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.
|Place of Publication||Tilburg|
|Number of pages||38|
|Publication status||Published - 24 Nov 2018|