Monkey See, Monkey Do? Vicarious Learning under Implicit Contracts

• In Event: Managerial Contracts

Abstract

Performance-based contracts often allow for managerial discretion, such that the manager decides after observing an employee’s performance how that employee will be rewarded or punished. Importantly, the effects of such performance-based outcomes can extend beyond the employee(s) directly affected, because such outcomes can be observed by peer employees within the firm. The net benefit of such vicarious learning as an indirect control depends on the inferences employees make after observing a peer’s performance-based outcome. In this study, we use an experiment to investigate whether the inferences observer-employees make depend on whether the valence of the observed outcome is positive or negative (i.e., a promotion versus a demotion). Using the setting of a strategic performance measurement system, we test and find support for a causal model, in which the valence of the observed outcome influences observer-employees’ inferences and subsequent behavior via their psychological distance from, and their construal of, the observed outcome. Our results suggest that how observer-employees respond after observing a peer employee’s performance-based outcome is asymmetric. Specifically, employees who observe positive outcomes plan actions designed to maximize specific measures within the strategic performance measurement system, whereas those who observe negative outcomes plan actions that are more strategy-oriented.

Authors

• Willie Choi, University of Pittsburgh

• Gary W Hecht, University of Wisconsin–Madison

• Ivo D Tafkov, Georgia State University

• Kristy L Towry, Emory University