Affect and Performance under Bonus, Penalty, and Hybrid Incentive Contracts

• In Event: Research in Management Accounting

Abstract

In an experimental setting, we examine the effects of an incentive contract with both penalty and bonus components (a hybrid contract) on individuals’ contract affect (perceived fairness and compensation-related satisfaction), and effort in a performance task. We also introduce a new measure of the economic effects of contract frame. Our work follows research that suggests while individuals prefer bonus contracts (because they perceive them to be more fair) they exert more effort under penalty contracts (due to their desire to avoid the penalty). Specifically, we examine whether there is a realistic hybrid contract design that agents will view similarly to bonus-only contracts but under which they will exert more effort than bonus-only and penalty-only contracts. Overall, we find that our participants perceive bonus contracts to be more fair and satisfactory (in terms of compensation) than penalty contracts, suggesting that they are not fundamentally different from participants in other contract frame studies. Our main findings are threefold. First, we find that our participants do not differentiate between bonus contracts and hybrid contracts on perceived fairness and compensation-related satisfaction. Second, we find that the hybrid contract leads to more output than the bonus-only and penalty-only contracts. Lastly, we find that our economic effects measure (i.e., the cost to the employer per unit of output) is highest (most costly) under a penalty-only contract but we find no significant difference between bonus-only and hybrid contracts, which suggests that the hybrid contract creates as much goal congruence as a bonus-only contract.

Authors

• Linda Ragland, University of New Hampshire

• Lee Kersting, Northern Kentucky University

• Nathan V. Stuart, University of Wisconsin Oshkosh

• Ann C Dzuranin, Northern Illinois University