The Sorting Benefits of Discretionary Adjustment to Performance-Based Pay

Bart Dierynck, Victor van Pelt

Research output: Working paperOther research output

Abstract

While discretionary adjustment is a salient feature of performance evaluation and influences employee behavior during the evaluation period, we know little about whether and how employees anticipate the use of discretionary adjustment before the evaluation period. In this study, we develop and test theory suggesting that the prospect of discretionary adjustment strengthens the relationship between identification with the objectives of the organization and employees’ preference for performance-based pay. Using a laboratory experiment, we show that identification has a stronger positive effect on the preference for performance-based pay when performance-based pay is accompanied by discretionary adjustment than when it is not. The root cause for this effect is that employees expect that managers adjust performance-based pay more (less) favorably when those managers have information that employees identify strongly (weakly) with the organization’s objectives. Complementing performance-based pay with discretionary adjustment may, therefore, improve sorting on identification with the objectives of the organization. We contribute to accounting research and practice by documenting a new and previously unknown consequence of discretionary adjustment that can enrich the trade-off that managers make when designing their performance evaluation system.
Original languageEnglish
Place of PublicationTilburg
PublisherSSRN
Number of pages38
Publication statusPublished - 24 Nov 2018

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Sorting
Employees
Managers
Evaluation
Performance evaluation
Accounting practices
Employee behaviour
Trade-offs
Performance pay
Evaluation system
Accounting research
Laboratory experiments

Cite this

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The Sorting Benefits of Discretionary Adjustment to Performance-Based Pay. / Dierynck, Bart; van Pelt, Victor.

Tilburg : SSRN, 2018.

Research output: Working paperOther research output

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