Factors Influencing Award of Compensation Contraacts: An Analysis of Written Protocols

Author Abstract This study reports the results of an analysis of written protocols collected in a laboratory experiment from 77 subjects while they were making compensation contract selection decisions. Each subject made compensation decisions for four divisional managers operating under them. The researchers varied the level of environmental uncertainty, as well as the level of perceived agent effectiveness. The results show that the type of factors considered by the individuals differed significantly. Subjects indicated that they focused more heavily on one of the two manipulated conditions, but not equally on both. It was also found that, overall, agent effectiveness factors weighed more heavily in the compensation decisions than uncertainty considerations. Additionally, it was found that subjects used some factors in their decisions that were not part of the experimental treatments, lending further evidence to the individuality of influences on compensation contract selections. The view that compensation should be tied to performance is widespread throughout the organization literature. It is commonly believed that if one wants to motivate high performance, one should attach rewards While a majority of the literature generally advocates contingent pay systems, it is also recognized that under some conditions the implementation of such systems may be dysfunctional. For example, Lawler (1971, 1981) stated that performance contingent pay cannot be used when trust levels are low, when performance cannot be validly and inclusively measured, and when large pay rewards cannot be given to the best performers. Lawler (1971) also acknowledged that under certain circumstances, subjective judgments by superiors and objective performance data should be combined into a managerial performance measure on which pay could be based. The accounting literature on performance evaluation has also dealt with issues of performance evaluation styles (Hopwood, 1972, 1973; Keely, 1977) and how uncertainty in the operating environment affects performance evaluation and compensation contract decisions (Govindrajan, 1984). In fact, several researchers in accounting and marketing have used techniques such as analytic modeling (Basu et al. to assess the individual and proportionate effects of environmental uncertainty and level of agent (employee) effectiveness on the salary/incentive mix in employment contracts. Of these studies, however, none have analyzed the decision process resulting in the final selection. Accordingly, this study is motivated by 1) the equivocal results obtained to date regarding the effects of environmental uncertainty and agent (employee) effectiveness, and 2) the lack of any decision process-oriented studies in this field. This research also takes a …