Using Fixed Wages for Management Control: An Intra-Firm Test of the Effect of Relative Compensation on Performance

2019 ◽  
Vol 32 (3) ◽  
pp. 137-154
Author(s):  
James W. Hesford ◽  
Nicolas Mangin ◽  
Mina Pizzini
Keyword(s):  
Control Mechanism ◽  
Employee Performance ◽  
Management Control ◽  
Data Availability ◽  
Efficiency Wage ◽  
Ex Post ◽  
Confidentiality Agreement ◽  
Market Wage ◽  
Wage Theory ◽  
Performance Based Compensation

ABSTRACT Efficiency wage theory predicts employers can elicit better employee performance ex post by paying higher fixed compensation ex ante, relative to the market wage. Relative compensation may thereby constitute an alternative control mechanism when performance-based compensation is difficult to implement. Using proprietary data from 436 hotels in a U.S. lodging chain, we find that relative compensation is positively associated with performance, and additional profits associated with higher compensation exceed the wage increase. Relative compensation has a larger impact on profit when tasks are more complex and a smaller impact on profit, revenue, and quality when chain monitoring is stronger. Finally, the magnitude of the relation between relative compensation and financial performance (nonfinancial) is larger (the same) for employees earning more than the median wage compared with those earning less. Overall, our results are consistent with assertions that higher relative compensation attracts more capable candidates and mitigates shirking, but provide little support for reciprocity. Data Availability: The confidentiality agreement with the firm that provided data for this study precludes revealing its identity and disseminating data.

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.

Behavioral Work Outcomes of a Strategic Performance Measurement System-Based Incentive Plan

2013 ◽  
Vol 25 (2) ◽  
pp. 115-143 ◽  
Author(s):  
Laurie L. Burney ◽  
Sally K. Widener
Keyword(s):  
Performance Measurement ◽  
Psychological Contract ◽  
Self Efficacy ◽  
Employee Performance ◽  
Critical Dimension ◽  
Data Availability ◽  
Performance Measurement System ◽  
Strategic Performance ◽  
Confidentiality Agreement ◽  
Incentive Plan

ABSTRACT: Strategic performance measurement systems (SPMS) that translate a firm's strategy to its employees are increasingly used. We examine whether the extent to which an SPMS is coupled with strategy affects employee performance indirectly through motivational characteristics including perceived self-efficacy and perceived psychological contract. Using data from 242 employees, we find evidence that the extent to which an SPMS is tightly coupled with strategy affects employee performance through perceived self-efficacy and perceived psychological contract. Self-efficacy is a critical dimension of intrinsic motivation. Thus, an implication of our findings is that tightly coupling an SPMS-based incentive plan with strategy facilitates internalized motivated behaviors. We also find that our hypothesized results hold across varying levels of two types of employee climate. However, the workforce's age and education levels serve as boundary conditions since we find that the relation between self-efficacy and employee performance holds only for the older, less-educated employees. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement with the participating firm.

scholarly journals Group Identity, Performance Transparency, and Employee Performance

2019 ◽  
Vol 95 (5) ◽  
pp. 373-397 ◽  
Author(s):  
Ruidi Shang ◽  
Margaret A. Abernethy ◽  
Chung-Yu Hung
Keyword(s):  
Group Identity ◽  
Employee Performance ◽  
Management Control ◽  
Data Availability ◽  
Identity Performance ◽  
Positive Effects ◽  
Performance Reporting ◽  
Employee Behaviors ◽  
Conformity Effect ◽  
The One

ABSTRACT Economics, social psychology, and management studies suggest that group identity plays an important role in directing employee behaviors. On the one hand, strong group identity could motivate high effort to resolve conflicts of interests in the workplace. On the other hand, it could encourage conformity toward group norms. We examine whether the effect of group identity is conditional on managers' performance reporting choices. Drawing on survey and archival data from a field site, we find that when performance transparency is low, the interest alignment effect is more salient and group identity positively relates to employee performance. However, when performance transparency is high, the conformity effect is more salient and higher group identity is associated with more homogeneous, but not necessarily higher, employee performance. Our findings contribute to the management control literature by documenting that managers' performance reporting choices determine whether group identity has positive effects on employee performance. Data Availability: Data in this study are derived from a proprietary source.

