The Effect of Bonus Deferral and Bonus Recovery on Effort in Multidimensional Tasks

55 Pages Posted: 14 Jan 2019 Last revised: 2 Apr 2019

See all articles by Maria Assel

Maria Assel

University of Augsburg

Mandy M. Cheng

UNSW Australia Business School, School of Accounting

Tami Dinh

University of St. Gallen, Institute of Accounting, Control, Auditing

Wolfgang Schultze

University of Augsburg

Date Written: January 14, 2019

Abstract

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

Assel, Maria and Cheng, Mandy M. and Dinh, Tami and Schultze, Wolfgang, The Effect of Bonus Deferral and Bonus Recovery on Effort in Multidimensional Tasks (January 14, 2019). 2019 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=3315296

Maria Assel (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Mandy M. Cheng

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia
(612) 9385.6343 (Phone)

Tami Dinh

University of St. Gallen, Institute of Accounting, Control, Auditing ( email )

St. Gallen, 9000
Switzerland

HOME PAGE: http://www.aca.unisg.ch/en

Wolfgang Schultze

University of Augsburg ( email )

Augsburg, 86135
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
18
PlumX Metrics