Dividing the Pie: Do Managers Fully Incorporate Non-Contracted Information into Full and Partial Discretionary Bonus Allocations?

52 Pages Posted: 10 Aug 2006

See all articles by Wendy J. Bailey

Wendy J. Bailey

Rhodes College

Gary Hecht

University of Illinois at Urbana-Champaign

Kristy L. Towry

Emory University

Date Written: October 2006

Abstract

Research indicates that bonus plans can provide effective incentives when managers use discretion to incorporate non-contracted information into performance evaluations. The use of managerial discretion, however, draws concern about whether non-contracted information is used appropriately in performance evaluations (Baiman and Rajan 1995; Fisher et al. 2005). This paper provides experimental evidence regarding the decision processes through which managers apply discretion in allocating bonus pools. Additionally, we investigate whether the design of the bonus plan affects managers' bonus allocations. Our theory and evidence suggest that managers rely on an anchoring and adjustment heuristic to allocate bonus pools and that the bonus plan type (i.e., whether managers have full or partial discretion) influences managers' choice of anchor information. Regardless of anchor information, managers' subsequent adjustment is insufficient, resulting in a failure to fully incorporate non-contracted information. Even for those managers who do not rely on an anchoring and adjustment heuristic but instead attempt to perform comprehensive calculations, only those with full discretion fully incorporate non-contracted information.

Keywords: discretionary bonus plans, anchoring and adjustment, non-contracted information, subjective performance evaluation

JEL Classification: M40, M46, J33, C91

Suggested Citation

Bailey, Wendy J. and Hecht, Gary and Towry, Kristy L., Dividing the Pie: Do Managers Fully Incorporate Non-Contracted Information into Full and Partial Discretionary Bonus Allocations? (October 2006). AAA 2007 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=899180 or http://dx.doi.org/10.2139/ssrn.899180

Wendy J. Bailey

Rhodes College ( email )

United States

Gary Hecht

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Kristy L. Towry (Contact Author)

Emory University ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-4895 (Phone)

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