Altruism, Social Norms and Incentive Contract Design

62 Pages Posted: 27 May 2012 Last revised: 16 Mar 2021

See all articles by Margaret A. Abernethy

Margaret A. Abernethy

University of Melbourne, Department of Accounting

Jan Bouwens

Amsterdam Business School

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Laurence van Lent

Frankfurt School of Finance and Management

Date Written: November 15, 2020

Abstract

We study theoretically and empirically the relation between altruism and incentive contract design. Theoretically, we extend Fischer and Huddart (2008) to investigate how social norms reinforce managers’ altruistic preferences, thus affecting the optimal contract design related to incentive strength and performance measurement. Empirically, we draw on the notion of an organization’s work climate to capture managers’ altruistic preferences. Using data collected from a sample of 557 managers we find that in a work climate where managers are mostly out for themselves, firms have lower pay-for-performance sensitivity and place a greater weight on aggregate performance measures. In addition, respondents report that they engage more in undesirable actions which are unproductive and costly to firm owners. In contrast, in a work climate where managers care about others, including peers in their organizational unit, firms place lower weights on aggregate performance measures. At the same time, respondents report that they supply more effort and engage less in undesirable actions.

Keywords: incentive contract; performance measures; social norms; unproductive actions; work climate

JEL Classification: M41

Suggested Citation

Abernethy, Margaret A. and Bouwens, Jan and Hofmann, Christian and van Lent, Laurence, Altruism, Social Norms and Incentive Contract Design (November 15, 2020). Available at SSRN: https://ssrn.com/abstract=2067040 or http://dx.doi.org/10.2139/ssrn.2067040

Margaret A. Abernethy

University of Melbourne, Department of Accounting ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia
+61 3 8344 7655 (Phone)
+61 3 9349 2397 (Fax)

Jan Bouwens

Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 5258740 (Phone)

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Laurence Van Lent (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

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