The Effect of Bonus Deferral and Bonus Recovery on Effort in Multidimensional Tasks
55 Pages Posted: 14 Jan 2019 Last revised: 2 Apr 2019
Date Written: January 14, 2019
We examine the impact of bonus deferral and bonus recovery on managers’ self-interested behavior. Deferred bonuses and bonus recovery provisions are important elements in modern incentives schemes designed to motivate managers to act in the best interest of the firm. Drawing on construal level theory and loss aversion, we propose that bonus deferral and bonus recovery encourage managers to exert effort toward advancing their company’s long-term interests. We conduct an experiment to examine this proposition and analyze managers’ willingness to exert real effort in a multidimensional task where managers can allocate effort towards increasing output quantity or output quality. We find that bonus deferral and bonus recovery work as complements. Both encourage effort provision, however towards different output dimensions. While bonus deferral increases output quantity, bonus recovery provisions induce managers to increase effort towards output quality in order to avoid losing previously awarded bonuses. Our study contributes to the debate on effective managerial compensation by showing that bonus deferral and bonus recovery can help align managerial interest with firm goals.
Keywords: Managerial compensation, self-interest, deferred bonus payments, bonus recovery
JEL Classification: M40, M41
Suggested Citation: Suggested Citation