The Effect of Bonus Deferral on Managers' Investment Decisions

Abstract

We examine the impact of deferred bonus payments and employment horizon on managers' investment decisions. Bonus deferral is an important element of compensation schemes designed to mitigate managers' tendency to avoid long-term investments that can reduce their bonuses, i.e., the problem of managerial myopia. Consistent with construal-level theory in the psychology literature, we find that bonus deferral increases managers' willingness to make an investment that has detrimental effects on their current bonus but that provides long-term benefits to the firm. This is driven by managers placing greater importance on their responsibilities for advancing their firm's long-term interests and on improving their reputations within their firms. These mediation effects are moderated by participants' employment horizon. Our study contributes to the debate on effective managerial compensation by showing that a simple deferral of bonus payments can reduce the negative consequences related to managerial myopia. JEL Classifications: M40; M41. Data Availability: Data are available from the authors upon request.