
oriented agencies in the field of sovereign functions, social services or redistribution.
Thompson (1993) proposed the ease of monitoring outputs as a criterion for introduc-
ing outcome oriented budgeting. In this sense, he suggested it for businesslike public
sector organizations. On the contrary, for the cases discussed in this paper managers
from non-market oriented departments often claimed that they had too little influence
on input categories (case load) and that the way their duties and tasks were organized
was responsible for less freedom to manage. However, there is no significant variation
of the formal reform across the cases discussed in this paper. Especially within one
organization managers are subject to exactly the same rules.
But perception might matter too, as the following example from Moynihan (2008)
about reading performance measures shows: In a classroom experiment students from
two public policy schools not only interpreted the same PART data differently but also
proposed different subsequent management decisions, depending on their social and
cultural background. He also reports about different outcomes in the adoption of per-
formance management in US States and explains this with several factors including the
formal reform and the agency leadership motivation.
In addition, differences between different types of departments might be in part caused
by an unlike leadership motivation. According to Moynihan (2008) that are their be-

49
lieve in performance management and whether they see it as a waste of time or an op-
portunity. In a process of self-selection, market-oriented departments might attract
employees with a higher affinity to management in an economic sense creating the
best value for money by being efficient and effective. Vice versa, non-market oriented
departments would attract employees favoring correlating values (e.g. social justice),
and thus opposing the introduction of managerial concepts such as performance bud-
geting. This type of self-selection could amplify the different outcomes caused by dif-
ferent tasks. However, an in-depth investigation of these effects is beyond the scope of
this paper.
Finally, perceived freedom seems to be limited to a certain extent by intensive input-
based control on detailed budget positions by the parliament. All these findings go
along with Decis (Deci and Ryan 1985) self-determination theory mentioned earlier.
It highlights a low degree of heteronomy as crucial for intrinsic motivation and hence
supports the room to maneuver argument. This is in line with other psychology-based
research about participative budgeting which proposes that more freedom of action
will lead to larger improvements in organizational performance (Covaleski et al.
2003). If managers do not perceive this new freedom to manage, as frequently occurs
in the second type of department, they do not seem to be motivated by this instrument.
Barzelay and Thompson report about similar findings from the US Air Force Material
Command. Among other factors (1) the relative freedom to allocate funds among es-
tablished program accounts, (2) the reduction of change requests, and (3) the assign-
ment of responsibility for each business unit to a single individual are supposed to be
key for organizational performance (Barzelay and Thompson 2006).
This paper aims to enhance our understanding of causal mechanisms that influence the
success of performance budgeting reforms. I find that managers from non-market
oriented departments have more problems adopting performance budgeting. Their
tasks, along with regulations, federal and regional laws limit them to an extent that
makes it often very unlikely for them to perceive freedom. The analysis of the parlia-
ments role also renders interesting insights. It shows the specific challenges a non-
professional parliament faces when performance budgeting is introduced. Earlier re-
search discovered that legislators tend not to take extended notice of performance data
provided by the executive branch (Pollitt and Bouckaert 2004). The problems that
arise if public managers provide legislators with meaningless performance information

50
are also well-known: Legislators tend to stick to line-itemized budgets (Hatry 2006).
This paper discusses from the perspective of public managers how they deal with the
challenge of uncooperative and overchallenged legislators, and how they find their
workarounds.
In sum, the interviewees presented an image of new budgeting that did not correspond
uniformly to what NPM theory predicts. These findings are in line with other critical
research that questions the claim of performance budgeting to be a panacea for better
performance (Moynihan 2008; Radin 2006; Thompson 1993). For many contextual
and individual reasons, public managers responded differently to such reforms. This
paper suggests a causal model for this process.


51
6 More Room to Maneuver - Better Performance?
Public Managers' Interpretations and the Success of Per-
formance Budgeting

6.1 Introduction
The literature on new budgeting systems in the context of public sector reforms con-
centrates on the financial, technical and institutional aspects (Grizzle and Pettijohn
2002; Melkers and Willoughby 2005; van der Hoek 2005). This macro-level focus of
an organizations performance lacks an empirically grounded understanding of how
individuals create meaning of these reforms in a specific context. Little attention has
been paid to the experiences of public managers, despite a central aim of budgeting
reforms such as the introduction of performance budgeting is the motivation and em-
powerment of those professionals to improve an organizations performance. Most
reforms tend to follow a deterministic assumption of human behavior with a clear
cause-and-effect relationship in such a way that more room to maneuver leads to a bet-
ter performance (Scott 2001). Although there are evaluation results at the macro-level
suggesting that this assumption might be correct for at least some public organizations,
the data base is still very small and data often ambiguous (Pollitt and Bouckaert 2004;
Rieder and Lehmann 2002). These results evoked our interest to explore the reform at
the individual level. This paper aims to investigate how public managers interpret per-
formance budgeting and which factors influence their corresponding mental models.
Following an interpretive perspective we assume that facts are interpretable and that
managers use individual mental models to make sense out of them (Daft and Weick
1984).
The paper contributes to knowledge within two respects. Theoretically we question
deterministic behavioral assumptions of performance budgeting and propose an inter-
pretive perspective to understand the underlying sense-making processes which are
obstructed by a financial or technical view. Applying a model of change discussed by
Isabella (1990) we intend to empirically enlarge our understanding of performance
budgeting as a reform process in the public sector.

52
This research is positioned in the context of the Swiss public sector reforms. As in
many other countries the Swiss government launched New Public Management (NPM)
as a new governance and management paradigm (Schedler 2003). Proponents of NPM
reforms that took place around the globe since the late 1980s associate better perfor-
mance of public sector organizations with the implementation of management con-
cepts from the private sector (Hood 1995; Osborne and Gaebler 1992; Paterson 1988).
Among those ideas at the macro-level are greater cost-efficiency through market orien-
tation of public sector organizations, the implementation of performance measurement,
higher degrees of managerial freedom and accountability, customer orientation, reor-
ganization of business processes and budgeting reforms (John et al. 1994; Pollitt and
Bouckaert 2004).
One of the most prominent instruments to give public managers more freedom to man-
age is the results based or performance budgeting. In a move from ex ante to ex post
controls the attention shifts from inputs to outputs or even outcomes. Input controls
are relaxed and managers and/or organizations are given flexibility to improve perfor-
mance. In return they are held accountable for results measured in the form of outputs
and/or outcomes as the OECD describes the development on a global perspective
(2005, 58). In order to accomplish this aim, many legislative bodies replaced a line-
itemized budget with a budget, in which a net sum of expenses is devolved to the ad-
ministrative entities combined with performance objectives (Schedler 2003). These
consolidated appropriations might apply to a whole budget or be restricted to opera-
tional costs (OECD 2007).
Concepts and names differ from country to country. One-line budgeting (Hood
1991), devolved-budgeting (Scott 2001), 'lump-sum budgeting (Jones and Thomp-
son 1986; Rubin 2006) or performance informed budgeting (Joyce 2003) are all
common names. In the following we will use the term performance budgeting and
refer to its definition by the OECD. It defines performance budgeting broadly as a
form of budgeting that relates funds allocated to measurable results (OECD 2005b,
59).

