Discretionary Bonus Research Articles

The Effects of In-Group Identity and Clarity of the Bonus Determination Criteria on Supervisors’ Discretionary Bonus Adjustments: Field Evidence from China

ABSTRACT This study examines the influence of in-group identity between supervisors and subordinates and the clarity of the bonus determination criteria on supervisors’ discretionary adjustments of subordinates’ bonus compensation through the lens of social identity theory. Using field data from a multinational manufacturing company’s subsidiary in China, we find that in-group sales agents receive higher bonus awards and that this effect is more pronounced when there is high clarity of the bonus determination criteria. Additional analysis shows that these effects hold for higher-tenured sales agents and in regions characterized by lower sales agent turnover. Finally, we find that higher bonus awards are positively (negatively) associated with in-group sales agents’ future performance when there is low (high) clarity of the bonus determination criteria. Our findings hold potential implications for management practices in corporations operating in countries that have strong relationship-based cultures. Data Availability: Data used in this study are provided by a proprietary source.

Regional Discrepancies in the Level of Knowledge-Based Economy in Poland

AbstractSubject and purpose of workThis paper analyzes the level of knowledge-based economy (KBE) in terms of sustainable development across the provinces (voivodships) of Poland in 2020. The underlying assumption of this study is that knowledge and skills are one of the fundamental preconditions for successfully implementing the concept of sustainable development.Materials and methodsIn order to calculate the rankings of Polish voivodships a synthetic indicator developed on the basis of the zeroed unitarization method was used.ResultsThere are vast disproportions in the levels of KBE across the voivodeships of Poland. The most advanced KBE was identified in the Mazowieckie Voivodship, and the least developed KBE was found in the Lubuskie voivodship.ConclusionsThe capacity to develop a knowledge-based economy is inextricably interrelated with the quality of the social capital, which is directly attributable to the levels of education. In order to offset the interregional disproportions spending on research and development needs to be increased and the investments in human capital (e.g. through career planning, training, improving the professional qualifications of employees, discretionary bonuses) and new technologies should be expanded.

Motivation Factors and Employee Performance: Evidence from Mopamuro Local Government Area of Kogi State

"This study aimed at the influence of promotion, career advancement, work condition, and recognition on the task performance of employee; ascertain the effects of remuneration, allowances, discretionary bonus and bonus based on the work's outcomes on the task performance of employee in Mopamuro Local Government. To achieve the objective, survey research design was applied. The sample (299 staff) was chosen through multi-stage sampling technique. Data were analyzed via descriptive and inferential analytical techniques (Stepwise Multiple Regression). Finding showed that promotion, career advancement, work condition, recognition have significant influence on the task performance of employee in Mopamuro Local Government, and that salary and allowances have weak effects on the task performance of employee in Mopamuro Local Government in Kogi State. The study recommended that managers/personnel should improve on policies towards promotion, career advancement and recognition; as these will enhance improved task performance of employee, and that they should improve on salary payment and bonus based on the work’s outcomes; as these contribute to improved task performance of employee in Mopamuro Local Government in Kogi State."

Challenges of subjectivity in team performance evaluation

Purpose This paper aims to analyze challenges of subjective performance evaluation (SPE) and their effects on team performance. It focuses on discretionary bonus allocations in teams and challenges driven by cognitive biases on the superior or the employee side. This is important as efficient teamwork is a relevant source of competitive advantages in firms, and firms often rely on teams to coordinate various, mutually supportive organizational activities. Design/methodology/approach The author analyzes results that have recently been discussed in the literature and link them to each other to create a more holistic picture about potential performance effects of SPE. Based on the analyses, the author develops avenues for future research and point out open questions. Findings Exploring employees’ fairness perceptions in team settings in which there is no clear standard for a “fair” team bonus allocation, the author finds that perceived fairness of team bonus allocation may decrease under SPE because employees interpret the “fairness” of the bonus allocation from an egocentric perspective. Such decrease in perceived fairness can eventually even lead to decreased team performance. Likewise, on the superior side, more complex, but highly relevant team can cause cognitive biases of superiors in assessing employee performance, thereby decreasing the potentially positive effects of SPE on team performance. Originality/value This paper contributes to the literature by analyzing recently discovered challenges of SPE in teams and linking them to each other to draw more general conclusions about the performance effects of SPE. For practice, my findings imply that firms may want to be cautious when evaluating the potential effects of SPE – as it is made by human beings with their cognitive biases. For research, the paper opens up new research possibilities and points out open questions.

