Management Accounting Section Midyear Meeting

The Effects of Social Connections and Supervisors’ Bonus Award Discretion on Subordinates’ Compensation

• In Event: Incentives and Compensation V

Abstract

This study examines the role of social connection bias between principals and agents in bonus allocation. Using field data from a Chinese manufacturing company that switched from a discretionary to a nondiscretionary bonus award plan, we find that, other things equal, sales agents who are socially connected to their supervisors receive higher bonus awards, on average, than sales agents who are not socially connected, thus clouding the link between sales agents’ performance and pay. However, removing supervisors’ discretion in awarding bonuses mitigates the social connection bias. Supplementary analyses show stronger social connection bias when the sales agents are highly educated or low-performing. The findings have implications for practice and research by documenting the drawbacks of allowing discretion in incentive plans in the presence of social connections between principals and agents.

Authors

• Joanna L Ho, University of California, Irvine

• Cody Lu, University of Massachusetts-Amherst

• Sandra C. Vera Munoz, University Of Notre Dame

• Anne Wu, National Chengchi University