53
6.2 An Interpretive Perspective on Performance Budgeting
Proponents of performance budgeting associate several positive aspects with the new
budgeting for public sector organizations. Overall, it is argued that budget formats and
procedures influence policy outcomes (Lynch and Lynch 1997) or in other terms, the
performance of the administration. This link, however, is not a direct one. In between
are, inter alia, the managers in public administration responsible for the implementa-
tion of policies and thus function as a kind of transmission belt. In this sense, they
are important to state performance, which gives reason for us to study their role in
budgeting. It has been argued that thinking in terms of costs might increase among
public servants after the introduction of performance budgeting (Boston, Pallot, and
Martin 1996; Rieder and Lehmann 2002). Additionally the flexibility and efficiency of
administrations will increase (Cothran 1993; Scott 2001) because they are able to allo-
cate resources corresponding to current needs rather than historical expectations
represented in the estimates (Boyle 1991; Thompson 1993). Furthermore, the motiva-
tion of employees should be improved by the increased responsibility (Osborne and
Gaebler 1992) expressed by slogans like let the managers manage! (Kettl 1997).
As Scott (2001) points out, the performance budgeting model can be identified as an
empowering model: By giving people the power to make decisions, individuals are
motivated and use their initiative and innovate, to the good of the organization.
From an interpretive perspective (Daft and Weick 1984) this reform is subject of
sense-making processes. Both senders and receivers of a reform message are expected
to interpret the message. Methodologically this approach follows a subjective ontolo-
gy, where reality is a product of individual awareness and construction (Hatch and
Cunliffe 2006).
Interpretivism grounds on the philosophies of hermeneutics (Palmer 1969). Hermeneu-
tics searches for the meaning of something through continual reference to its context
and phenomenology (Husserl 1931), a concept that favors an understanding of the
world derived from consciousness, experience and understanding (for a detailed intro-
duction to interpretivism we refer to Lindlof 1995). These assumptions have the im-
portant consequence that knowledge is always relative to the knower. Therefore, a
reform (such as the introduction of performance budgeting) has not necessarily the
same meaning for everyone. The meaning depends on the interpreter. Furthermore the

54
meaning is continuously mediated by communication. Because of this discourse,
which changes the meaning of the object, there is no final authority to scientific expla-
nation (Lindlof 1995). The interpretive perspective offers the possibility to explore and
compare how different managers create multiple meanings out of the same reform.

This paper analyzes the introduction of performance budgeting as a change process in
Swiss public administrations. It investigates how individuals interpret the reform. The
key questions we address are which possible factors have an impact on these sense-
making processes and how the resulting mental models influence an acceptance of per-
formance budgeting as a mayor public management reform.
6.3 Research Design
The empirical material in this paper draws upon a two-year research project that inves-
tigated the effects of performance budgeting on public sector managers. The participat-
ing interviewees all held management positions in the Swiss public sector on the mu-
nicipal or cantonal (i.e. regional) level. As a consequence of budget reforms they were
now responsible for a performance budget for their organization or department. Fur-
thermore, the participating managers had already been in office before the change of
the budgeting system, allowing them to compare the old and the new systems. With
approximately five years of experience in the new system they were still able to recall
the transition phase and the situation prior to that.
The involved public managers were invited to participate in a university research
project about performance budgeting. The interviews had a semi-structured character,
covering specific areas but also allowing the interviewees to outline their topics of in-
terest. It is the goal to see the research topic from the perspective of the interviewee,
and to understand how and why he or she comes to have this particular perspective
(King 1994, 14). Ideally, the interviewees should provide insights into their sense-
making processes in terms of frames (Weick 1995) or mental models (Rouse and
Morris 1986) as a construct of individuals to make sense out of the world around
them (Denzau and North 1994, 4).

55
Our paper analyses 23 interviews with male and female volunteers out of a set of 31
interviewees within the research project. Six interviews with performance measure-
ment comptrollers were excluded from the sample. The comptroller positions were
established during the reform. Hence, these new hires were not able to compare the
conditions before and after. In addition, we assumed that they were biased as the
reform created their jobs. Two additional interviews with a former manager and a dep-
uty manager were used for background information on one case.
Participating interviewees originated from five different jurisdictions. Though their
administrations differed all managers were exposed to similar performance budgeting
approaches with the same incentive schemes.
The interviews had a strong narrative character, allowing the interviewees to detail
their personal experiences with performance budgeting and the consequences it had for
them. Questions were asked to trigger the narrations (Mason 2003), covering topics
such as biography, perceived flexibility, degrees of freedom in the organization, self-
conception and evaluation of steering processes and new budgeting.
The interviews were carried out in the Swiss-German dialect, to enable the intervie-
wees to feel comfortable and to reduce distances between interviewers and intervie-
wees. Interviews lasted around an hour and a half, were tape-recorded and transcribed.
We tried to encourage truthful responses by assuring strict anonymity during the inter-
views (Marshall and Rossman 1995). In order to further improve soundness, all inter-
views were scrutinized by an additional researcher who had access to the transcripts.
Interviews were also supplemented by document research for triangulation purposes
(Forster 1994; Miles and Huberman 1994). This covered internal material about the
introduction of performance budgeting. These documents were carefully examined
checking the selected performance budgeting approach and with an emphasis on a
possible organizational story in order to identify potential outliers.
During subsequent data analyses interviews were coded (Miles and Huberman 1994).
For an initial clustering the following codes were used: 'opportunity' if managers had
positive expectations about the reform and 'threat' in the opposite case. Regarding their
evaluation of the reform the code 'success' was used if managers welcomed the reform
outcome, while 'failure' was chosen if they had a negative perception. Subsequent to

56
this coding process the interviewees were clustered in four groups: Enthusiasts who
welcomed the reform from the beginning and have a positive perception of its out-
come, disillusioned who started open-minded but got frustrated at some point, wor-
rywarts who criticized and defeated the reform from the beginning and converts
who became convinced of performance budgeting during day-to-day business. This
was followed by an in-depth content analysis of the interviews.
6.4 Findings
19 out of 23 public managers initially welcomed performance budgeting. Being asked
about what they remembered from the beginning of the reform they reported about an
optimistic atmosphere of departure. As one IT-Manager described his first feelings
during those days: I had only positive thoughts. I said to myself: yes, that brings a
return!. A colleague from the culture and sports department mentioned the degree of
managerial freedom. Others remembered the joy about the flexibility. A social ser-
vice manager reminded the stimulating discussions at the beginning which started a
fruitful exchange of thoughts within the whole organization. A financial manager
welcomed the new outcome orientation: that really makes a difference!. A public
forest ranger called it a chance to show the public and the politicians the administra-
tions performance for the common good. A pre-school education manager enjoyed
it from the beginning and with performance budgeting she can make a difference .
After the introduction phase, enthusiasts felt reassured on the basis of the experiences
they made during the project. Indeed, during our interviews, they described these ex-
periences enthusiastically. These managers believed that performance budgeting fits
my way of doing things, or that it opens big doors. They claimed to make use of
the financial ratios to show how we perform or to manage where we should staff
our prisoners to get the highest returns. Other managers indicated that they were us-
ing the respective performance information for managing their bureaucrats and would
regret if the reform was abandoned. They furthermore added that they would not, or
indeed had not changed their mind when challenged by any downsides of the reform.
The reporting duties which correspond to the enhanced managerial freedom were seen
as necessary or acceptable, as the following quote demonstrates: the use of per-
formance budgeting exceeds the corresponding red tape. Rather, they felt convinced

