Management Accounting Section Midyear Meeting

Leveraging Managerial Ability: The Role of Discretion, Incentives, and Persistence

• In Event: Performance Measurement IV

Abstract

Prior work documents, and we corroborate, a strong positive association between managerial ability and firm performance. We examine the moderating roles of industry discretion, incentive compensation, and persistence of ability on this relationship. We find that all three factors are important parameters that influence the strength of the ability-performance relationship. Specifically, high-ability managers are better able to take advantage of firm-level discretion to generate higher levels of profitability when industry discretion is higher. Consistent with motivation crowding theory and a substitution effect between ability and incentive compensation, we also find that incentive compensation strengthens (weakens) the ability-performance relationship for lower- (higher-)ability managers. Finally, we demonstrate in a multi-industry setting that more persistent, or stable, ability likewise enhances the ability-performance relationship.

Authors

• Barry Hettler, Ohio Univeristy

• James Cordeiro, The College at Brockport – SUNY

• Arno Forst, University of Texas Rio Grande Valley-Brownsville