Management Accounting Section Midyear Meeting

The Effects of Managerial Discretion in Settings with Multiple Effort Dimensions: Experimental Evidence

• In Event: Incentives & Compensation (Experimental)

Abstract

This study uses an experiment to investigate the effects of subjective performance evaluation in settings with multiple effort dimensions and their employee- and manager-related drivers. In contrast to its positive effects when effort provision is unidimensional, prior work has provided evidence that subjective performance evaluation can have negative effects when employees have multiple effort dimensions. In such settings, employees should not only exert high effort but also allocate their effort efficiently to these multiple dimensions. We identify and disentangle three potential drivers of the potentially negative effects of subjective performance evaluation in these settings. We use an interdependent team task setting where a bonus has to be allocated to the employees. First, even though a driver could be that employees may not prefer bonus allocations based on efficient effort only, we predict and find that, without any manager intervention, employees prefer efficient effort-based to equal bonus allocations. This increases performance. Second, we predict and find some evidence that when a manager is involved in performance evaluation, employees’ effort provision can be distorted because concerns about how performance will be evaluated deplete cognitive resources. Finally, we predict and find that managers use their discretion to deliberately deviate from rewarding efficient effort only and (partly) reward inefficient effort because they falsely anticipate employees’ fairness preferences or have fairness preferences themselves, which in turn decreases performance. We contribute to the literature on managerial discretion in performance evaluation by enhancing our understanding of the effects of subjectivity in settings with multiple effort dimensions.

Authors

• Markus C Arnold, University of Bern

• Kai Alexander Bauch, University of Bern