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Setting financial performance thresholds, targets and maximums in bonus plans

Citation

Merchant, KA and Stringer, CP and Shantapriyan, PT, Setting financial performance thresholds, targets and maximums in bonus plans, Journal of Management Accounting Research pp. 1-40. ISSN 1049-2127 (2018) [Refereed Article]

Copyright Statement

© 2018 American Accounting Association. All rights reserved.

DOI: doi:10.2308/jmar-52116

Abstract

This study uses both archival and field evidence from one multidivisional firm to examine how the three commonly used financial performance standards used to calibrate short-term bonus payouts—thresholds, targets and maximums—are set. The setting of the standards results from complex negotiating processes. Consistent with prior research, we find that performance targets— the middle parameter—are set to be exceeded by most organizational entities. Contrary to some existing normative theory, actual performance is often outside the incentive zone, which is defined by the range between the maximum and threshold. The reasons for this include desires to raise managers’ aspiration levels, concerns about bonus payment affordability, and trade-offs in gaining manager commitment to the standards. Often the target is not in the middle of the incentive zone. We identify three additional factors that provide partial explanations of where and why these standards are set where they are: employee risk mitigation, desire for cross-entity equity, and manager operating style.

Item Details

Item Type:Refereed Article
Keywords:incentive compensation, bonuses, performance targets, thresholds, maximums, performance evaluations
Research Division:Commerce, Management, Tourism and Services
Research Group:Accounting, Auditing and Accountability
Research Field:Management Accounting
Objective Division:Economic Framework
Objective Group:Management and Productivity
Objective Field:Management
Author:Shantapriyan, PT (Dr Paul Shantapriyan)
ID Code:125397
Year Published:2018
Deposited By:Accounting and Corporate Governance
Deposited On:2018-04-16
Last Modified:2018-07-03
Downloads:0

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