Inter-firm social dilemmas with agency risk

Abstract Many social dilemmas involve decisions made by firms. We design a laboratory experiment that represents firms’ principal-agent problem and includes an inter-firm social dilemma and stochastic agent performance. Agents’ unobservable effort affects the likelihood of a bad outcome occurring, such as a regulatory violation. This harms the agent's principal but can also damage others, thus creating an inter-firm social dilemma. In our baseline treatment, we omit the agency problem, and principals make their “firm's” effort decision directly. In the second treatment, principals can only offer an unconditional wage contract to their agent, although a non-contractual (ex-post) bonus can be paid. In a third treatment, principals can condition wages on the stochastic outcome, and a fourth treatment combines the conditional wage with a non-contractual bonus. We find that principals use a combination of a conditional wage and the non-contractual (ex-post) bonus to help overcome the agency problem and incentivize agents to choose higher effort. Fixed wage, unconditional contracts lead to significantly lower effort levels, even when augmented with bonuses. Similarly, conditional contracts on their own also perform poorly. Only the combination of conditional wage contracts and discretionary bonuses is effective in limiting agency risk to address the inter-firm social dilemma problem.

The timing of discretionary bonuses – effort, signals, and reciprocity

In a real-effort experiment, we investigate the relationship between reciprocity and the timing of discretionary bonuses in a two-period principal-agent (manager-worker) setting. We vary the timing of the manager's bonus decision in order to examine two main channels, reward and trust, through which discretionary bonuses may operate. Average worker performance improves when bonus decisions are made between the two periods, since both channels are simultaneously active. First-period output significantly increases as workers attempt to signal their trustworthiness to managers. When the bonus decision is made upfront or at the end, average output is no different than in a baseline setting without the bonus mechanism. Furthermore, output after a bonus is not paid decreases substantially, consistent with negative reciprocity. Our main findings are reinforced by using time spent on the available real leisure activity as an alternative measure of subjects' effort.

Nagrody pieniężne dla pracownika

The aim of the article was to analyze the genesis and construction of the prize money in labour law. In particular, the rationale of the prize was characterized: non-spam and discretionary. The article shows that from the legal dogmatic point of view, the construction of “discretionary bonuses” was developed in the 1970s, while the practice of applying the law in the following years. One new element that will appear in the jurisprudence practice is the reference to the prohibition of discrimination.

Is It Okay As Long As You Make a Profit? – Further Evidence on a Spillover Effect in Negative Discretionary Bonus Adjustments

To prevent unethical behaviour by employees, many companies include compliance aspects in their compensation schemes. For example, ex-post bonus adjustments allow managers to retract parts of bonuses previously paid to employees in reaction to fraudulent behaviour. We propose that the level of ex-post adjustment due to an employee’s misconduct depends on the employee’s ex-ante objective performance. We further propose that this effect is reduced when the managers must justify their final bonus decision, in which they can adjust a preliminary determined bonus. We conduct two experiments and find evidence confirming our hypotheses. The participants’ subjective ex-post bonus reduction is lower (higher) when the employees’ ex-ante objective performance is higher (lower). Additionally, our data show that increasing participants’ accountability by asking participants to justify their final bonus decision reduces this effect. Further analyses show – in line with what the halo effect proposes – that participants’ perception of employee morality mediates the effect of objective performance on the ex-post bonus reduction. This mediation is moderated by the presence of justification. Our findings expand prior research and can help firms implement remuneration schemes that foster compliant employee behaviour.

Expertise and Discretionary Bonus Decisions

We examine the association between managers’ expertise and their discretionary bonus decisions in a hospital setting. We hypothesize that high-expertise managers make decisions that encourage cooperation among their subordinates. However, low-expertise managers cannot do so because their lower levels of knowledge, experience, and domain expertise prevent them from having sufficient personal influence to persuade other professionals to cooperate. We find that high-expertise managers make two types of bonus decisions: (1) keep a smaller share of the bonus pool than what they are entitled to retain and (2) allocate the remainder to subordinates more evenly after adjusting for the underlying heterogeneity in their productivity. We also find evidence that high-expertise managers whose bonus decisions reflect their support for cooperation have higher department performance than all other managers. This paper was accepted by Suraj Srinivasan, accounting.

