The (Non-)Use of New Information for Incentive Recalibration: Evidence from Sales Managers’ Intra-year Target Revisions

Abstract

We investigate whether and under which conditions top management uses or commits to not use new information when deciding about intra-year bonus target revisions, and how this use or non-use of information varies contingent on firms’ organizational design. First, we analyze whether firms’ use of new information for performance evaluation depends on the level of a manager’s incentive miscalibration that can be recalibrated with an intra-year target revision (i.e., benefits of using new information). Second, we explore whether higher degrees of delegated decision authority and intra-firm interdependencies increase firms’ costs of using new information, thereby increasing the cost of reacting to miscalibrated incentives. For a sample of sales executives, we find support for our hypotheses. Our paper contributes to literature streams highlighting the benefits of commitment in target setting and the relationship between organizational and incentive design.

Keywords: Bonus function; commitment; delegated decision authority; incentives; intra-firm interdependencies; sales executives; target deviation; target revision

JEL Classification: M41, M52