The Effect of Bonus Deferral on Managers’ Investment Decisions

• In Event: Corporate Governance

Abstract

We examine the impact of deferred bonus payments and employment horizon on managers’ investment decisions. Deferred bonus is an important element of compensation schemes designed to mitigate managers’ tendency to avoid long-term investments that can reduce their bonuses, i.e. the problem of managerial myopia. Consistent with Construal Level Theory from psychology, we find that bonus deferral increases managers’ willingness to make a bonus-decreasing investment. This is driven by managers’ placing greater importance on their responsibility for advancing their company’s long-term interests and on improving their reputation within the company. These mediation effects are moderated by participants’ employment horizon. Our study contributes to the debate on effective managerial compensation by showing that a simple deferral of bonus payments can reduce the negative consequences related to managerial myopia.

Authors

• Mandy Man-sum Cheng, UNSW Australia

• Tami Dinh, University of St Gallen

• Wolfgang Schultze, Universität Augsburg

• Maria Assel, Universität Augsburg