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Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts

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  • EDDY CARDINAELS
  • HUAXIANG YIN

Abstract

Principals make decisions on various issues, ranging from contract design to control system implementation. Few studies examine the principal's active role in these decisions. We experimentally investigate this role by studying how a principal's choice of an incentive contract that may discourage misrepresentation, compared to a fixed‐salary contract, affects the honesty of his or her agents’ cost reporting. Results show that, besides an incentive effect and a principal trust effect, the active choice for incentives produces a negative “information leakage” effect. When principals use incentives, their choices not only incentivize truthful reporting and signal distrust, but they also leak important information about the social norm, namely, that other agents are likely to report dishonestly. Agents conform to this social norm by misrepresenting cost information more. Our results have important practical implications. Managers must recognize that their decisions can leak information to their agents, which may produce unanticipated consequences for the social norms of the organization.

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  • Eddy Cardinaels & Huaxiang Yin, 2015. "Think Twice Before Going for Incentives: Social Norms and the Principal's Decision on Compensation Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 985-1015, December.
    • Handle: RePEc:bla:joares:v:53:y:2015:i:5:p:985-1015
    DOI: 10.1111/1475-679X.12093
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    6. Abdel-Rahim, Heba Y. & Lorenz, Melanie P. & Zaher, Angie Abdel, 2022. "How do cultural difference, cultural exposure, and CQ affect interpretations of trust from contract choices? Evidence from dyadic cross-country experiments," Accounting, Organizations and Society, Elsevier, vol. 96(C).
    7. Pamela R. Murphy & Michael Wynes & Till‐Arne Hahn & Patricia G. Devine, 2020. "Why Are People Honest? Internal and External Motivations to Report Honestly†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 945-981, June.
    8. Satoshi Taguchi & Yoshio Kamijo, 2018. "Intentions behind disclosure to promote trust under short-termism: An experimental study," Working Papers SDES-2018-8, Kochi University of Technology, School of Economics and Management, revised Oct 2018.
    9. Marvin Deversi & Lisa Spantig, 2023. "Incentive and Signaling Effects of Bonus Payments: An Experiment in a Company," CESifo Working Paper Series 10302, CESifo.
    10. Christoph Feichter & Isabella Grabner, 2020. "Empirische Forschung zu Management Control – Ein Überblick und neue Trends [Empirical Management Control Reserach—An Overview and Future Directions]," Schmalenbach Journal of Business Research, Springer, vol. 72(2), pages 149-181, June.
    11. Kathrin Manthei & Dirk Sliwka & Timo Vogelsang, 2023. "Talking About Performance or Paying for It? A Field Experiment on Performance Reviews and Incentives," Management Science, INFORMS, vol. 69(4), pages 2198-2216, April.
    12. Ruan, Qinnan, 2022. "Management control systems and ethical decision making," Other publications TiSEM 3b6dc74f-fd2a-48ef-b1a9-c, Tilburg University, School of Economics and Management.
    13. Anthony D. Nikias & Steven T. Schwartz & Richard A. Young, 2021. "The effect of information transparency on capital budgeting with privately informed agents: a short research note," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 32(2), pages 253-268, June.
    14. Jakob Alfitian & Dirk Sliwka & Timo Vogelsang, 2021. "When Bonuses Backfire: Evidence from the Workplace," Natural Field Experiments 00725, The Field Experiments Website.
    15. Wai Fong Chua & Yu Flora Kuang & Yi (Ava) Wu, 2024. "The Effect of Organizational Climate on Sell‐side Analyst Turnover and Performance," Abacus, Accounting Foundation, University of Sydney, vol. 60(1), pages 49-90, March.
    16. Lisa-Marie Wibbeke & Maik Lachmann, 2020. "Psychology in management accounting and control research: an overview of the recent literature," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 275-328, September.
    17. Christian Daumoser & Bernhard Hirsch & Matthias Sohn, 2018. "Honesty in budgeting: a review of morality and control aspects in the budgetary slack literature," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(2), pages 115-159, August.
    18. Brink, Alisa G. & Coats, Jennifer C. & Rankin, Frederick W., 2018. "Who’s the boss? The economic and behavioral implications of various characterizations of the superior in participative budgeting research," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 89-105.

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