Somewhat surprisingly given the explosion in performance management research over the last two decades, prominent scholars have recently suggested that there is a paucity of generalizable theory regarding the adoption and implementation of performance-related reforms. In response to this call, scholars have begun to fill this void with relatively broad stories about the motivations for reform. One line of this work suggests that adoption and implementation varies depending on the individual manager’s role within and perceptions of the organization. Other recent scholarship has introduced the concept of risk to reform-related decision-making and suggested that different innovations and organizational contexts produce different types of risk that must be accepted and proactively managed through policy.

This project builds on these works and contributes to the ongoing development of generalizable theory regarding performance management reform. As have others, we begin with the assumption that the adoption and implementation of reforms (or innovations of any type) involves risk and that the tolerance of a manager or organization for risk will, therefore, influence these decisions. We go beyond previous work, however, by carefully testing the utility of a model of risk-tolerance from the private management literature in the context of public organizations.

The March and Shapira model blends prospect theory, which suggests that risk tolerance can change depending on perceived performance, with the argument that decision criteria may change when an organization is struggling to survive. This synthesis produces the expectation that managers will be risk adverse when near bankruptcy AND when performing close to aspirations, and relatively more risk tolerant at other levels of performance. The model has been tested in the study of private firms, but has not been conscientiously applied to risk taking in the public sector. 

This paper applies the March and Shapira model to the question of performance management in the public sector. In order to provide as comprehensive a test as possible, we model the impact of multiple types of organizational performance (financial and outcome) on multiple management decisions (performance information use and strategic planning) in two distinct forms of public organization (municipal governments and school districts), over multiple years (2005 to 2010). Preliminary results provide very consistent support for the assertion that managers become more risk adverse when their organizations are performing just above or just below where they “should” be. They suggest that managers use performance data more actively and revise strategic plans more frequently when they are near a performance threshold determined by statutorily mandated levels, peers, or previous accomplishments, depending on the model. The evidence is much less consistent for the expectation that managers also become more risk adverse when their organizations are near catastrophe either financially or on other dimensions of performance. We conclude by discussing the implications of these findings, and of the multiple goals faced by public organizations, for the construction of a theory of risk and reform in the public sector.