Supervisor Discretion in Target Setting: An Empirical Investigation

Abstract

In a setting where total sales targets are dictated by corporate headquarters, we study how supervisors allocate sales targets to individual stores. Specifically, we analyze whether supervisors strategically use their discretion in the target-setting process to deal with compensation contracting issues. We begin by examining whether supervisors use their discretion to manage compensation risk. The results are consistent with the agency prediction that supervisors provide easier targets to stores that face higher levels of store-specific risk. Next, we examine whether discretion is used to mitigate fairness concerns. The results suggest that, consistent with behavioral arguments, supervisors use their discretion to deal with fairness issues, even if the area in which the supervisor is granted discretion is not the source of the fairness concerns. Finally, we analyze whether supervisors use their discretion in the target-setting process to reduce their potential confrontation costs. Consistent with research in psychology, we find that supervisors provide easier targets to store managers with relatively higher hierarchical status.

Keywords: Discretion, sales target, target-setting process, compensation risk, fairness concerns, confrontation costs

JEL Classification: M12, M40, M46, M47, J31, J33