57
in their role as a leader and product manager. In sum performance budgeting stood
for the successful implementation of (private sector) management concepts in the ad-
ministration, which should have been introduced earlier.
However, at some point five out of 19 initially optimistic managers had challenging
experiences which changed their minds about performance budgeting. Now I am not
so convinced anymore started a disillusioned social service manager his critique. He
complained about the formalism and the escalating control structures which he
denoted as a backslide into old days. Other managers criticized the internal transfer
prices, which they argued were too high for leases and central services, their limited
managerial influence on figures used to evaluate them (our caseload which drives the
costs is beyond my control) or the fact that they were not enabled to hire and fire on
their own.
There were also public managers who refused the reform from the beginning. Four
managers did not see any use or improvements for their day-to-day business through
the reform. Negative attitudes varied from ignorance to a complete denial or refusal.
One museum manager remarked I said this before: I just didnt take any notice of per-
formance budgeting as a topic on my agenda or as a management tool. A colleague
from a social service department remembered the worries to change the accounting
procedures just after they had been implemented. At the time of the interview he still
did not believe in the idea of the reform as he saw no additional degree of managerial
freedom (we are pretty much under control of the cantonal government). Another
manager took the same line when he remarked that in his job, he just executed federal
law and had no additional degree of managerial freedom. But there were also fears
about the management concept itself as the following quote shows: the bad expe-
riences with NPM projects in other administrations led to skepticism in our organiza-
tion. Furthermore, this manager was skeptical that chancelleries like ours benefit
from performance budgeting in their business.
Three worrywarts out of this group evaluated the reform outcome negatively. A mu-
seum manager didnt get any significant degree of managerial freedom and com-
plained about the increased complexity of coordination. Red tape was a big issue other
managers criticized as well (we are over-administered [] its just an additional
level of bureaucracy is there any managerial freedom left on the community level?).

58
Some managers felt betrayed by the high-reaching promises of the reformers who did
not mention the downsides during the introduction phase. One manager compared the
additional efforts for performance budgeting with his returns: too much bureaucracy
since I have too few advantages from the project.
There was also one convert who finally became convinced about the reform. He admit-
ted that the training and the pragmatic approach of how to handle performance bud-
geting changed his mind. At the time of the interview he believed that efficiency has
improved considerably. He continued that management by objectives and results has
led to significant improvements even if its sometimes hard to find the adequate
measures.
Figure 8 summarizes the distribution of predispositions and evaluations of the reform
in our sample in a matrix.

Figure 8: Different types of managers based on their interpretations of
performance budgeting
II Disillusioned I Enthusiasts
III Worrywarts IV Converts
(5) (14)
(3) (1)
success failure
opportunity
threat
Predisposition towards PB
P
e
r
c
e
p
t
i
o
n

o
f

r
e
f
o
r
m

o
u
t
c
o
m
e

59

This leads to the question why different managers evaluated the same management
concept with the same incentive setting differently. In the following we will focus our
analysis on the interpretations and sense-makings of public managers. Given the fact
that all managers were exposed to the same type of reform we believe that to learn
more about the managers believe systems is the key to understand the success or fail-
ure of the reform itself.
6.5 Performance Budgeting as a Change Process of Individual Interpreta-
tions
In the following we will use Isabella's (1990) approach to conceptualize change as a
process of interpretation of organizational events. Her work grounds on Lewin (1947)
who characterized change as a process of unfreezing, moving and freezing. His ideas
have been repeatedly adopted since then (Armenakis and Bedeian 1999).
With her model Isabella suggests that manager's interpretations of change unfolds in
four stages (see Figure 9). Anticipation marks the beginning of the process when in-
dividuals have to deal with limited information and are confronted with rumors and
scattered information. Using a conventional frame of reference or mental model during
a phase of confirmation events are compared to past similar events. After the event
occurred, managers compare the conditions before and after. This stage of culmina-
tion is associated with questioning of former behaviors and rules. They puzzle over
symbolic meanings and how change will affect their work and relationships. The final
evaluation of the consequences of a change constitutes the last stage of aftermath
where winners and losers are identified.
In Isabellas model individuals pass through a cognitive transition (1990, 34) during
change where they move from one interpretive stage to another. She argues that man-
agers have constantly changing construed realities as new events evolve. In a change
process three triggers push them through the four stages: first, the announcement that
an event will definitely happen (move from anticipation to confirmation), second, its
actual occurrence (move from confirmation to culmination) and third, derivative
events or the passage of time (move from culmination to aftermath). Individuals per-

60
sonalize and interpret these triggers in questions like what will this event mean to
me?, what will the event mean to my work? and what has the event meant
overall?. This kind of personalization of events forces subjects to move on to the next
stages.
In this sense, resistance to change might alternatively be viewed, not as obstacles to
overcome, but as inherent elements to cognitive transition occurring during change
(Isabella 1990, 34). Resistance evolves as a result of the personalization of an event
when individuals anticipate possible loss due to the change. Over time they will move
forward in their interpretations of an event and finally accept it. Personalization will
help them to finally come to terms with the change.

Figure 9: Isabella's model of evolving interpretations of events in change
processes
(adaptedfromIsabella1990)
Process of
Change
(Lewin)
Interpretive
Trigger
Personalization
of Trigger
Interpretive
Stage
Construed
Reality
Interpretive
Task
Predominant
Frame of
Reference
UNFREEZING
Announcement that
event is pending
"What will event
mean to me?"
MOVING
Events
occurs
"What will event
mean to my work?"
FREEZING
Derivative event;
passage of time
"What has event
meant overall?"
ANTICIPATION
Rumors, scattered
information and
observations
Assembly
In-progress
CONFIRMATION
Conventional
explanations;
references to past
similar events
Standardization
Conventional
CULMINATION
Double exposures;
symbols
Reconstruction
Amended
AFTERMATH
Consequences;
strength and
weaknesses;
winners and losers
Evaluation
Evaluative

61
Table 3 illustrates how our interviewees interpret the triggers that impel them to move
through different stages in their interpretations of performance budgeting. In addition,
Table 3 unveils differing evaluations of the reform. Enthusiasts, disillusioned,
worrywarts and converts interpret the same triggers differently.
The interpretation of enthusiasts is excitement about the reform. It seems they had
been waiting for a long time for an innovation like this and want the new budgeting
system to get started as soon as possible. The shift to confirmation unleashes their
energy:
I had only positive thoughts. I had this feeling and said to myself: yes, that
brings a return!
The group of the disillusioned managers initially shows very similar positive reactions.
They expect a lot and are full of hope:
At the beginning I perceived an atmosphere of departure where new things be-
came possible. I thought now we are able to escape the sharp monetary restric-
tions.
Worrywarts are totally different in the way they perceive performance budgeting. The
shift to confirmation is associated with negative expectations. They believe that the
reform does not fit their specific needs and often consider it as worthless:
I expected more: better opportunities and more transparency.
The convert in our set of interviews did not expect a positive outcome too, when per-
formance budgeting started. In his judgment he is obviously influenced by negative
rumors:
The bad experiences with NPM projects in other administrations led to skepticism
in our organization.
During the shift to culmination managers personalize the event as they begin to work
with the new budgeting system and make their day-to-day experiences. They reason
how their job will be affected. Enthusiasts feel vindicated as their expectations are met
working with the new budgeting:
The use of performance budgeting exceeds the corresponding red tape.