Organizational Error Climate and Auditors' Predispositions toward Handling Errors

2011 ◽  
Vol 23 (2) ◽  
pp. 69-92 ◽  
Author(s):  
Ulfert Gronewold ◽  
Michaela Donle
Keyword(s):  
Theoretical Model ◽  
Public Sector ◽  
Audit Quality ◽  
Control Mechanism ◽  
Management Control ◽  
Data Availability ◽  
Error Handling ◽  
Research And Practice ◽  
Empirical Results ◽  
Soft Management

ABSTRACT Handling their own errors effectively is important for auditors to assure audit quality. Similarly, how auditors deal with their clients' errors may affect clients' cooperativeness, which is a prerequisite for conducting audits effectively and efficiently. Auditors' predispositions will likely influence how they actually approach errors. We introduce the constructs of (and develop measures for) the error climate of audit organizations and auditors' predispositions toward handling their own errors and client errors and relate them in a theoretical model. Empirical results from a sample of 284 external, internal, and public sector auditors support that an audit organization's error climate positively influences auditors' predisposition toward handling their own errors, which, in turn, positively influences their predisposition toward handling client errors. These results imply that an appropriately shaped error climate may serve as a “soft” management control mechanism by fostering predispositions toward functional error handling behaviors. We discuss implications for research and practice. Data Availability: Contact the first author.

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.

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 Performance-Based Compensation and Firm Value—Experimental Evidence

2015 ◽  
Vol 29 (4) ◽  
pp. 777-798 ◽  
Author(s):  
Glenn M. Pfeiffer ◽  
Timothy W. Shields
Keyword(s):  
Private Information ◽  
Stock Prices ◽  
Firm Value ◽  
Data Availability ◽  
Equity Prices ◽  
Market Prices ◽  
Compensation Plans ◽  
Price Reactions ◽  
Performance Based Compensation ◽  
The Impact

SYNOPSISWe study equity price reactions to compensation contracting in experimental markets. Motivated by research reporting positive price reactions to adoption of performance-based compensation plans for executive managers, but postulating competing reasons as to why, we design an experiment that allows us to manipulate variables separately to examine the effect of adverse selection and moral hazard on equity prices. We find that managers select contracts based on their private information, sometimes differing from predicted choices, and that private information is conveyed to the market by the choice of compensation contract and is reflected in stock prices. We refer to this as the sorting effect. Additionally, we find that managers do not always exert costly effort in spite of favorable incentives to do so. The design also allows us to assess if the market rationally prices managers' actual choices. We find market prices are consistent with the empirically observed manager choices. Our results imply that to properly assess the impact of compensation plan on market prices, the sorting, as well as the incentive effects of compensation contracts, should be considered, and that the market anticipates errors in managers' choices.JEL Classifications: C92; D82; G12; J33; M52.Data Availability: Available upon request.

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.

Why do Restatements Decrease in a Clawback Environment? An Investigation into Financial Reporting Executives' Decision-Making during the Restatement Process

2015 ◽  
Vol 90 (6) ◽  
pp. 2515-2536 ◽  
Author(s):  
Jonathan S. Pyzoha
Keyword(s):  
Decision Making ◽  
Executive Compensation ◽  
Financial Reporting ◽  
Financial Statements ◽  
Data Availability ◽  
Archival Studies ◽  
Key Factors ◽  
Ex Post ◽  
Auditor Quality

ABSTRACT Prior archival studies find that firms that voluntarily adopted clawback policies have experienced a reduction in restatements. I experimentally examine this outcome by investigating the influence of two key factors (i.e., executive compensation structure and auditor quality) on financial reporting executives' (hereafter, “executives”) decision-making regarding a proposed restatement that will lead to a clawback of their incentives. I find that executives (i.e., CFOs, controllers, and treasurers) facing a lower quality auditor are less likely to agree with amending prior financial statements when a higher proportion of their pay is incentive-based. However, this tendency is reduced when executives face a higher quality auditor, indicating that higher quality auditors can act as effective monitors. My results identify an ex post unintended consequence of clawback regulation that could at least partially offset the benefits of the ex ante deterrent effects of clawbacks, and that could contribute to findings of less frequent restatements when clawback policies are in place. I discuss potential implications regarding the role of executives during restatement decisions and auditors' risk assessments in a clawback environment. Data Availability: Data are available from the author upon request.

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