When the Cat’s (Far) Away: The Effect of Control Centralization and Compensation Interdependence on Performance Misreporting

• In Event: Ethical Behavior

Abstract

This study investigates how control features influence employees’ perceptions of controls and, subsequently, their reporting behaviors. Specifically, I examine whether implementing a more centralized versus decentralized monitoring control influences employees’ perceptions of whether the control will detect misreported performance. In an experiment that holds the true detection rate constant, I find participants perceive a relatively decentralized control more likely to detect misreporting than a centralized control. Because decisions about monitoring controls and compensation systems are interrelated (O’Donnell 2000) and made contemporaneously (Brenner and Ambos 2013), I also examine whether compensation interdependence influences the effect that control centralization has on misreporting. Prior research documents aggressive reporting behavior increases as compensation becomes more interdependent (Sutter 2009). This suggests that larger increases in perceived detection rates are required to reduce dishonest reporting as compensation interdependency increases. Therefore, for a given level of perceived detection resulting from control centralization, employees are more likely to misreport when compensation is more interdependent than independent. Consistent with this reasoning, I find that a more decentralized control reduces dishonest reporting when compensation interdependence is low. However, when compensation interdependence is high, the effect of control centralization on dishonest reporting is muted. These results suggest that a complex relationship exists between control centralization and compensation interdependence. As such, this study has important implications for academics, control system designers, and compensation system designers.

Author

• Jeremy B. Lill, Georgia State University