62

Paper III: Public Managers' Interpretations and the Success oI PerIormance Budgeting

63

Table 3: Public managers' interpretations oI triggering
events during perIormance budgeting reIorm

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64
For the group of disillusioned the first experiences with new budgeting are negative.
They do not feel vindicated. The occurrence is not perceived as a trigger to move on
and accept change. Instead, they express second thoughts and start questioning the
reform:
I dont agree that weve got a lot of managerial freedom. But what I like about the
new system is the link between our financial figures and our mandate.
Worrywarts show an even sharper reaction. Their reservations came true. In their daily
business they try to ignore the reform, complain about it and neglect potentially posi-
tive aspects. In contradiction to enthusiasts, worrywarts believe the corresponding re-
porting regulations exceed the gains from the reform:
For me its just red tape, because I get only few benefits out of it.
However, the experiences of the convert are quite different. He enters the process of
change as he starts questioning his initial rejection about performance budgeting. The
convert illustrates the cognitive redefinition in the sense of Isabellas model when he
begins to change his mind:
After a while, skepticism disappeared because we had intensive training including
staff and management.
During the last shift to aftermath individuals come to their final evaluation of the
reform. As indicated before in Figure 9 the four types have diverse perceptions of its
outcome. The following examples of personalization illustrate these different interpre-
tations and deliver insights in how they come to their judgments.
Enthusiasts look back at a successful invention:
I am convinced of it and would regret if the reform was abandoned.
On the other hand disillusioned express their negative experiences which make them
change their minds:
And then you ask yourself: what's the benefit? Not only for me but also for the
others? Thats when enthusiasm vanished and I became a vehement brakeman for
NPM.

65
Worrywarts emphasize their hostile position as they conclude and realize that their
personal goals or moral standards differ from the concept of performance budgeting.
In our interviews they often added long or complex justifications for their position:
With performance budgeting politicians lose some sort of awareness. Nowadays
no one notices the fact that the expenses for school dental service increase and
that young parents dont even think about looking at the teeth of their kids. []
Thats a real cost driver in the long run! And I believe this insight is important.
But politicians dont understand. Thats where Ive got the feeling politics became
functionalized.
In his final evaluation of the reform the convert expresses the change of his mind with
the daily experience of the reform. In his opinion, change agents did a good job and he
is convinced of the advantages of performance budgeting:
I think our administration did a good job in transforming the theoretical ideas of
performance budgeting into a down-to-earth approach. Thus, they didnt imple-
ment all crazy ideas of NPM. Instead, they focused on the practical things.

The persistence some managers show in their evaluation of the reform is striking. They
do not pass different interpretive stages during the change process. Instead, they seem
to stick to their initial interpretations. These managers report about formative past ex-
periences which shaped their mental models. As the reform established they do not
seem to have questioned these models as the following two examples illustrate. First
there is Thomas head of the social services department of a medium size town. For
18 years, this experienced public manager has been managing his agency. But original-
ly, he had been trained as a management assistant in the private sector. However, later
he realized that he would rather stand up for other peoples situations than sell instant
soups. He views himself as an active public servant who is driven by his wish to
look after those people who might not be able to keep up, those who are handicapped
somehow; there are so many different kinds I just took more interest in that. He
qualified for this occupational change by completing complementary training in the
social sector and supervision.
Thomas thinks of himself as a responsible manager who makes sure that the work en-
vironment suits the people, if necessary by making changes to it without explicit per-

66
mission. He puts emphasis on optimizing processes or even structures so that they
work and result in a accommodating environment for the employees. To him, indivi-
duality plays an important role; he winks both eyes gleefully when talking about his
perfidious motive that with his job he outsmarts the conformity of society []
every once in a while.
His mental model is shaped by formative experiences that made him leave the private
sector. He entered social services to help the people. From his perspective performance
budgeting which goes along with outcome orientation and performance measurement
features vocabulary and a work style which he has tried to leave behind. Hence, he
refuses performance budgeting as a threatening intruder in his social world.
At the other end of the scale there is Ronny, a public real estate manager. He also
worked for companies before but entered the public sector with a very different mis-
sion. Ronny enjoys the pioneer-role in which the NPM reforms in his town have put
him. As one of the first departments he has launched the reorganization of the budget-
ing system. He experienced the following phase as awakening. Ronny is very favor-
able of a better outcome orientation thanks to the implementation of the performance
budgeting. He says that today he can show what we perform and make use of key
controlling figures such as net and gross returns. He clearly distances himself from the
former input oriented management paradigm that pleaded for an obligatory accom-
plishment of tasks in terms of work to rule. According to him, civil servants have
become entrepreneurs.
In contradiction to Thomas, Ronny's frame of reference is dominated by a high per-
formance culture. Performance budgeting is a welcome innovation and symbolizes the
possibility to transform the public sector by unleashing hidden entrepreneurial forces.
He favors individualism and argues that competition and incentives lead to the best
individual performance and outcomes. Ronny seems to live in a world with an eco-
nomic paradigm. He claims to have never experienced any defeats and believes those
colleagues who are suffering are just not working hard enough.
6.6 Discussion
Our sample of public managers covered four types of reform interpretations. Applying
Isabella's model of change (1990) we investigated public managers' interpretations of

67
triggers. These triggers should guide personalization of the reform and impel individu-
als to move from one interpretive stage to another. However, persisting and deviant
mental models do not necessarily seem to converge. Managers interpret key events in
the change process differently, which causes differing final evaluations. There is only
one convert who could be convinced of performance budgeting in retrospect. But there
are three worrywarts who do not accept change from the beginning and five disillu-
sioned who reject performance budgeting after getting frustrated during the project.
Instead of moving towards acceptance these managers went the opposite direction.
From a practical perspective this is a challenging result for the public sector. Due to
well-established employment protection in the Swiss public sector, reform opponents
have a strong position in the power game. Maybe that is the missing incentive to push
them to question persisting mental models. Instead of dismissing their opponents
change agents have to cope with them.
Due to their relative strong position in the public sector opponents can even try to ig-
nore or sabotage the reform ("I said this before: I just didnt take any notice of perfor-
mance budgeting as a topic on my agenda or as a management tool" as one museum
manager has put it). This is why the management of interpretations becomes crucial
for organizational leaders.
From an interpretive perspective, facts do not speak for themselves. Instead, organiza-
tional change can be conceptualized as a fluid, social process of interpretations (Weick
1993) where public managers personalize the same event with different mental models
(Ford and Baucus 1987). Moynihan (2008) demonstrated this for performance meas-
ures. In a classroom experiment students from two public policy schools not only in-
terpreted the same PART data differently but also proposed different subsequent man-
agement decisions, depending on their social and cultural background. In this respect
the same reform introduction of performance budgeting provokes different reac-
tions, too. In order to succeed, it is of crucial importance that actions of politicians and
top-level administrators are interpreted positively during the phase of culmination.
These leaders are responsible to provide meaningful interpretations for their fellows
(Daft and Weick 1984). They have to arrange the right context and enlarge an organi-
zation's capacity for novel interpretations (Smircich and Stubbart 1985).

68
In addition, our interviews show that negative rumors can play an important role in
establishing negative interpretations of performance budgeting. Hence, the adding of
people with positive experiences (success stories) may help to change mental models
of the skeptical ones.
When it comes to expanding the understanding of change Reger, Mullane et al. (1994)
differentiate two possible mental barriers which may cause resistance. If subjects fail
to comprehend the meaning of the change they generate passive resistance. This is
what the quote from the museum manager shows who ignored the reform. She does
not oppose the idea in general but is not convinced that performance budgeting is of
any use in executing her job. On the other hand, subjects may perceive change as in-
consistent with their mental models which evokes active resistance. An example in our
data would be Thomas, the social service manager who once sold instant soups but
now enjoys to "stand up for other peoples situations." He sees performance budgeting
as some sort of "economization" and as a cutting back of support for those who need it
most.
To overcome passive resistance like in the case with the museum manager, Reger,
Mullane et al. (1994) propose to better train managers to fully comprehend change.
Leaders should provide necessary links to the organizational identity to enable subor-
dinates to understand the deeper meaning of a reform. As Hales (1999) points out,
every effort to decentralize responsibility has to be accompanied by forms of mana-
gerial training which impart the skills and knowledge to handle the newly gained room
to maneuver. In combination with performance measurement, greater responsibility
also enlarges managerial risk, a risk that is more easily taken by people with an affinity
to management. After training a reform is more likely to fit managers' mental models
of their organization.
Active resistance is harder to overcome since it directly affects valued elements of cur-
rent organizational identity. Subjects think they understand the reform very well but
perceive results as disadvantageous. Within their mental models the organization
moves into the wrong direction. Cognitive opposition provokes strong negative emo-
tional responses as anger and fear (Reger et al. 1994). Several years of reframing ef-
forts might be needed to develop new mental models.