Discretionary bonuses and turnover

This paper develops a signaling model to investigate the effects of discretionary bonuses and wage increases on turnover. When the worker’s output is not contractible and the firm privately learns about the match quality between the firm and the worker, bonus payments and wage increases can convey the firm’s private information to the worker. If the firm credibly communicates favorable information about the match quality to a worker, the worker develops higher expectations concerning her career outcomes at the firm (such as future wage increases and promotions) and, consequently, becomes less likely to separate. The analysis demonstrates that although a wage increase and a bonus reflect the same information regarding the match quality, each serves a distinctly different role in terms of the worker’s turnover decision. Specifically, the firm pays bonuses to signal a good match while using wages to respond to competing offers the worker receives. The model yields testable predictions that concern how bonuses are related to wage increases and promotions and how bonuses and wage increases are related to turnover. The empirical analysis based on the data constructed from the personnel records of a large firm in the financial services industry provides support for the model’s implications.

Expertise and Discretionary Bonus Decisions

We examine the association between managers’ expertise and their discretionary bonus decisions in a hospital setting. We hypothesize that high-expertise managers make decisions that encourage cooperation among their subordinates. However, low-expertise managers cannot do so because their lower levels of knowledge, experience, and domain expertise prevent them from having sufficient personal influence to persuade other professionals to cooperate. We find that high-expertise managers make two types of bonus decisions: (1) keep a smaller share of the bonus pool than what they are entitled to retain and (2) allocate the remainder to subordinates more evenly after adjusting for the underlying heterogeneity in their productivity. We also find evidence that high-expertise managers whose bonus decisions reflect their support for cooperation have higher department performance than all other managers.

The Timing of Discretionary Bonuses: Effort, Signals, and Reciprocity

In a real-effort experiment, we investigate how the timing of discretionary bonuses affects the relationship between workers and managers. Average output is substantially higher if bonuses are paid in the middle rather than upfront or at the end, as workers increase first-period output to signal trustworthiness. In contrast, average output does not differ when the decision is made at the beginning or end. When the decision is made upfront, output increases after receiving a bonus but decreases substantially, if the bonus is not paid. This is consistent with negative reciprocity by workers who anticipate, but do not receive a bonus.

The Impact of Financial Distress on CEO Compensation in the United States

This M.A. dissertation presents a study of the influence of financial distress on CEO compensation in the United States. It focuses on the four main components of executive compensation: salary, bonus, restricted stock and stock options. More specifically, I apply linear regression to panel data on publicly listed firms from 2007 to 2016. Financial information and compensation data are drawn from Compustat and ExecuComp. This study reveals that base salary and discretionary bonuses tend to be unaffected by distress, whereas performance-based bonuses and restricted stock are significantly lower in distressed firms. Stock options showed ambiguous results: although the fair value of options was not seen to change, there was a significant decrease in the value realized upon exercising stock options.

Discretionary Bonus Pools and Employeess Influence Activities: An Experimental Investigation

This study experimentally investigates how the extent of superior discretion over the allocation of a bonus pool affects the output of a team when employees can engage in unproductive influence activities. Granting superiors high discretion allows them to use non-verifiable information and observations in order to mitigate free-rider incentives in teams. Prior research, however, also suggests that discretion may give rise to unproductive influence activities of employees. The question, therefore, is whether organizations should reduce superiors’ discretion extent in order to mitigate influence activities in teams. Conventional economic theory assumes that superiors optimally account for influence activities in bonus decisions if they have incentives to do so. Reducing the discretion extent therefore harms superiors’ flexibility and may impair the efficiency of discretionary bonus pools. Relying on behavioral theory, however, I argue that superiors likely overweight their personal information in bonus decisions. This increases incentives for employees to engage in influence activities under high discretion and detracts them from contributing to team output. I thus predict that reducing superiors’ discretion extent actually increases team output. Furthermore, I predict and show that the degree of mutual monitoring between peers amplifies the positive effect of reducing superiors’ discretion extent. The reason is that influence activities of peers are more salient under a high degree of monitoring and thereby affect behavior and fairness perceptions of employees more strongly. Reducing the discretion extent therefore becomes particularly important with higher degrees of mutual monitoring. This study contributes to the literature on discretionary bonus pools by providing evidence on the failure of superiors to sufficiently account for influence activities in bonus decisions and, thus, on the benefits of limiting superiors’ discretion extent.

