Management Accounting Section Midyear Meeting

Is it okay as long as you make a profit? –Evidence on Biased Discretionary Bonus Adjustments

• In Event: Break/Research Exhibition 3: Incentives and Cost Management

Abstract

To prevent unethical behaviors by managers and employees, many companies include compliance aspects in their compensation schemes. One example are ex post discretionary adjustments, which allow managers to react to unforeseen events like dishonest behavior. We propose that the level of ex post adjustments due to a subordinate’s misconduct depends upon the subordinate’s ex ante financial performance. We further propose that this effect is reduced when the superior must justify his/her decision to adjust or not adjust the subordinate’s bonus. Through an experiment, we find evidence confirming our hypotheses. Participants’ subjective ex-post bonus reduction is lower (higher) when the subordinate’s ex-ante objective performance is higher (lower). Additionally, our data show that increasing superiors’ accountability through justification reduces the spill-over effect. Our research can help companies to understand how and why superior managers (in-)sufficiently react to subordinates’ unethical behavior and can help to develop remuneration schemes that are less vulnerable to judgmental biases.

Authors

• Miriam Kristina Maske, University of Bundeswehr Munich

• Matthias Sohn, University of Bundeswehr Munich

• Bernhard Hirsch, University of Bundeswehr Munich