The Dark Side of Compensation Discretion: How are Targets Affected When Superiors Have a Back-Up Plan?

• In Event: 5.04 Personality Trait

Abstract

Target setting by superiors and their discretion in compensation decisions are important pieces in an organization’s control system. Thus, we examine how these processes affect each other and superiors’ decisions therein. We predict, and experimentally find, that superiors with ex post compensation discretion set more aggressive targets and put less time into the target-setting process, as they rely on their discretion as insurance against setting an overly aggressive target with insufficient effort. This is an important finding, as past research shows that subordinates find aggressive targets especially demotivating when their superiors have ex post discretion. We further examine the target-setting process by analyzing the effect of Dark Triad personality traits on superiors’ target-setting decisions. We find that high Dark Triad superiors with ex post discretion set the most aggressive targets, but without ex post discretion these superiors set the least aggressive targets. This facet can be considered in the design of compensation plans and provides insight as to why compensation plans affect individuals differently. Additionally, we find in supplemental analyses that superiors’ target setting affects how they use their ex post compensation discretion. Thus, our study illustrates that target setting and compensation discretion influence each other to affect superiors’ decisions concerning subordinates, providing insight into the use of these processes within management control systems.

Authors

• Rachel Martin, Utah State University

• Tyler F Thomas, University of Wisconsin-Madison