Bonus Plan Choices During an Economic Downturn

Forthcoming in Journal of Management Accounting Research

Posted: 24 Jul 2019

See all articles by Pablo Casas-Arce

Pablo Casas-Arce

Arizona State University (ASU) - W.P. Carey School of Business

Raffi Indjejikian

University of Michigan at Ann Arbor - Accounting

Michal Matejka

Arizona State University

Date Written: July 22, 2019

Abstract

We use survey data to estimate the effect of the 2008–2009 recession on three fundamental bonus plan choices. We find robust evidence that the recession (i) reduced incentive strength, (ii) increased the relative incentive weight on financial performance measures, and (iii) increased the perceived difficulty of financial performance targets, not only in absolute terms but also relative to the perceived difficulty of nonfinancial targets. To assess the extent to which these findings can be explained by standard theoretical explanations, we review prior agency literature and discuss several channels through which an economic downturn can affect firms’ bonus plan choices. Our review highlights that contracting issues rarely examined in prior empirical work such as retention concerns and information asymmetry issues are likely to play an important role during an economic downturn.

Keywords: incentives; choice of performance measures; targets; agency theory

JEL Classification: M41, M52

Suggested Citation

Casas-Arce, Pablo and Indjejikian, Raffi J. and Matejka, Michal, Bonus Plan Choices During an Economic Downturn (July 22, 2019). Forthcoming in Journal of Management Accounting Research. Available at SSRN: https://ssrn.com/abstract=3424427

Pablo Casas-Arce

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Raffi J. Indjejikian

University of Michigan at Ann Arbor - Accounting ( email )

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

Michal Matejka (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287-3706
United States
480-965-7984 (Phone)

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