How managerial accountability mitigates a halo effect in managers’ ex-post bonus adjustments

Posted: 13 Aug 2019 Last revised: 29 Mar 2021

See all articles by Miriam Maske

Miriam Maske

University of the German Federal Armed Forces - Universität der Bundeswehr München

Matthias Sohn

European University Viadrina Frankfurt (Oder)

Bernhard Hirsch

Bundeswehr University Munich

Date Written: August 9, 2019

Abstract

To prevent unethical behaviour by employees, many companies include compliance aspects in their compensation schemes. For example, ex-post bonus adjustments allow managers to retract parts of bonuses previously paid to employees in reaction to fraudulent behaviour. We propose that the level of ex-post adjustment due to an employee’s misconduct depends on the employee’s ex-ante objective performance. We further propose that this effect is reduced when the managers must justify their final bonus decision, in which they can adjust a preliminary determined bonus. We conduct two experiments and find evidence confirming our hypotheses. The participants’ subjective ex-post bonus reduction is lower (higher) when the employees’ ex-ante objective performance is higher (lower). Additionally, our data show that increasing participants’ accountability by asking participants to justify their final bonus decision reduces this effect. Further analyses show – in line with what the halo effect proposes – that participants’ perception of employee morality mediates the effect of objective performance on the ex-post bonus reduction. This mediation is moderated by the presence of justification. Our findings expand prior research and can help firms implement remuneration schemes that foster compliant employee behaviour.

Keywords: halo effect; subjective performance evaluation; discretionary bonus adjustments; compliance; employee misconduct

JEL Classification: M14; M49; M52

Suggested Citation

Maske, Miriam and Sohn, Matthias and Hirsch, Bernhard, How managerial accountability mitigates a halo effect in managers’ ex-post bonus adjustments (August 9, 2019). Available at SSRN: https://ssrn.com/abstract=3434896 or http://dx.doi.org/10.2139/ssrn.3434896

Miriam Maske (Contact Author)

University of the German Federal Armed Forces - Universität der Bundeswehr München ( email )

Werner-Heisenberg-Weg 39
Neubiberg
Munich, 85579
Germany

Matthias Sohn

European University Viadrina Frankfurt (Oder) ( email )

Grosse Scharrnstr. 59
Frankfurt (Oder), Brandenburg 15230
Germany

Bernhard Hirsch

Bundeswehr University Munich ( email )

Werner-Heisenberg-Weg 39
Neubiberg, 85577
Germany

HOME PAGE: http://www.unibw.de

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