Publications and research

Many companies use color codes in their internal performance reports to highlight how current performance compares to performance in a previous period. We examine whether the use of color coding affects managers’ decision making in a resource allocation task. We argue that managers’ decision accuracy will be lower if they receive noisier feedback, but that this detrimental effect of noise can be mitigated through color coding. Using two experiments, we find evidence consistent with our theory. Managers who receive reports in which performance increases are color coded green and performance decreases are color coded red are less affected by noise than managers who receive feedback reports without color coding. Supplemental analyses suggest that color coding induces managers to process feedback in a more holistic manner, which reduces the adverse effect of noise on managers’ learning processes. Our findings have several important implications for research and practice.

Although it is well understood that product market competition acts as a disciplining mechanism that reduces inefficiencies, our understanding of the implications for firms’ incentive design choices is still limited. We use a comprehensive new measure of competition and examine its effect on four major choices: CEO equity portfolio incentives, annual bonus plan incentives, choice of performance measures, and difficulty of financial performance targets. We find that competition reduces firm profits and total CEO compensation, including equity grants, which then also weakens portfolio incentives. Firms respond by adjusting annual bonus plans to restore incentives. Specifically, we find that competition goes together with stronger bonus plan incentives, more challenging annual performance targets, and a greater emphasis on long-term performance measures. Finally, we show that competition increases performance relative to annual bonus targets, which we interpret as evidence that CEOs work harder but get paid less in highly competitive environments.

We use an experiment to examine escalation bias in subjective performance evaluations. Participants assume the role of manager and evaluate the performance of an employee based on a balanced-scorecard-type performance report. We manipulate whether managers recommended positively or negatively about the evaluated employee’s promotion to his current position. Consistent with the presence of escalation bias, we find that managers give higher performance ratings to employees about whom they advised positively than to employees about whom they advised negatively. Using eye-tracking data, we investigate whether escalation bias arises because managers with different prior commitments toward the evaluated employee pay attention to different items in the scorecard. We find that evaluators’ prior recommendation does not affect what proportion of their visual attention is given to favorable…

A large stream of work on relative performance evaluation highlights the benefits of using information about peer performance in contracting. In contrast, the potential costs of discouraging cooperation among peers have received much less attention. The purpose of our study is to examine how the importance of cooperation affects the use of information about peer performance in target setting, also known as relative target setting. Specifically, we use data from an industrial services company where business unit managers need to share specialized equipment and staff with their peers to manage bottlenecks in their capacity. We construct several empirical proxies for the costs and benefits of information about peer performance and examine their effects on target setting. We find robust evidence that the sensitivity of target revisions to past peer performance is higher when peer group performance has greater …

We conduct a laboratory experiment to examine whether the provision of detailed relative performance information (i.e., information about the specific performance levels of peers) affects employee performance. We also investigate how – if at all – explicit ranking of performance levels affects how employees respond to relative performance information. Our hypotheses are developed based on insights about social comparisons and status incentives from the psychology and behavioral economics literature. The results of the experiment show that the provision of relative performance information increases employee performance, yet we find no additional effects of rank ordering. Specifically, average performance levels are similar in conditions in which relative performance figures are presented in random order, in best-to-worst order and in worst-to-best order.

Prior research has shown that managers tend to compress ratings when subjectively evaluating employees and that such compression can have negative organizational consequences. We reason that organizations can use the design of their control system to influence the personal costs and benefits associated with managers’ rating decisions and thus shape managers’ rating behavior. Based on findings from prior literature, we focus on the effects of two control system design elements: the accuracy of the information on which managers need to base their evaluations and the transparency about performance evaluation outcomes. We hypothesize that increasing information accuracy will increase the extent to which managers differentiate between stronger and weaker employees, but only when there is transparency about evaluation outcomes. Our experimental data support this hypothesis, and we discuss the …

This study investigates how the weight on subjective performance measures and the achievement of bonus targets affect managers’ distributive and procedural fairness perceptions of annual bonus contracts. We argue that the effect of subjectivity on fairness perceptions follows an inverted U-shaped relationship, consistent with the idea that subjectivity increases fairness perceptions when the overall emphasis on subjective measures is relatively low, but that subjectivity decreases fairness perceptions when the overall emphasis on subjective measures is relatively high. We further argue that managers use bonus targets as referent standards, whose achievement increases perceptions of distributive fairness, but not of procedural fairness. We use a time-ordered cross-sectional survey study design to separate the measurement of ex ante contract characteristics from the measurement of actual bonus payments and …

This paper investigates the effects of a top‐down (TD) versus bottom‐up (BU) orientation in different stages of the budgetary target‐setting process on slack and managerial performance. We use social exchange theory to explain the outcomes of these alternative budgetary arrangements, and complement the traditional focus on budgetary participation in target setting with a process‐oriented perspective. We develop hypotheses predicting that TD and BU orientations in the subsequent stages of the budgeting process have different effects on managers’ exchange relationships with the firm, and their behavioral responses. Using survey evidence from German managers across 127 firms we find that a TD orientation in the issuance of guidelines enhances economic exchange and that a BU orientation in the development of the initial budget proposal enhances social exchange, which in turn are associated with …

Using past peer performance benchmarks can be an effective way to set annual performance targets, but it might discourage cooperation among business units…

The accuracy of information available to managers about an employee`s performance, combined with the transparency of performance evaluations based on that information, can help to motivate managers to reward good performance and highlight poor performance….

It is difficult to overestimate the importance of fairness in the link- ing of individual and collective effort to remuneration in a com- mercial enterprise. Arguably just as important is the perception of fairness on the part of the individual being remunerated…

It may sound incredible to management accountants, but we are on the brink of a revolution in the science of economics and business. While economics and business are beginning to recognize the advantages that neuroscientific evidence brings to understanding the behavior of people in firms and markets, our pilot study into the management accounting prospects of neuroscience to enrich and validate its role in organizations indicates that its potential contribution to management accounting knowledge could be huge…

Der Beitrag analysiert die Entwicklung der Rechnungslegungsforschung in vier führenden deutschsprachigen wissenschaftlichen Zeitschriften im Zeitraum von 1949 bis 2007…

Die Budgetierungspraxis wird seit Jahren kritisiert und kaum ein Unternehmen kommt umhin, diesen zentralen Steuerungsprozess immer wieder zu adjustieren…