Management Accounting Section Midyear Meeting

The Effects of Compensation Contracts and Process Accountability on Employee Adaptability

• In Event: Outcome Responsibility

Abstract

Prior research suggests that pay-for-performance increases performance in stable work environments. We study the effect of pay-for-performance contracts on employee performance after the optimal task execution strategy suddenly changes (i.e. adaptive performance). We propose that pay-for-performance reduces adaptive performance and that process accountability can mitigate this negative effect. To test our predictions, we conducted a 2 × 2 between-subjects experiment in which we manipulated the design of compensation contracts (flat wage versus pay-for-performance) and process accountability (present versus not). We find that pay-for-performance decreases adaptive performance when individuals are not held accountable for their decision-making processes. This negative effect of pay-for-performance goes away when individuals are held accountable for their decision-making process. Hence, process accountability mitigates the negative effect of pay-for-performance on adaptive performance. Furthermore, we find that perceived control mediates the interaction of pay-for-performance contracts and process accountability on adaptive performance. This study has important implications for the literature on the design of management control systems, as it shows that pay-for-performance and process accountability are complements with regard to adaptive performance.

Authors

• Marte Abts, KU Leuven

• Martine Cools, KU Leuven

• Sabra Khajehnejad, KU Leuven

• Alexandra Van den Abbeele, KU Leuven