69
But for the public sector diversity is not only a quality of the mental models of the ad-
ministrators but also of the political leaders. Discourses on budgeting issues are not
only determined by economic rationalities but also by political (Wildavsky 1966). Like
in several other countries Swiss governments are usually coalitions of different parties
with no top down hierarchies. Party leaders frequently underline their deviant positions
and assert their claims. The public political discourse may vary widely from internal
administrative realities and needs. In the messages to their fellows political leaders
cannot focus on winning hearts and minds for change as their colleagues within the
private sector may. Instead, they always have to consider the political implications of
communication. Hence, public managers do not necessarily get specific goals (La-
tham, Borgogni, and Petitta 2008) and meaningful interpretations they need to under-
stand the necessity for change.
This is the case too for the five jurisdictions that constitute our sample. Performance
budgeting reforms were initiated by politicians, not by the public managers. The offi-
cial discourse of legislators and politicians was voter-oriented: improving governance,
performance management and efficiency of public services in other words focused
on control. Only one jurisdiction initiated the reform with an explicit motivation for
organizational development ("review and optimize established management struc-
tures"). In addition, all jurisdictions established the position of a NPM comptroller
who is responsible to review the administration's performance. From the perspective of
the interviewed public managers this was a striking experience. They were exposed to
new management and governance structures which targeted goals which had not nec-
essarily a lot to do with their daily businesses. The accompanying discourse was polit-
ical (voter-oriented, not organizational-development-oriented). This may be an addi-
tional explanation of the sharply differing mental models and some managers' prob-
lems to adopt.
6.7 Conclusions
Performance budgeting has been criticized from different perspectives, mostly tech-
nical. In early qualitative studies, Meltsner and Wildavsky (1970) found line-itemized
budgets easier to administer and that they allow for better control of spending than
performance budgets. Carlin and Guthrie (2003) point out that politicians in Victoria

70
(Australia) cannot rely on long-term comparability of data in performance budgets and
thus develop skepticism against them. Evaluations in Switzerland (Rieder and Leh-
mann 2002) showed that politicians had problems to refrain from intervening in de-
tailed budget lines (inputs). A survey in the US discovered differing perceptions
among budget officers from executive and legislative branches (Melkers and Wil-
loughby 2001). None of these studies, however, focused on public managers and their
perceptions of the budget reforms.
This paper analyzed the introduction of performance budgeting as a change process in
public administrations. We investigated how individuals interpret the reform. Our find-
ings suggest that this process has multiple outcomes depending on individual interpre-
tations of the reform. As du Gay argues (1996) NPM reforms directly affect the identi-
ty of public servants and their organizations. Traditionally shaped by the 'rule of law'
they are now faced with an entrepreneurial paradigm (Lynn 2009). Such boundary
crossing undermines a public service ethos of probity and reliability in the treatment
of cases. Max Weber (1976) described these characteristics of bureaucracy as legale
Herrschaft (legal domination) almost a century ago.
In contrast to this tradition performance budgeting values the function of management.
It originated in the ideology of managerialism with which many public management
reforms were started in the 1980s and 1990s (Pollitt 1993). Managerialism stressed a
crucial role of public managers for the success of the administration. Managers are
seen as heroes. As Pollitt (1993) points out, it privileges certain groups and margina-
lizes or negatively values others.
We were able to match our interviewees to four types of managers depending on pre-
disposition and evaluation of the reform outcome. Our data indicates that there is no
clear cause-and-effect relationship between the introduction of performance budgeting,
a greater room to maneuver and greater motivation of managers to achieve output ob-
jectives.
This questions the assumptions of the managerialist ideology. According to manage-
rialism public managers would in any case use their freedom to manage for the
sake of better results. Our data suggest that this may be true for executive administra-
tors with an affinity to management in its economic sense: creating the best value for
money by being efficient and effective. There is, however, a significant share of ex-

71
ecutives with personal or interactive predispositions that do not value the economic
rationale, with the consequence that they do not prioritize efficiency. If public manag-
ers are really the transmission belt between a (performance) budget with output objec-
tives and the performance of the administration, the heterogeneity of overall reform
results observed in most countries could be explained by the heterogeneity of its inter-
pretations by public managers. Maybe in the long run signaling effects will support
change. A reform favoring an economic perspective like performance budgeting might
cause self-selection processes that attract public managers with an affinity to economic
incentives.
In this paper we intend to enlarge our understanding of factors that influence public
managers' interpretations and acceptance of performance budgeting. Quantity and
Swiss provenance of interviewees restrict generalizations of our results to other con-
texts. Furthermore, despite careful data analysis researchers' access to managers' men-
tal models is limited (Rouse and Morris 1986). Keeping these general caveats in mind
we were able to show that personal experiences and managers' biographies have an
impact on the mental models they use to interpret the budgeting reform. Some manag-
ers report on past formative experiences which tend to interfere with other arguments
and have a persisting effect on their interpretations. In these cases the given mental
models are that dominant that the involved individuals do not act according to the in-
herently deterministic assumptions of NPM theories. According to the interpretive
perspective, modifications of those meanings occur in an iterative communication
process when individuals interpret institutional or expressive symbols (Hatch and Cun-
liffe 2006). The specific institutional context in the European public sector with the
absences of a hire and fire culture causes a low pressure to change for public manag-
ers, too. Further research on these effects may be worthwhile for other countries as
well. A recent discussion in the Public Administration Review highlighted tensions
between powerful career bureaucrats and political appointees (Bauer 2010; O'Leary
2010; Sleight 2010; Warm 2010).
As strong mental models can cause a powerful resistance to change, performance bud-
geting is not a panacea for a better performance. Instead, leaders might consider the
context when they select departments for the application of performance budgeting or
search for ways to influence the mental models of public managers. An 'interpretive
capacity building' that provides additional interpretations for public managers might be

72
a possible strategy to encounter resistance. Previous research on change discussed ear-
lier in this paper proposes 'how-to-deal-with' training and the involvement of reform
champions and success stories to enlarge the interpretive capacity. However, the polit-
ical and the administrative discourse on reforms is determined by different rationali-
ties. This challenges the idea that politicians might be able to control reforms in the
public sector in a narrow sense. Their reform activities are of symbolic nature, include
connotative meanings beyond their control and do not necessarily provide meaningful
interpretations to the administration.
Reforming the public sector is not only about design it's about meaning, too!

