Earnings Targets and Annual Bonus Incentives

2014 ◽  
Vol 89 (4) ◽  
pp. 1227-1258 ◽  
Author(s):  
Raffi J. Indjejikian ◽  
Michal Matějka ◽  
Kenneth A. Merchant ◽  
Wim A. Van der Stede
Keyword(s):  
High Frequency ◽  
Serial Correlation ◽  
Data Availability ◽  
Performance Information ◽  
Past Performance ◽  
Revision Process ◽  
Confidentiality Agreement ◽  
Earnings Targets ◽  
Bonus Plans ◽  
Do So

ABSTRACT: We examine the extent to which firms use past performance as a basis for setting earnings targets in their bonus plans and assess the implications of such targets for managerial incentives. We find that high-profitability firms commonly decrease earnings targets when their managers fail to meet prior-year targets but rarely increase targets. Conversely, we find that low-profitability firms commonly increase earnings targets when their managers meet or exceed prior-year targets but rarely decrease targets. This target-revision process yields a serial correlation in target difficulty—targets remain relatively easy (or difficult) through time. We also find that firms are reluctant to revise earnings targets below zero, resulting in an unusually high frequency of zero earnings targets that are abnormally difficult to achieve. Collectively, our findings suggest that firms incorporate past performance information into targets, yet they do so only to a limited extent. This is consistent with theoretical arguments that highlight the benefits of contractual commitments. Data Availability: Data used in this study cannot be made public due to the confidentiality agreement with the sponsoring organization.

Performance Target Revisions in Incentive Contracts: Do Information and Trust Reduce Ratcheting and the Ratchet Effect?

2015 ◽  
Vol 90 (5) ◽  
pp. 1755-1778 ◽  
Author(s):  
Jasmijn C. Bol ◽  
Jeremy B. Lill
Keyword(s):  
Structural Changes ◽  
Data Availability ◽  
Performance Information ◽  
Ratchet Effect ◽  
Past Performance ◽  
Performance Targets ◽  
Positive Performance ◽  
Confidentiality Agreement ◽  
To Receive ◽  
Performance Target

ABSTRACT In this study, we examine a setting where principals use past performance to annually revise performance targets, but do not fully incorporate the past performance information in their target revisions. We argue that this situation is driven by some principals and agents having an implicit agreement where the principal “allows” the agent to receive economic rents from positive performance-target deviations that are the result of superior effort or transitory gains by not revising targets upward, while the agent “accepts” target revisions by not restricting output when these revisions are the result of structural changes in the operation's true economic capacity. Although both the principal and the agent can benefit from an implicit agreement, we argue that for the implicit agreement to be maintainable, the principal either needs information on the cause of the performance-target deviation or there needs to be trust between the principal and the agent. Using archival data across multiple years and independent bank units, we find a pattern of ratchet attenuation and output restriction that is consistent with the existence of implicit agreements for those principal-agent dyads where information asymmetry is sufficiently reduced or mutual trust exists. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement with the participating firm.

Logistics Costs Behavior and Management in the Auto Industry

2015 ◽  
Vol 31 (4) ◽  
pp. 389-408 ◽  
Author(s):  
Marcela M. Porporato
Keyword(s):  
Real Life ◽  
Systems Design ◽  
Management Control ◽  
Data Availability ◽  
Manufacturing Companies ◽  
Bottom Line ◽  
Related Data ◽  
Profitability Analysis ◽  
Confidentiality Agreement ◽  
Cost Behavior

ABSTRACT This case, based on a real-life situation of how logistics costs function in daily operations, aims to provide students with the opportunity to understand how logistics costs are calculated and how the inter-organizational nature of these costs affects the profitability of two companies. The case hinges on understanding cost behavior (fixed and variable) and on management control systems design. Although logistics costs represent a small fraction of total costs in manufacturing companies, they can negatively affect the bottom line if left unattended. Students are presented with data relating to a three-year project in the automotive industry that shows that the project has been experiencing a sustained increase in costs that has eroded its profit margin. While it appears that logistics costs are the problem, it cannot be verified until the contracts are studied. In addition, the financial- and contract-related data provided are sufficient to extend the profitability analysis to the provider of logistics services. This case is suitable for management accounting courses at the master's or advanced undergraduate level; it has been tested and well received by students who want to gain a greater understanding of logistics costs—their nature, behavior, possible containment strategies, and inter-organizational effects. Data Availability: Some of the data are from public sources, but the logistics contracts and cost schedules are private; the confidentiality agreement with the two companies requires masking certain details and modifying the numeric data.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

scholarly journals Perceived ethical misconduct: a survey of neuropsychology professionals in Mexico

