The Effect of Subordinate Contract Frame and Choice on Superiors' Target-Setting Decisions

Abstract

Organizations use penalty contracts to deter negative behavior, but these contracts are rarely used for subordinate performance. Prior studies focus on subordinates’ reactions to contract frame to address this paucity of penalty contracts. In contrast, we examine how subordinates’ contract frame affects superiors’ behavior, specifically their target-setting decisions, and whether a penalty contract increases superiors’ leniency, which could provide a potential explanation for the lack of performance penalty contracts in practice. We predict and find experimentally that superiors’ set more lenient targets for subordinates under a penalty contract compared to a bonus contract, as superiors can project their negative perceptions of penalties onto subordinates and seek to mitigate these perceptions. Further, we provide evidence that increasing the salience of subordinates’ contract choice to the superior during the target-setting process mitigates leniency under a penalty contract. We also find that these effects are present only in low Dark Triad superiors, as high Dark Triad superiors set similar targets regardless of subordinates’ contract frame and choice. This study provides some insight into the limited use of penalty contracts in practice, as these contracts could lead to greater leniency in superiors’ decisions. We identify a way to limit superiors’ leniency under a penalty contract through highlighting that subordinates’ chose the contract, which could increase the appeal of penalty contracts in practice.