Discussion and Conclusions

73
7 Discussion and Conclusions
The last chapter of this dissertation starts with a reflection upon the research design
and a summary of the findings of the three papers. Then I will briefly outline some
implications of my results. Last but not least, this chapter aims to discuss the findings
in the context of the extended literature.
7.1 Reflections on the Quality and Validity of the Research Design
This dissertation consists of one theoretical paper and two empirical papers. The re-
search designs have been introduced and discussed in each paper. This section briefly
evaluates the quality of the designs in answering the research questions. The literature
regarding research design evaluation discusses criteria including objectivity, reliability
and validity (Kerlinger 2000; Rost 1996).
Objectivity stands for the degree of independence of the findings from influences out-
side the research subject. This is especially relevant for the interviews covered by pa-
pers II and III, where the interviewer and interviewee are part of an interaction. For the
literature review of paper I, objectivity concerns are more about the interpretation of
the literature, as published texts are out of the influence of the researcher.
Reliability of a research design describes the accuracy of measurement. A set of mea-
surements should be consistent across multiple (follow-up) studies which are con-
ducted under the same circumstances (Kerlinger 2000). For example, a scale as an in-
strument for weighing is considered reliable if repeated measures of the same object
show the same weight.
Validity expresses the ability of a method to measure what it is supposed to be measur-
ing (Stier 1996). Validity can be differentiated in internal and external validity. Inter-
nal validity reflects the data of a study: Do the results make sense in light of the theo-
ries affected? Are they credible? On the other hand, external validity is about the com-
parability of data from the study of interest with the results of studies with similar re-
search questions. It is about the fit and generalizability of results (Kennedy 1979).
The nature of this dissertation's first paper differs from that of the last two papers. As a
theoretical paper, it reflects multiple studies by different authors. A problem of objec-

74
tivity might arise if the author of this dissertation would have presented biased ideas in
the paper. I tried to deal with this problem by focusing on literature from well-
established journals with rigorous review processes. I attempted to assure reliability by
carefully analyzing the literature. Furthermore, I presented the paper at two confe-
rences before it was subject to a double-blind two-stage review process. It is in the
nature of a theoretical paper that all sources are open to readers (and reviewers), enabl-
ing them to control for reliability. The internal validity of the paper seems to be ac-
ceptable, in that the underlying theories originated from high-level sources, though
some may suffer from a low level of maturity for the time being. As the paper lacks an
empirical test, it is hard to judge external validity.
The criteria of objectivity, reliability and validity present a challenge for the social
sciences, and qualitative research in particular (Mayring 2003). Social science research
methods differ in nature from laboratory experiments in the natural sciences. In the
following, I will use an adoption for qualitative studies of the three criteria proposed
by Miles and Huberman (1994) to discuss the quality of the research methods of the
last two papers.
For the first criterion of objectivity, the focus is on the interviewer. To what extent are
the interviews influenced by an unacknowledged researcher bias? Conclusions should
be drawn based on the subjects and conditions of the inquiry rather than on the motiva-
tions and interests of the researcher (Lincoln and Guba 1985). To address this issue, all
interviews of these papers were tape-recorded and accompanied by a second inter-
viewer who did not co-author the papers. After the interviews, we openly discussed
potential biases and reflected upon the interview processes. In addition, the second
interviewers served as excellent partners to discuss the interviews' findings, as they
could speak independently from their own publication ambitions.
The second criterion of reliability is about quality control and thoroughness in the qua-
litative research process (LeCompte, Preissle, and Tesch 1993; Miles and Huberman
1994). Besides the discussions about the interview data with my accompanying inter-
viewers, I tried to improve reliability in discussions about the research process with
my academic advisors and peers from the universities of St. Gallen, Potsdam and
Georgetown. In addition, I presented earlier versions of the papers at different confe-

75
rences to further advance my methodological approach through peer feedback (see
Table 4).
The topic of internal validity includes credibility and authenticity of results in the eyes
of the subjects studied as well as in those of the readers. One can refer to this as natu-
ral validity, in the sense that the facts studied are genuine and not modified by the re-
searcher (Miles and Huberman 1994). By quoting managers in both papers, I tried to
provide readers of the papers with an authentic image of the data. However, both re-
view processes led to some condensations of the quotations. Hence, I was constrained
to present a "thick description" (Geertz 1973) in the journal-sized papers to a full ex-
tent. This certainly improves the papers' readability and facilitates access, but also im-
plies some threats on internal validity.
The last criterion of external validity describes the transferability of conclusions from
the study of interest to other contexts (Lincoln and Guba 1985). It refers to generaliza-
tions beyond the group studied (Maxwell 2005). Maxwell argues that the generaliza-
tion of findings from a rather small number of cases in qualitative research requires
"the development of a theory that can be extended to other cases" (2005, 116). The
second paper aims to develop a theory like that. That paper discussed how typologies
in combination with process tracing might be used to detect causal mechanisms which
provide some ground for mid-range theorizing beyond the cases studied. As the term
'mid' indicates, these theories are limited in scope and range. But the data of the paper
suggests that jurisdictions does not seem to have a dominating influence on the reform
outcome (see Table 2). This proposes a transferability of the results to other compara-
ble Swiss administrations. The transferability to other countries would probably be
limited by differences in the politico-administrative system and environmental factors
(Pollitt and Bouckaert 2004).
These methodological issues are rather complicated with respect to the last paper. It
has been mentioned before that paper three follows an interpretive perspective. This
assumes subjectivism on the ontological level (reality is a product of individual aware-
ness and construction) and an interpretive epistemology (all knowledge is relative to
the knower) (Hatch and Cunliffe 2006). If we think about the above-cited example of
the scale; from an interpretive perspective, the weight results from individual mental
models. However, I would argue that there are still good reasons to aim to be as close

76
as possible to quality criteria discussed above when working with interview data (the
results of sense-making).
7.2 Summary of the Results
The first paper investigated the theoretical foundations of performance-related pay in
the public sector with respect to recent neuroeconomic findings. Neuroeconomics ap-
plies neuroscientific imaging techniques to investigate human decision-making in eco-
nomic situations. The paper highlights three areas of neuroeconomic research with
direct impact on performance-related pay. First, it discusses hyperbolic discounts
which cause non-rational intertemporal choices. In other words, managers affected by
these discounts are not able to compute decisions with consequences in multiple time
periods correctly. Hence, they do not react rationally in the economic sense of an in-
centive. Second, fairness concerns of some managers make the standard incentive con-
tract a less preferable option. Instead, bonus contracts with a high level of discretion
for principals and with a high share of performance-related pay lead to better results.
Finally, neuroeconomic research is able to substantiate so-called 'altruistic punish-
ments' where group members punish a peer on their own cost. This would not be ra-
tional in the traditional economic sense but it is a well-known phenomenon within
groups. Organizations can make use of this effect by reducing free riding with peer
pressure. Considering some peculiarities of the public sector, the first paper discusses
possible difficulties which may be associated with these new ideas.
The second paper analyzes cases of success and failure in the application of perfor-
mance budgeting in public administrations from the perspective of public managers. It
proposes a causal model consisting of the following six variables: type of department,
parliamentary behavior, perceived freedom, proper project management and prior ca-
reer in the private sector, with perceived reform outcome as the dependent variable. In
a test with 23 cases, the variables had a different impact in size and direction. First,
managers from departments with a high level of market orientation were more likely to
perceive freedom. Second, perceived freedom had an overall dominating influence on
the perceived reform outcome. Third, the impact of parliamentary behavior does not
seem to be binary in nature. Instead, parliaments which partially resist outcome orien-
tation do not constrain every public manager in his or her perceived freedom. Fourth,

