Cascading Controls: Manager Incentive Frame and Subordinate Effort to Help or Harm

In a typical organization hierarchy, whether a manager achieves her goals is a function of her subordinates’ effort. With this study we examine whether and when the incentives placed on the manager in turn affect the subordinates’ effort toward the manager’s goals. We consider two factors theory suggests will affect this choice: 1) the subordinate’s perception of the relationship quality with the manager; and 2) the framing of the manager’s incentive as either a bonus or a penalty. We predict and find that subordinates who perceive a higher quality relationship expend greater effort when the manager faces a penalty contract relative to a bonus contract. Conversely, when subordinates perceive a lower quality relationship they are instead motivated to exert effort to actively harm their manager’s performance, making the penalty more likely to be inflicted. In a typical one-to-many hierarchy, our results reveal that an incentive placed on a single manager has significantly greater organizational implications than has been previously documented, impacting the behavior of potentially numerous lower level subordinates as well. Further, we show that the frame of the manager’s incentive interacts with the manager-subordinate relationship such that this cascading effect is either greater benefit or cost. Our results provide valuable insights to the designers of control systems in practice. We also advance the literatures investigating incentive contract framing and the interaction of controls in an organizational setting.

This seminar is organised by the Erasmus Accounting Research Group.