Relational Bonus Contracts versus Rank-Order Tournaments with Envious Workers

This paper shows that relative pay comparisons among coworkers may induce employers to implement discretionary bonus pay rather than tournaments even if worker performance is nonverifiable. In a repeated game between the firm and its workers, I explore the trade-off between the agency costs due to the firm's commitment problem and those due to envy among workers. When workers are purely selfish, the tournament outperforms independent bonus contracts, while the result is reversed for envious workers if the firm's commitment ability is sufficiently high. Moreover, bonus contracts may become superior more often as envy among workers gets more pronounced.

Shareholder say on pay and CEO compensation: three strikes and the board is out

AbstractFrom 2011 in Australia, if over 25% of shareholders vote against a non‐binding remuneration resolution, firms are awarded a ‘strike’. We examine 237 firms that receive a strike relative to matched firms, and find no association with any measure of CEO pay. However, we do find that strike firms have higher book‐to‐market and leverage ratios, suggesting that the remuneration vote is not used to target excessive pay. We also find that firms respond to a strike by decreasing the discretionary bonus component of CEO pay by 57.10% more than non‐strike firms and increasing their remuneration disclosure by 10.95%.

Subjective Evaluations: Discretionary Bonuses and Feedback Credibility

We provide a new rationale for the use of discretionary bonuses. In a setting with unknown match qualities between a worker and a firm and subjective evaluations by the principal, bonuses are useful in order to make the feedback from the firm to the workers credible. This way workers in good matches are less inclined to accept outside offers. (JEL D82, J33, M12, M52)

FOREWORDSome Ideas for Further Research in Managerial Accounting

S tanley Baiman, William H. Lawrence Emeritus Professor at the Wharton School, University of Pennsylvania, and Adjunct Professor at Bocconi University in Milan, Italy, is among the most influential contributors to the field of management accounting. Whereas his work and its reach have been both deep and broad, there are three strands in his work over the last 30 years across his circa 30 articles in major journals. In the 1980s, Professor Baiman was pivotal in jump starting the literature on agency problems in accounting, with Joel Demski, the 2011 winner of this Lifetime Contribution Award. Stan was a pioneer with agency theory in accounting, which became an important research framework in management accounting since its ‘‘invention’’ in the late 1970s. Stan’s early work led us to rethink how classic managerial accounting ideas, like variance investigation and responsibility accounting, are impacted when used to measure and evaluate managerial performance. In the mid-1990s, Stan and his coauthors made important progress on organizational design and multi-agent contracting problems. The interplay of contracting and organizational design is at the heart of management accounting. Particularly of note here is the paper ‘‘On the Usefulness of Discretionary Bonus Schemes’’ (The Accounting Review 1994), where the ingenious solution of a ‘‘budget balancer’’ was introduced in the setting of a bonus pool with multiple agents. This paper triggered significant follow-up work to the present and has been key in explaining the ubiquity of bonus pools in practice. In the early 2000s, Stan’s research focus shifted to examining management accounting issues in inter-firm contracting problems, such as in supply chains. Much of this work adopts an ‘‘incomplete-contracting’’ logic where contracts are too complex and too dynamic to be completely specified in advance. His survey article in this area, ‘‘Incentive Issues in Inter-Firm Relationships’’ (Accounting, Organizations and Society 2002), describes this in sufficient detail to help new researchers in the area, but is intuitive enough to be readable by consumers, and not just the producers, of this style of research. Professor Baiman has written a number of influential surveys, which have become essential reading for Ph.D. students and researchers throughout the world in accounting, as well as adjacent fields. His survey articles ‘‘Agency Research in Managerial Accounting’’ (Journal of Accounting Literature 1982) and ‘‘Agency Research in Managerial Accounting: A Second Look’’ (Accounting, Organizations and Society 1990) were not only invaluable to agency researchers, but also made the field accessible to nonagency (and nonanalytical) researchers.

BOOK REVIEWS

BOOK REVIEWS

Relative Performance Evaluation and the Use of Discretionary Bonuses in Executive Compensation

Relative Performance Evaluation and the Use of Discretionary Bonuses in Executive Compensation