In Search of Informed Discretion (Revisited): Are Managers Concerned about Appearing Selfish?

Abstract

To improve the quality of performance evaluation and compensation decisions, managers can undertake costly searches for additional information about employees' contributions to performance. Prior accounting research suggests that managers are generally willing to undertake these costly information searches because they have a preference for fairness. However, our experimental results show that managers are significantly less willing to undertake costly information searches when the situation allows them to avoid negative inferences when acting selfishly. Our findings are consistent with predictions rooted in behavioral economics and psychology that even self-interested people behave fairly in some situations because they have concerns about appearing selfish, either to themselves or others. We conclude that increasing managers' concerns about appearing selfish may prompt them to make fairer and thus more informed performance evaluation and compensation decisions.

Keywords: managerial discretion; discretionary bonus pool; incentive contracting; reciprocity; fairness; trust; third-party intervention

JEL Classification: C92, D91, M40, M41