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Gibbs Et Al 2004 Presentatie

Gibbs Et Al 2004 Presentatie

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Determinants and Effects of Subjectivity in IncentivesAuthor(s): Michael Gibbs, Kenneth A. Merchant, Wim A. Van der Stede and Mark E. VargusSource:
The Accounting Review,
Vol. 79, No. 2 (Apr., 2004), pp. 409-436Published by:
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This content downloaded from 146.50.155.47 on Sun, 8 Sep 2013 08:42:24 AMAll use subject toJSTOR Terms and Conditions
 
THEACCOUNTINGREVIEWVol.79,No. 2pp.409-436
Determinants
and
Effects
of
Subjectivity
in
Incentives
Michael GibbsUniversityofChicagoKenneth A. MerchantWimA. Van derStedeUniversityofSouthernCaliforniaMark E.VargusTheUniversityofTexas atDallas
ABSTRACT:Thisstudyexamines twoquestions:Whendo firms makegreateruse ofsubjectivityinawardingbonuses? What are the effectsofsubjectivityonemployee paysatisfaction andfirmperformance?We examine thesequestionsusingdata fromasampleof526departmentmanagersin250cardealerships.First,thefindingssuggestthatsubjectivebonusesareusedtocomplementperceivedweaknessesinquantitativeperformancemeasures and toprovideemployeesinsuranceagainstdownsiderisk intheirpay.Specifically,use ofsubjectivebonuses ispositivelyrelatedto:(1)the extentoflong-terminvestmentsinintangibles; (2)the extent oforganizational interdependen-cies;(3)the extent to which theachievabilityofthe formulabonustargetis both difficultandleadstosignificantconsequencesifnotmet;and(4)thepresenceof anoperatingloss.Second,we findthatthe effects ofsubjectivebonusesonpaysatisfaction,pro-ductivity,andprofitabilityarelargerthegreaterthemanager'stenure,consistentwiththeidea thatsubjectivity improvesincentivecontractingwhen thereisgreatertrustbetween thesubordinate andsupervisor.Keywords:incentivecompensation;discretionarybonus;subjective performanceeval-uation;performance;paysatisfaction.DataAvailability:Confidentialityagreementspreventthe authors fromdistributingthedata.Thispaperhas benefited romcommentsbytwoanonymouseviewers,ShannonAnderson,RajivBanker,TonyDavila,HarryEvans,JoeFisher,NickGonedes,RaffiIndjejikian,illLanen,EddieLazear,MichalMatejka,KevinJ.Murphy,D.J.Nanda,RobinPoston,MichaelRaith,DhinuSrinivasan,MarkYoung,andworkshopparticipantsatCopenhagenBusinessSchool,ErasmusUniversityRotterdam,HarvardusinessSchool,Hong KongPolytechnicUniversity,HKUST(2002AccountingSummerSymposium),London School ofEconomics,NationalChengchiUniversity,TilburgUniversity,UniversityofGothenburg,UniversityPompeuFabra,UniversityofSouthernCali-fornia,TheUniversityofTexas atAustin,UniversityofWisconsin-Madison,Universityof ZurichconferencenManagement,EconomicsandCorporateGovernance),WashingtonUniversitynSt.Louis,andtheAmericanAc-countingAssociation2002 AnnualMeetingand2003ManagementAccountingMeeting.Theauthorsalso thankLiuZhengfor researchassistance.Editor'snote:Thispaperwasacceptedby TerryShevlin,SeniorEditor.SubmittedJanuary2002Accepted August2003
409
This content downloaded from 146.50.155.47 on Sun, 8 Sep 2013 08:42:24 AMAll use subject toJSTOR Terms and Conditions
 
Gibbs, Merchant,Van derStede,andVargus
I.INTRODUCTIONnimportantharacteristicf most incentive contractssthe use ofsubjectivitynevaluatingandrewardingemployees(MurphyandCleveland1995;Prendergast1999).In bonusassignments,ubjectivityan arise inseveralways,which areoftenusedincombination:1)all orpartof a bonusisbased onsubjective udgmentsaboutperformance;2)theweightsonsomeorallquantitativemeasuresaredeterminedubjec-tively,1or(3)asubjectiveperformancehresholdor"override"sused,inwhich case asubjectivedeterminations to whetheropayabonus is madebased on measuredperform-anceand otherfactors.Subjectivitysalso animportantlementofimplicitncentivesgiven,forexample, throughpromotions,obassignments,and threatof termination.Whiletheo-reticalresearchhassuggestedvariousplausiblereasons fortheuseeofsubjectivitynthe
assignmentofbonuses,empiricaltestingof these theories is rare(Bushmanetal.1996;MacLeod and Parent1999;HayesandSchaefer2000;MurphyandOyer2003).Thisstudy
helpstofillthisgap, providingan examinationofthe use ofsubjectivitynincentive
contractsusingauniquedatasetof526departmentmanagersin 250 cardealershipsthatincludes variabes relatedtosubjectivityandperceptionsofits use andeffects.Weexploretwoquestions:What are the determinants of the use ofsubjectivityinawardingbonuses?Whatare the effects ofsubjectivityonpaysatisfaction andperformance?Thefindingssuggestthatsubjectivebonuses(sometimescalleddiscretionarybonuses)areusedtomitigatedistortionsor reduce risk ofbonuses tiedbyformula toquantitative per-formancemeasures(formulabonuses).We find that theuseofsubjectivebonuses isposi-tivelyrelated to:(1)the extentoflong-terminvestmentsinintangibles;(2)theextentoforganizational interdependencies;(3)the extenttowhichtheachievabilityof the formulabonustargetis both difficultand leads tosignificantconsequencesifnotmet;and(4)thepresenceof anoperatingloss.Wealsofindthat theuseofsubjectivityincreases themanager'ssatisfaction with thepayscheme andispositivelyrelatedtoproductivityandnetprofitwhenthemanagerhaslongtenure.Weinterpretthesefindingsassuggestingthat whentrust(proxied bythemanager'stenure at thedealership)ishigher,subjectiveincentives canbe effective.SectionIIreviewsexisting theoryanddevelops hypotheses.SectionIIIdetails theempiricaldesignandmeasures. SectionIVpresentsthe results. SectionVconcludes andoffersdirectionsfor futureresearch.II. THEORYSubjectivitycanbeuseful inmitigatingvariousproblemsfacedinassigningrewardsthroughformulasbasedonquantitative performancemeasures.The use ofsubjectivityal-lowsevaluatorstoexploitanyadditionalrelevantinformation thatarisesduringthemea-surementperiodto thebenefitof both thefirm and theemployee.Thefirmcan benefitthrough improvedincentivealignmentandtheemployeecanbenefitthroughreducedrisk.Ineffect,subjectivityallowsfor the recalibrationof incentivesduringoraftertheperiod,which canbeespeciallyimportantif there are coststochangingorrenegotiatingformalbonuscontracts(Bakeret al.1988).Our mainfocus is on howsubjectivitycanplaytheseroles.However,we shouldnotexpecttheuse ofsubjectivitytoalwaysbe effective. Because
itinvolvesdiscretion,subjectivityworks wellonlyifthesupervisormakesfair,unbiased
judgmentsandif the subordinateacceptsthejudgmentsand doesnottryto influence the
Quantitativeperformancemeasuresareoftentermedobjective.However,theemployeeor evaluatorcan oftenmanipulatethemeasures,andthe measuresmaynotmeasureexactlywhattheyarethoughttomeasure,so thisterminologyismisleading.We avoid thisby usingthe termsquantitativemeasuresandformula-basedincentives.
TheAccountingReview,April2004
410
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