Targets, Standards and Performance Expectations: Evidence from Annual Bonus Plans

41 Pages Posted: 10 Mar 2000

See all articles by Raffi Indjejikian

Raffi Indjejikian

University of Michigan at Ann Arbor - Accounting

Peter Lenk

University of Michigan, Stephen M. Ross School of Business

Dhananjay Nanda

University of Miami - Department of Accounting

Date Written: January 2000

Abstract

This paper studies the role of performance standards in executive annual bonus plans. We find that earned bonuses exceed pre-determined target bonuses (on average), implying that standards do not reflect performance expectations in a statistical sense. We also find that target bonuses are adjusted upward (downward) in response to performance above (below) standard in a prior year. However, these adjustments do not appear to fully incorporate past performance information since our evidence also suggests that "abnormal" bonuses (earned bonus less target bonus) are positively serially correlated. Finally, we find that the magnitude of the abnormal bonus is related to proxies for the existence of information asymmetry between managers and their superiors. Overall, our results are consistent with the predictions and insights of the participative budgeting literature.

JEL Classification: J33, L22, M41, M46

Suggested Citation

Indjejikian, Raffi J. and Lenk, Peter and Nanda, Dhananjay, Targets, Standards and Performance Expectations: Evidence from Annual Bonus Plans (January 2000). Available at SSRN: https://ssrn.com/abstract=213628 or http://dx.doi.org/10.2139/ssrn.213628

Raffi J. Indjejikian

University of Michigan at Ann Arbor - Accounting ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Peter Lenk

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Dhananjay Nanda (Contact Author)

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
749
rank
31,974
Abstract Views
3,535
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information