The Relation between Individual Characteristics and Compensation Contract Selection

Posted: 14 Jul 2016

See all articles by Dennis Fehrenbacher

Dennis Fehrenbacher

Institute of Accounting, Control and Auditing (ACA), University of St.Gallen; Department of Accounting, Monash Business School, Monash University

Steven E. Kaplan

Arizona State University

Burkhard Pedell

University of Stuttgart

Date Written: July 12, 2016

Abstract

In this study we examine the relation between individual characteristics and the choice of a compensation contract. Based on a framework introduced by Waller and Chow (1985), we propose that the choice of a compensation contract will be associated with three types of individual characteristics: task related skills, risk preferences, and psychological traits. The two psychological traits considered in our study are need for achievement and locus of control. We also examine potential interactions between individual characteristics and the choice of a compensation contract. In our research, participants initially practice a task and are given feedback, and subsequently select a compensation contract which is used to determine their pay during a real-effort work session of the same task. The menu of contracts is composed of a fixed pay contract without performance incentives, and two performance-based contracts reflecting moderate and high performance incentives. We find that skill is significantly associated with selecting a performance-based contract and the type of performance-based contract. We also find that risk preferences, need for achievement and locus of control are significantly associated with selecting a contract with performance incentives. We also find several instances of marginal significance with respect to need for achievement and locus of control moderating the relation between other individual characteristics and contract selection. Overall, our evidence suggests that both skill and non-skill characteristics are associated with individuals’ compensation contract choices.

Keywords: Self-selection, Contracting, Individual characteristics, Risk preferences, Psychological traits

JEL Classification: M4

Suggested Citation

Fehrenbacher, Dennis and Kaplan, Steven E. and Pedell, Burkhard, The Relation between Individual Characteristics and Compensation Contract Selection (July 12, 2016). Management Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2795566

Dennis Fehrenbacher (Contact Author)

Institute of Accounting, Control and Auditing (ACA), University of St.Gallen ( email )

St.Gallen, 9000
Switzerland

Department of Accounting, Monash Business School, Monash University ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia

Steven E. Kaplan

Arizona State University ( email )

Tempe, AZ 85287
United States
602-965-6498 (Phone)
602-965-8392 (Fax)

Burkhard Pedell

University of Stuttgart ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany

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