An Empirical Examination of Goals and Performance-to-Goal Following the Introduction of an Incentive Bonus Plan with Participative Goal-setting

Management Science. Vol. 56, No. 1, January 2010, pp. 90–109

48 Pages Posted: 27 Mar 2007 Last revised: 7 May 2012

See all articles by Shannon W. Anderson

Shannon W. Anderson

University of California, Davis - Graduate School of Management

Henri C. Dekker

VU University Amsterdam - Department of Accounting

Karen Sedatole

Goizueta Business School

Date Written: January 2010

Abstract

Prior research documents performance improvements following the implementation of pay-for-performance (PFP) bonus plans. However, bonus plans typically pay for performance relative to a goal, and the manager whose performance is to be evaluated often participates in setting the goal. In these settings, PFP affects managers’ incentive to influence goal levels in addition to affecting performance effort. Prior field research is silent on the effect of PFP on goals, the focus of this paper. Using sales and sales goal data from 61 stores of a U.S. retail firm over 10 quarters, we find that the introduction of a performance-based bonus plan with participative goal setting is accompanied by lower goals that are more accurate predictors of subsequent sales performance. Statistical tests indicate that increased goal accuracy is attributable to managers “meeting but not beating” goals and to new information being impounded in goals. We further investigate how differences among managers are associated with goal levels. We find significant “manager effects” but no “supervisor effects.” In additional tests we find that cross-sectional differences among managers are related to differing marginal returns to slackbuilding effort. Turning to the role of new information on goals, we find that prior period performance has incremental power to explain goal levels in the postplan period. Our results provide field-based evidence that PFP and participative goal setting affect the level and accuracy of goals, effects that are associated with both information exchange and with managers’ incentives to influence goals.

Keywords: pay-for-performance, incentives, compensation, goal participation

JEL Classification: M10, M40, M46, M41, M52, J33

Suggested Citation

Anderson, Shannon W. and Dekker, Henri C. and Sedatole, Karen, An Empirical Examination of Goals and Performance-to-Goal Following the Introduction of an Incentive Bonus Plan with Participative Goal-setting (January 2010). Management Science. Vol. 56, No. 1, January 2010, pp. 90–109. Available at SSRN: https://ssrn.com/abstract=975465 or http://dx.doi.org/10.2139/ssrn.975465

Shannon W. Anderson

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Henri C. Dekker

VU University Amsterdam - Department of Accounting ( email )

Netherlands

Karen Sedatole (Contact Author)

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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