Management Accounting Section Midyear Meeting

The Effect of RPI on Employee’s Ex Ante Compensation Expectations and Ex Post Compensation Requests

• In Event: Incentives and Compensation III

Abstract

This study examines the effect of RPI on employees’ ex ante perceptions of fair compensation and their subsequent requests regarding compensation. Using a laboratory experiment we form groups of five workers (with one manager) to perform an effort based task. Prior to performing the task, workers provide a hypothetical distribution of fair compensation across the relative performance ranks. After completion of the task, workers are provided RPI showing their performance rank compared to other workers in the group. Each worker is then allowed to request any compensation they desire from the manager (within a given range). We find the ex ante distributions reflect decreasing compensation as rank decreases in accordance with fairness sentiments. However, as predicted, deviations from the fairness sentiments established in the ex ante distributions increase as performance rank decrease. As rank decreases, workers do not want to admit failure or accept challenges to their self-image, and thus, their compensation requests increase. Our findings provide evidence that RPI can lead workers to divert from ex ante sentiments of fair compensation, especially low performing workers.

Authors

• Bei Shi, Georgia State University

• Jeremy Douthit, University of Arizona

• Michael John Majerczyk, Georgia State University

• Tyler F Thomas, University of Wisconsin-Madison