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Setting financial performance thresholds, targets and maximums in bonus plans
journal contribution
posted on 2023-05-19, 17:25 authored by Merchant, KA, Stringer, C, Shantapriyan, PThis 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.
History
Publication title
Journal of Management Accounting ResearchVolume
30Pagination
55-73ISSN
1049-2127Department/School
TSBEPublisher
American Accounting AssociationPlace of publication
United StatesRights statement
© 2018 American Accounting Association. All rights reserved.Repository Status
- Restricted