2016 ◽  
Vol 9 (1) ◽  
pp. 64-71 ◽  
Author(s):  
Paola Fonseca ◽  
Laiene Olabarrieta Landa ◽  
Ivan Panyavin ◽  
Xóchitl Angélica Ortiz Jiménez ◽  
Adriana Aguayo Arelis ◽  
...  
Keyword(s):  
Professional Practice ◽  
High Frequency ◽  
Professional Training ◽  
Clinical Care ◽  
Professional Relationships ◽  
Ethical Misconduct ◽  
And Training ◽  
Do So

Objective: To evaluate the frequency of perceived ethical misconduct in the practice of neuropsychology in Mexico. Method: One hundred fourteen psychologists answered a survey which assessed perceptions of ethical misconduct in four areas of professional practice in the field of neuropsychology.Results: The area of professional training contained the highest percentage of perception of ethical misconduct, followed by research and publications, clinical care, and professional relationships. Conclusion: The high frequency of ethical misconduct perceived by neuropsychology professionals in Mexico is a cause for concern. The results suggest the need to create and implement a system to make sure that professionals follow the ethics standards required by the profession, and to provide consequences for those who fail to do so. The profession of neuropsychology and training of professionals in the field must be regularized in the country, to reduce the frequency of future ethical misconducts.

The Effect of Relative Performance Information on Performance and Effort Allocation in a Multi-Task Environment

2012 ◽  
Vol 88 (2) ◽  
pp. 553-575 ◽  
Author(s):  
R. Lynn Hannan ◽  
Gregory P. McPhee ◽  
Andrew H. Newman ◽  
Ivo D. Tafkov
Keyword(s):  
Employee Performance ◽  
Relative Performance ◽  
Data Availability ◽  
Task Environment ◽  
Performance Information ◽  
Behavioral Theories ◽  
The Social ◽  
Distortion Effect ◽  
Relative Performance Information ◽  
Motivation Effect

ABSTRACT This study investigates how relative performance information (RPI) affects employee performance and allocation of effort across tasks in a multi-task environment. Based on behavioral theories, we predict that the social comparison process inherent in RPI induces both a motivation effect that results in increased effort as well as an effort distortion effect that results in the distortion of effort allocations across tasks away from the firm-preferred allocations. We also predict that both effects are magnified when the RPI is public compared to private. We argue that although the motivation effect will generally benefit performance, the effort distortion effect may be detrimental to performance. We design an experiment that isolates these two effects. Consistent with our predictions, we find that RPI induces both motivation and effort distortion effects and that both effects are magnified when the RPI is public rather than private. Although the motivation effect increases performance, we demonstrate that the effort distortion effect can decrease performance. By isolating the motivation and effort distortion effects, our study provides insights into the costs and benefits of RPI in a multi-task environment. As such, it informs accountants regarding the design of information systems and when tasks should be aggregated or disaggregated across employees. Data Availability: Data are available from the authors upon request.

An Empirical Analysis of Employee Responses to Bonuses and Penalties

2020 ◽  
Vol 95 (6) ◽  
pp. 395-412 ◽  
Author(s):  
Wim A. Van der Stede ◽  
Anne Wu ◽  
Steve Yu-Ching Wu
Keyword(s):  
Employee Turnover ◽  
Selection Effect ◽  
Unintended Consequences ◽  
Data Availability ◽  
Marginal Effect ◽  
Confidentiality Agreement ◽  
And Performance ◽  
Bonuses And Penalties ◽  
Employee Responses ◽  
Chip Manufacturer

ABSTRACT We examine how employees respond to bonuses and penalties using a proprietary dataset from an electronic chip manufacturer in China. First, we examine the relative effects of bonuses and penalties and observe a stronger effect on subsequent effort and performance for penalties than for bonuses. Second, we find that the marginal sensitivity of penalties diminishes faster than that of bonuses, indicating that the marginal effect of a bonus may eventually exceed that of a penalty as their value increases. Third, we find an undesirable selection effect of penalties: penalties increase employee turnover, especially for skillful and high-quality workers. These results may help inform our understanding of the observed limited use of penalties in practice due to their bounded effectiveness and possible unintended consequences. Data Availability: The confidentiality agreement with the company that provided data for this study precludes the dissemination of detailed data without the company's consent.

