Management Accounting Section Midyear Meeting

The Effect of Past Performance and Task Type on Managers’ Target Setting Decisions: An Experimental Investigation

• In Event: Budgeting and Target Setting (Experimental)

Abstract

This study investigates how performance-to-target (exceeding vs. missing prior target) and task type (ability-driven vs. effort-driven) affect manager’s target setting decisions in a setting in which a manager sets targets for multiple employees. We predict that target adjustments are greater when the prior target is exceeded than when it is missed, especially when the task is ability-driven rather than effort-driven. Additionally, we predict that target difference, i.e., the difference in target levels between stronger and weaker performer within the firm, is larger when task is ability-driven than when it is effort-driven and that this effect is attenuated when prior targets are missed compared to when they are exceeded. Our findings, from an experiment using executives from an EMBA alumni program averaging more than 16 years of professional work experience support our hypotheses as well as the underlying theoretical process. As prior empirical findings are inconclusive in this area of reseach, we contribute to the literature by providing controlled experimental evidence about the asymmetric nature of target adjustments when prior targets are exceeded vs. missed. Additionally, we identify an important factor that affects managers’ target setting decisions—task type—that has largely been neglected in prior work.

Authors

• Markus C Arnold, University of Bern

• Martin Artz, University of Münster

• Ivo D Tafkov, Georgia State University