The Effects of Goals and Pay Structure on Managerial Reporting Dishonesty

Abstract

Organizations often address agency concerns through reward systems such as goal setting and monetary incentives, and while these are important mechanisms for increasing and aligning employee effort, they can lead to undesirable or unethical behaviors. In this article, we explore the interactive effects of goals and pay structures on the amount of dishonesty that occurs in managerial reporting. Using a simulation replicating the cost reporting decisions made by managers, we find that having cost goals decreases dishonesty when managers are paid a flat wage and increases dishonesty when managers are paid a bonus for hitting certain targets. We also observe a “slippery step” effect, wherein dishonest behavior becomes increasingly worse once managers have crossed a certain threshold of dishonesty. This research helps disentangle the effects of goals and monetary incentives and identifies an important boundary condition to warnings about the dangers of goal setting in organizations.

Keywords: goalsetting, incentives, dishonesty

JEL Classification: C92, D91, M52