The Effect of Bonus Deferral and Bonus Recovery on Managers’ Self-Interest: An Experimental Examination of Effort Provision

• In Event: 2.03 Management Behavior

Abstract

We examine the impact of bonus deferral and bonus recovery on managers’ self-interest. Deferred bonuses and bonus recovery provisions are an important element of a “bonus bank” scheme designed to motivate managers to act in the best interest of the firm. Consistent with construal level theory from psychology and loss aversion, we expect to find that bonus deferral and bonus recovery work as complements and encourage managers to place greater importance on advancing their company’s long-term interests. We conduct a computerized laboratory experiment to examine this proposition and analyze managers’ willingness to exert effort to advance their company’s interests. We find that bonus deferral encourages managers to exert more effort to the long-term benefit of their firm. More specifically, performance quantity increases when bonus payments are delayed. Moreover we find that performance quality is higher under bonus recovery provisions. In particular, managers are encouraged to increase effort intensity in order to avoid loosing previously awarded bonuses. Our study contributes to the debate on effective managerial compensation by showing that bonus deferral and bonus recovery can help align managerial interest with firm goals.

Authors

• Mandy Man-sum Cheng, UNSW Sydney

• Tami Dinh, University of St Gallen

• Wolfgang Schultze, Universität Augsburg

• Maria Assel, Universität Augsburg