The Effects of Vertical Pay Dispersion: Experimental Evidence in a Budget Setting

42 Pages Posted: 4 Jan 2014 Last revised: 12 Apr 2017

See all articles by Lan Guo

Lan Guo

Wilfrid Laurier University

Theresa Libby

Kenneth G. Dixon School of Accounting - University of Central Florida

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Date Written: August 5, 2015

Abstract

Vertical pay dispersion is the difference in pay across different hierarchical levels within an organization (Milkovich and Newman 1996). While vertical pay dispersion may be useful in attracting, retaining and motivating highly skilled employees (Lazear and Rosen 1981; Lazear 1995; Prendergast 1999), our study investigates a potential disadvantage; specifically, the negative impact of perceived unfairness of vertical pay dispersion on employees’ budgeting decisions. We predict and find that high vertical pay dispersion motivates subordinates to misreport costs to a greater extent than low vertical pay dispersion. Furthermore, we predict and find that superiors, on average, exercise more lenient cost controls when vertical pay dispersion is high rather than low. Supplemental analysis indicates superiors are more lenient on average due to their aversion to inequity caused by vertical pay dispersion. Our results suggest that high vertical pay dispersion can compromise the overall corporate budgeting environment, where higher levels of misreporting by subordinates goes unchecked by superiors.

Keywords: vertical pay dispersion, control strength, misreporting, budgeting

JEL Classification: M41; M12; M52

Suggested Citation

Guo, Lan and Libby, Theresa and Liu, Xiaotao Kelvin, The Effects of Vertical Pay Dispersion: Experimental Evidence in a Budget Setting (August 5, 2015). Contemporary Accounting Research 34 (1) Spring 2017, 2014 Canadian Accounting Research Annual Conference, Available at SSRN: https://ssrn.com/abstract=2374074 or http://dx.doi.org/10.2139/ssrn.2374074

Lan Guo

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

Theresa Libby (Contact Author)

Kenneth G. Dixon School of Accounting - University of Central Florida ( email )

Orlando, FL
United States

Xiaotao Kelvin Liu

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

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