How managerial accountability mitigates a halo effect in managers’ ex-post bonus adjustments

Abstract

To prevent unethical behaviour by employees, many companies include compliance aspects in their compensation schemes. For example, ex-post bonus adjustments allow managers to retract parts of bonuses previously paid to employees in reaction to fraudulent behaviour. We propose that the level of ex-post adjustment due to an employee’s misconduct depends on the employee’s ex-ante objective performance. We further propose that this effect is reduced when the managers must justify their final bonus decision, in which they can adjust a preliminary determined bonus. We conduct two experiments and find evidence confirming our hypotheses. The participants’ subjective ex-post bonus reduction is lower (higher) when the employees’ ex-ante objective performance is higher (lower). Additionally, our data show that increasing participants’ accountability by asking participants to justify their final bonus decision reduces this effect. Further analyses show – in line with what the halo effect proposes – that participants’ perception of employee morality mediates the effect of objective performance on the ex-post bonus reduction. This mediation is moderated by the presence of justification. Our findings expand prior research and can help firms implement remuneration schemes that foster compliant employee behaviour.