Fairness perceptions of annual bonus payments: The effects of subjective performance measures and the achievement of bonus targets

Abstract

This study investigates how the weight on subjective performance measures and the achievement of bonus targets affect managers’ distributive and procedural fairness perceptions of annual bonus contracts. We argue that the effect of subjectivity on fairness perceptions follows an inverted U-shaped relationship, consistent with the idea that subjectivity increases fairness perceptions when the overall emphasis on subjective measures is relatively low, but that subjectivity decreases fairness perceptions when the overall emphasis on subjective measures is relatively high. We further argue that managers use bonus targets as referent standards, whose achievement increases perceptions of distributive fairness, but not of procedural fairness. We use a time-ordered cross-sectional survey study design to separate the measurement of ex ante contract characteristics from the measurement of actual bonus payments and managers’ fairness perceptions, and we find empirical support for our hypotheses. Our study aims to reconcile some of the mixed findings on subjective performance evaluation and sheds new light on the relationship between target achievements and fairness perceptions.