ABSTRACT
Prior academic research finds that formal controls can cause employees to engage in dysfunctional behaviors (e.g., decreased effort, fraud, or theft). This study investigates one specific aspect of formal control that contributes to employees' negative reactions—employees' beliefs about management's intentions signaled by the control. I use two interactive experiments to examine the effects on employee effort and firm profit of: (1) employees' beliefs regarding management's intentions when implementing control (i.e., perceived intentionality), and (2) employees' preferences for reciprocity. Consistent with prior literature, I find that formal control can cause employees to exert low effort, resulting in reduced firm profit. However, I find that the adverse consequences only occur when management clearly imposes the control and, therefore, employees interpret it as a signal of distrust. Further, employees respond negatively to controls that are unambiguously imposed by managers, even when managers have entrusted them with a large amount of resources. Thus, when employees are faced with simultaneous, conflicting signals regarding managers' trust, the distrust signaled by the control crowds out employees' positive reciprocity. Alternatively, when managers' intentions for imposing control are ambiguous or clearly do not signal distrust (i.e., it is exogenously imposed), the control does not cause such negative effects. I find that all of the observed effects persist over time. In supplemental analysis, I also find that managers accurately predict that employees' response to formal control is influenced by their beliefs regarding management's intentions, and entrust fewer resources to employees when they have imposed the control than when it is imposed exogenously. The results of this study suggest that organizations should carefully consider employees' beliefs about management's intentions when implementing formal controls, because these beliefs influence employee behavior.