77
existing experiences with performance budgeting from a prior career in the private
sector could not be associated with positive effects on reform outcome. Fifth, the in-
fluence of proper project management remains unclear due to data limitations. The
results contribute to the discussion about success factors for performance budgeting in
public administrations in specific contexts (typologies).
The focus of the last paper shifts to public managers and their interpretations of per-
formance budgeting as a public management reform. Key questions addressed in the
paper are: which possible factors have an impact on these sense-making processes, and
how the resulting mental models influence the level of acceptance of performance
budgeting. The paper proposes a clustering of four types of managers based on their
interpretations: Enthusiasts who welcomed the reform from the beginning and have a
positive perception of its outcome, disillusioned who started open-minded but be-
came frustrated at some point, worrywarts who criticized and defeated the reform
from the beginning and converts who became convinced of performance budgeting
during day-to-day business. The findings suggest that formative personal experiences
strongly influence public managers' interpretations of the reform. Sometimes the cor-
responding mental models resist change and prevent an acceptance of the reform
among public managers.
7.3 Contribution and Implications
As argued in each of the three papers, this dissertation supports earlier findings that
managers differ in their adoption of material and non-material incentives such as per-
formance-related pay and performance budgeting. The discussion of fundamental re-
search on neuroeconomics in the first paper led to several important theoretical impli-
cations for the field of public management. These findings challenge still frequently
cited traditional theoretical foundations of performance-related pay in NPM with their
underlying 'neoclassical' economic paradigm (Aucoin 1990; Gruening 2001; Niskanen
1971). In a so called 'non-profit' sector, the predominant traditional (economic) theo-
ries assume 'rational' actors who always intend to maximize their own profit under
every circumstance. The paper proposes the integration of neuroeconomic findings
which favor more 'human-like' actors into public management theory and to revise es-
tablished performance-related pay schemes. These new types of contracts would better

78
fit administrations which are shaped by actors with multiple cognitive predispositions
and extrinsic but also intrinsic motivations.
The second and third paper contribute to the theoretical discussion about performance
budgeting. The causal model which is proposed and discussed in paper II highlights
the importance of freedom to manage as a core requirement for better performance.
This would confirm earlier arguments by reform proponents (The Treasury of New
Zealand 1987; OMB 2001; Gore 1994; Osborne and Gaebler 1992) as well as by pub-
lic management theorists (OECD 2005b; John et al. 1994; Richardson 2000). Howev-
er, the findings of paper II indicate that public managers perceive freedom to manage
differently across multiple agencies. Interestingly, all involved departments shared the
same type of performance budgeting reform. Hence, such a reform per se is not neces-
sarily sufficient for managers to perceive freedom to manage. Rather, the behavior of
the parliament, and especially the involved departments' level of market orientation,
seem to provide a meaningful explanation for diverse reform outcomes. This is an in-
teresting insight for performance budgeting theory which is in line with other critical
research that stresses the argument of context-dependency of performance budgeting
reforms (Moynihan 2008; Radin 2006; Thompson 1993). Consequently, reformers
should consider these contextual factors first, before attempting to introduce a univer-
sal concept to all kinds of departments.
With its interpretive perspective, the third paper adds further theoretical implications.
Not only structural factors, but also individual sense-making processes shape manag-
ers' perceptions of performance budgeting reforms. The paper concludes that specific
factors in the public sector, such as well-established employment protection or differ-
ing rationalities, particularly hamper the convergence of mental models among public
managers as well as between public managers and politicians. The results challenge
the ideology of managerialism, with its economic-based, deterministic model of beha-
vior. In this way, the results suggest the need to emphasize meaning in addition to the
reform's design issues.

79
7.4 Results in the Context of all Papers, the Political and Administrative
Systems and the Environment
In an attempt to integrate the research of this dissertation Figure 10 illustrates the con-
nectivity of some major findings and puts them in the context of environmental condi-
tions and the extended literature. The causal model of the second paper (Figure 7)
makes up the core of the figure. It assumes a causal relationship between a set of six
variables with a dominating influence of 'type of department' on 'perceived freedom'
and with 'perceived freedom' as an intermediate variable on 'perceived reform out-
come' as dependent variable.
However, causal mechanisms may not be the only way to explain diverse reform out-
comes. From the interpretive perspective of paper III, managers' perceptions of the
variables are subject to sense-making processes (left side of Figure 10). This might be
especially true for perceived freedom and perceived reform outcome. Managers interp-
ret the same reform message differently and sometimes change their minds during
adoption, but not necessarily in the preferred direction of the reform promoters (e.g.
"disillusioned"). Change management literature explains these underlying mental bar-
riers by either a failure to comprehend a reform or by refusal of the core ideas of a
reform (Reger et al. 1994).
Comparing both papers, each provides reasonable explanations for diverse reform out-
comes though from different perspectives. While paper II focuses on factors and
causal mechanisms (e.g. different tasks and business processes in different types of
departments), paper III emphasizes individual interpretations of the reform (different
sense-making processes in different contexts).
With respect to resistance, paper I provides interesting further insights on human in-
formation processing. Non-compliant behavior towards incentives would be labeled
"irrational" in the categories of traditional economic paradigms. But it is explicable
with a person's "hardware" his/her brain. Dopamine-infused rewarding circuits trig-
ger some people to favor altruistic solutions and other to neglect long-term perspec-
tives. This would not only explain the frequent failure of performance-related pay but
also provides fresh perspectives on the sense-making processes of performance bud-
geting reforms. For other managers, hyperbolic discounts may inhibit a realistic as-
sessment of performance information and goals. Since performance budgeting consists

80

Figure 10: Causal model of performance budgeting in the context of other find-
ings of this dissertation and the extended literature.

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M a r k e t o r i e n t a t i o n

81
of outcome orientation and goals, a lack of ability to compute goals correctly would
most likely cause a mental barrier. In this sense, neuroeconomics offers some reasona-
ble explanations for the persistence of those concerns some social service managers
emphasized when they justified their rejection of performance budgeting.
These arguments are consistent with goal-setting theory, which states that the effec-
tiveness of goal setting on performance is moderated by commitment, ability and
feedback (Latham, Borgogni, and Petitta 2008). A manager who perceives a goal as
unfair would hence show no commitment. A lack in the individual cognitive capacity
to compute a strategy and goal attainment would also limit effectiveness of goals. Fi-
nally, performance information must provide useful feedback on performance deci-
sions that enable managers to assess progress and adjust their strategies, if necessary.
The impact of the political and administrative systems on performance budgeting re-
forms (right side of Figure 10) were only very briefly discussed in the papers, as the
data of my research originated from interviews with public managers. However, both
aspects are frequently discussed subjects in the rich stream of literature on perfor-
mance budgeting.
The performance doctrine which has been mentioned earlier assumes that performance
information effect a rationalization of political decisions (Moynihan 2008). In this
sense, performance information should support knowledge transfer to politicians and
improve the quality of decisions (Hartley and Allison 2002; Moynihan and Ingraham
2004; Schedler 2006). Performance information are also associated with an early iden-
tification of possible problems, a better agenda setting and an advanced budget prepa-
ration (Askim 2007; Halachmi 2005; Melkers and Willoughby 2005). Finally, propo-
nents argue that performance information strengthens the watchdog function of politics
and alleviate control (Askim 2004; Gilmour 2006; Nicholson-Crotty, Theobald, and
Nicholson-Crotty 2006).
But reality shows that politicians often discount this information in their decision-
making (Hatry 2006). Pollitt illustrated the inability of politicians to effectively make
use of performance information with case studies of four European countries (2006).
The situation in the US seems to be very similar (Ingraham 2005). Besides a number
of unknown factors (Askim 2008), research identified the following factors as possible
reasons for a failure to adopt performance information in politics: quality and perti-

