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An Empirical Examination of Goals and Performance-to-Goal Following the Introduction of an Incentive Bonus Plan with Participative Goal Setting

Jesse H. Jones Graduate School of Business, Rice University, Houston, Texas 77005; and School of Economics and Commerce, University of Melbourne, Victoria 3010, Australia
Department of Accounting, VU University Amsterdam, 1081 HV Amsterdam, The Netherlands
Eli Broad College of Business, Michigan State University, East Lansing, Michigan 48824
swa{at}rice.edu
hdekker{at}feweb.vu.nl
sedatole{at}bus.msu.edu

Prior research documents performance improvements following the implementation of pay-for-performance (PFP) bonus plans. However, bonus plans typically pay for performance relative to a goal, and the manager whose performance is to be evaluated often participates in setting the goal. In these settings, PFP affects managers' incentive to influence goal levels in addition to affecting performance effort. Prior field research is silent on the effect of PFP on goals, the focus of this paper. Using sales and sales goal data from 61 stores of a U.S. retail firm over 10 quarters, we find that the introduction of a performance-based bonus plan with participative goal setting is accompanied by lower goals that are more accurate predictors of subsequent sales performance. Statistical tests indicate that increased goal accuracy is attributable to managers "meeting but not beating" goals and to new information being impounded in goals. We further investigate how differences among managers are associated with goal levels. We find significant "manager effects" but no "supervisor effects." In additional tests we find that cross-sectional differences among managers are related to differing marginal returns to slack-building effort. Turning to the role of new information on goals, we find that prior period performance has incremental power to explain goal levels in the postplan period. Our results provide field-based evidence that PFP and participative goal setting affect the level and accuracy of goals, effects that are associated with both information exchange and with managers' incentives to influence goals.

Key Words: pay for performance; incentives; compensation; goal participation
History: Received: July 27, 2007; accepted: August 23, 2009.