Sticking with “Sticks:” The Legitimacy of Informal Controls in a Management Control Setting

• In Event: Management Accounting 2

Abstract

This study explores the impact of informal controls on employees’ motivation to reciprocate in a gift-exchange game. An informal control is when a manager does not commit to impose a control (“carrots and sticks”) up front and will decide whether to impose a control after observing employees’ performance. Managers often attempt to use formal controls, in which a manager
commits to impose a control before observing employees’ performance, to motivate employees
to perform in accordance with managers’ preferences. However, considerable existing literature shows that imposing a formal control can undermine employees’ motivation to reciprocate because it is negatively perceived by employees as a signal of distrust and an intent to forcibly align their interest with the managers’ interest. The effects of informal controls in this study are found to be the opposite of the effects of formal controls as found in the prior literature. This study has two main findings. First, employees do not exert lower effort when managers
choose to retain the option to impose an informal control. This might be explained by employees’ perception of an informal control as a legitimate and expected means of enforcing fair behavior. Second, employees exert lower effort when managers choose to abandon the option to impose an informal control. It appears that abandonment is perceived as a signal that managers believe incurring a cost to enforce fair behavior is not worthwhile. This perception undermines employees’ desire to reciprocate because employees base their willingness to behave fairly on their perception of whether managers value fair behavior. These results suggest that whether
controls are perceived positively or negatively by employees may depend on how controls are
structured – formal or informal. Managers should be aware that when a “stick” is perceived as legitimate, retaining the ability to use it does not necessarily destroy reciprocity and forgoing that ability does not necessarily showcase trust.

Author

• Jing Davis, The Ohio State University