82
nence of data, the number of indicators, political environment and cognitive capacity
of politicians (Kroll and Kchler-Stahn 2009; Moynihan 2006; Van Dooren and Van
de Walle 2008). However, influence of politics on performance is not limited to deci-
sions with direct effects on performance (and public managers' perceptions of the ac-
tual performance). Furthermore, their discourse with politicians most likely influences
public managers' sense-making (Covaleski et al. 2003; Wildavsky 1966).
Another stream of literature from an organizational perspective concentrates on the
application and effects of performance information in administrations. It has been ar-
gued that the capacity and size of an organization, its age, the competitiveness of its
environment, practical benefits, comparability of units, definition of services and ru-
mors all influence the adoption of performance information (Loegreid, Roness, and
Rubec 2008; Proeller 2007; Proeller and Siegel 2009). This is believed to cause a cul-
tural change as well as improve leadership styles and communication but also man-
agement techniques as strategic planning (Barzelay and Thompson 2006; Hansen, Ot-
ley, and Van der Stede 2003) and finally lead to an improved assessment of results and
a better allocation of resources (Melkers and Willoughby 2004). Moynihan reports that
in the best case this administrative discourse not only leads to single-loop learning but
also results in double-loop learning where mental models change into a new steady
state (2008).
Besides individual learning and imprinting processes and a political discourse which
shape the mental models of public managers, organizational theory suggests that the
organizational environment is also of importance (Walter-Busch 1996; Weick 1995).
In Figure 10, I indicated this with an arrow highlighting the 'administrative discourse'.
Last but not least, the overall environmental conditions have an impact on perfor-
mance, as they determine stakeholders' options. The US-based Governmental Ac-
counting Standards Board (GASB) proposed to consider the following external and
internal factors: economic, social, and demographic conditions; actions of other organ-
izations; budget and operational constraints (GASB, 2009). In addition, literature em-
phasizes the institutional and judicial context as a relevant factor. Pollitt and Bouckaert
suggest a taxonomy to classify "politico-administrative systems" (2004, 40) which in-
cludes structural, cultural and functional elements. Regarding budgeting, for example,
significant differences exist between the Westminster system and congressional-like

83
systems. In the Westminster system, the executive is an integral part of the legislature
which leaves little room for independent parliamentary action (Beaumier 2006). On
the contrary, in countries with non-Westminster political systems, such as the United
States or Switzerland, the parliament has significant influence over budget formulation
and execution (OECD 2008; Joyce 2003).
7.5 Limitations and Directions for further Research
As I have already outlined in each paper and in section 7.1, my findings suffer from
important limitations. The first paper suffers from the limitations inherent to funda-
mental research. On the one hand, neuroeconomic findings originate from instruments
which turned out to be objective and reliable in manifold ways. Experimental methods
have shown an impressive development during the last years. On the other hand, a
contractual simulation presented in a narrow, tunnel-like magnetic resonance tomo-
graph (MRT) will always be different from real-life work. In addition, a MRT may
measure changes of the metabolism of a brain precisely which correspond with deci-
sion-making, but it will still only be a model of actual human thinking. Finally, results
mostly originate from experiments with college students. The participation of public
servants and managers in future samples seems to be advisable to verify the generali-
zability of the results to a professional public context.
The second and third paper suffer from possible misinterpretations inherent to research
based on qualitative data. This is particularly true for the last paper which findings are
based on an interpretive perspective. The goal of interpretive research is at the same
time a sharp limitation. This perspective is by definition not able to discover truth. Ra-
ther, it seeks to "understand the actual production of meanings and concepts used by
social actors in real settings" (Gephart Jr 2004, 457). On the other hand, the findings of
the last two papers are limited to the Swiss context. With an emphasis on the explora-
tion of the effects of performance budgeting, their sample was not representative in a
quantitative sense. They originate from mid-size cities with between 18,000 and
42,000 citizens and mid-size cantons with between 190,000 and 260,000 citizens. In
this sense, the causal model of paper II and the classifications of managers in reform
processes of paper III provide interesting opportunities for further research which tests

84
their generalizability to smaller and larger contexts as well as additional cultural back-
grounds.
Furthermore, as both papers evolved from interviews with public managers, my empir-
ical research has necessarily neglected other perspectives. Section 7.4 suggested that
public managers' sense-making is influenced by multiple other factors, too. Hence, all
models would benefit from empirical research investigating in-depth the influence of
the broader politico-administrative and environmental context.


85
7.6 Final Conclusions
spond to and make sense of performance incentives. In a theoretical paper, it con-
trasted the foundations of performance-related pay in NPM as a material incentive
with recent findings in neuroeconomics. The second and third papers empirically ex-
amined performance budgeting as a non-material incentive.
This dissertation discusses several factors which enhance or limit the effectiveness of
performance-related pay and performance budgeting. But findings also contribute to a
theory building in NPM which favors 'multi-rational actors'. The dissertation supports
some scholars' findings which question that NPM reforms as performance budgeting
are context-sensitive. In contrast to the bestselling, influential blueprint-books of sev-
eral practitioners and reform proponents (Gore Jr 1997; Kettl 1997; Osborne and
Gaebler 1992) this line of research questions one-size fits all claims (Flury and Sched-
ler 2006; Hood 1991; Radin 2006).
From a practical perspective, the findings of this dissertation are insightful as well.
They may be challenging or even disappointing for decision-makers in search of an
easy-to-handle, all-purpose performance management concept. But they provide mani-
fold lessons for leaders who are willing to get a deeper understanding of the applica-
tion of these concepts in different public management contexts.
In the coming years, mastering public performance will most likely become even more
important. Though public administrations are accustomed to the demand to 'do more
with less,' (Grning 2000) the importance of allocating scarce public resources effec-
tively and efficiently has become essential, as the recent financial crisis has caused
tremendous deficits in most OECD countries (OECD 2009). In their role as
'transmission belts' between performance requirements and corresponding performance
management reforms, public managers will be responsible for this policy outcome. By
enhancing our modeling of human decision-making and investigating public managers'
experiences as well as reform evaluations, this dissertation may offer some contribu-
tions for the ongoing debate how we can deal with this challenge more effectively.

Appendix

86
Appendix

Paper I: Revising the Fundamentals: Insights of Neuroeconomics for
Economic Foundations of Performance-Related Pay in Public
Management
Conference
presentations
1. EGPA 2006, PhD Workshop, Milan, Italy
2. FIHUSO 2007, Kaunas, Lithuania
Publication Published in Transformations in Business and Economics, 8
(2009), Nr. 1, p. 1-17 (SSCI-listed)
(1
st
Revision: December, 2007, 2
nd
Revision: March, 2008, Ac-
cepted: September, 2008)

Paper II: Better performance with performance budgeting?
Analyzing cases of success and failure in public administra-
tions
Conference
presentations
1. EGPA 2007, PhD Workshop, Madrid, Spain
2. IPMN 2009 Annual Conference, Seoul, South Korea
3. ABFM 2009 Annual Conference, Washington, DC, USA
Publication Accepted for publication in International Public Management
Journal (SSCI-listed)

Paper III: More Room to Maneuver Better Performance?
Public Managers' Interpretations and the Success of Perfor-
mance Budgeting
Conference
presentations
1. ABFM 2007 Annual Conference, Washington, DC, USA
2. EGPA 2008, Rotterdam, The Netherlands

Table 4: Status of papers

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CV

Utz Helmuth
Date of birth: June 26, 1976

Education
Since 2006 University of St. Gallen (HSG)
Doctoral candidate
2009 Georgetown University, Washington (D.C.)
Visiting Researcher with a scholarship of the Swiss National
Science Foundation
2004 2005 University of Witten/Herdecke
Graduate student in business economics
"Diplom-konom" (with Highest Distinction)
2000 Laureate of the German Student Research Prize
("Deutscher Studienpreis"), a research contest for students
donated by the Krber foundation
1997 2000 University of Witten/Herdecke
Undergraduate student in business economics
1983 1996 Elementary and secondary school in Hannover
Examination with "Abitur"

Professional Experiences
Since 2006 University of St. Gallen (HSG)
Research Associate with Prof. Dr. Kuno Schedler
2000 2004 Co-founder and Managing Director of cosinex GmbH, Bochum

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