Employment relationships provide fertile ground for both employee and employer opportunism. Employers worry about whether employees will devote sufficient effort to work, and employees are concerned about whether employers will compensate them appropriately. In this paper, we examine whether employer discretion over the size of the total employee compensation pool and the allocation of this pool among employees influences employee and employer opportunism. The results of our experiment indicate that firm output and employees' compensation are greater when the employer does not have discretion over total employee compensation, but does have discretion over the allocation of total compensation. We find that the employer's residual profit increases with discretion over the allocation of compensation among employees; however, we find no effect on residual profit of the employer's discretion over the total amount of employee compensation. Our results suggest that firms benefit from a compensation contract that establishes total employee compensation as a predetermined function of public, aggregate measures such as accounting income, but provides the employer at least some discretion to allocate this compensation using private information. However, our results caution that employees and employers may not have similar preferences for the degree of employer discretion over the determination of total employee compensation.
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1 April 2005
Research Article|
April 01 2005
An Experimental Investigation of Employer Discretion in Employee Performance Evaluation and Compensation
Geoffrey B. Sprinkle
Geoffrey B. Sprinkle
dIndiana University.
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Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
2005
The Accounting Review (2005) 80 (2): 563–583.
Citation
Joseph G. Fisher, Laureen A. Maines, Sean A. Peffer, Geoffrey B. Sprinkle; An Experimental Investigation of Employer Discretion in Employee Performance Evaluation and Compensation. The Accounting Review 1 April 2005; 80 (2): 563–583. https://doi.org/10.2308/accr.2005.80.2.563
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