Ratcheting and the Role of Relative Target Setting

2014 ◽  
Vol 89 (4) ◽  
pp. 1197-1226 ◽  
Author(s):  
Carmen Aranda ◽  
Javier Arellano ◽  
Antonio Davila
Keyword(s):  
Data Availability ◽  
Past Performance ◽  
Target Setting ◽  
Performance Targets ◽  
Setting Process ◽  
Other Information ◽  
Absolute Magnitudes ◽  
Using Data ◽  
Individual Information

ABSTRACT: Managers use a variety of information to set performance targets. Using data from 376 branches of a large travel retailer over five years, this study documents supervisors considering the relative performance of comparable units in target setting, which we term relative target setting (RTS). We find evidence of RTS after controlling for individual past performance in the form of ratcheting. Our findings also indicate that RTS partially shapes the use of other information on past performance. Specifically, we find that the magnitude of ratcheting decreases (increases) with RTS for favorable (unfavorable) performance variances, and the asymmetry of ratcheting characterized by different ratcheting coefficients for unfavorable than for favorable variances is significant for large absolute magnitudes of RTS. Managers use the flexibility associated with the subjectivity of the target-setting process to weight peer and individual information differently across different units. Data Availability: The data used in this study cannot be made publicly available due to confidentiality agreements with the participating organization.

Stock market predictability

2014 ◽  
Vol 31 (4) ◽  
pp. 354-370 ◽  
Author(s):  
Silvio John Camilleri ◽  
Christopher J. Green
Keyword(s):  
Stock Market ◽  
High Frequency ◽  
Serial Correlation ◽  
Design Methodology ◽  
High Frequency Data ◽  
Frequency Data ◽  
Content Type ◽  
Lag Effects ◽  
Daily Data ◽  
Indian Stock Market

Purpose – The main objective of this study is to obtain new empirical evidence on non-synchronous trading effects through modelling the predictability of market indices. Design/methodology/approach – The authors test for lead-lag effects between the Indian Nifty and Nifty Junior indices using Pesaran–Timmermann tests and Granger-Causality. Then, a simple test on overnight returns is proposed to infer whether the observed predictability is mainly attributable to non-synchronous trading or some form of inefficiency. Findings – The evidence suggests that non-synchronous trading is a better explanation for the observed predictability in the Indian Stock Market. Research limitations/implications – The indication that non-synchronous trading effects become more pronounced in high-frequency data suggests that prior studies using daily data may underestimate the impacts of non-synchronicity. Originality/value – The originality of the paper rests on various important contributions: overnight returns is looked at to infer whether predictability is more attributable to non-synchronous trading or to some form of inefficiency; the impacts of non-synchronicity are investigated in terms of lead-lag effects rather than serial correlation; and high-frequency data is used which gauges the impacts of non-synchronicity during less active parts of the trading day.

Private and Public Relative Performance Information under Different Compensation Contracts

2012 ◽  
Vol 88 (1) ◽  
pp. 327-350 ◽  
Author(s):  
Ivo D. Tafkov
Keyword(s):  
Individual Performance ◽  
Relative Performance ◽  
Data Availability ◽  
Performance Information ◽  
Public And Private ◽  
Compensation Contracts ◽  
Private And Public ◽  
Relative Performance Information ◽  
Wage Contract ◽  
Positive Effect

ABSTRACT: This study investigates the conditions under which providing relative performance information to employees has a positive effect on performance when compensation is not tied to peer performance. Specifically, I investigate, via an experiment, the effect of relative performance information (present or absent) on performance under two compensation contracts (flat-wage or individual performance-based). Given the presence of relative performance information, I examine the effect of the type of relative performance information (private or public) on performance. Using theory from psychology, I predict and find that relative performance information positively affects performance under the two compensation contracts and that this positive effect is greater under an individual performance-based contract than under a flat-wage contract. I also predict and find that, although both public and private relative performance information have a positive effect on performance, the effect is greater when relative performance information is public. Data Availability: Data are available from the author on request.

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