Social Norms and Incentive Contract Design

54 Pages Posted: 27 May 2012 Last revised: 17 Aug 2018

See all articles by Margaret A. Abernethy

Margaret A. Abernethy

University of Melbourne, Department of Accounting

Jan Bouwens

Amsterdam Business School

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Laurence van Lent

Frankfurt School of Finance & Management gemeinnützige GmbH - Accounting Department

Date Written: June 15, 2018

Abstract

We develop a model to investigate how social norms influence a manager’s desired actions (supply of effort) and undesired actions (unproductive activities that are costly to firm owners). Specifically, when a manager has a strong preference to conform to the behavior of other managers, we predict that the firm will adjust contract design choices related to incentive strength and performance measurement. Empirically we draw on the notion of an organization’s work climate to capture managers’ preferences to conform to social norms. Using data collected from a sample of 557 managers we find that in a work climate where the prevailing norm is defined as what is right for oneself, firms have weaker incentives and place a greater weight on aggregate performance measures. In addition, respondents report to engage more in undesirable actions. In contrast, when the social norm highlights how actions impact on others, firms place lower weights on aggregate performance measures. At the same time, respondents report that they supply more effort and engage less in undesirable actions.

Keywords: incentive contract; performance measures; social norms; unproductive actions; work climate

JEL Classification: M41

Suggested Citation

Abernethy, Margaret A. and Bouwens, Jan and Hofmann, Christian and van Lent, Laurence, Social Norms and Incentive Contract Design (June 15, 2018). Available at SSRN: https://ssrn.com/abstract=2067040 or http://dx.doi.org/10.2139/ssrn.2067040

Margaret A. Abernethy

University of Melbourne, Department of Accounting ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia
+61 3 8344 7655 (Phone)
+61 3 9349 2397 (Fax)

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Laurence Van Lent (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH - Accounting Department ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany
+4969154008531 (Phone)

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