The Effect Of Individual And Pooled Profit Sharing Plans On Honesty In Managerial Reporting

Abstract

Many organizations offer profit sharing plans to motivate increased effort and goal congruence. However, an unintended consequence of such plans may be to reduce honesty in managerial reporting. We investigate two commonly observed profit sharing plans (individual and pooled) in a laboratory experiment where multiple agents with private cost information submit budget requests to an employer. Consistent with our prediction based on crowding theory, our findings suggest that honesty is reduced in the presence of an individual profit sharing plan. However, when a pooled profit sharing plan is used, the adverse effects on honesty are partially mitigated. Our results suggest that an unintended consequence of profit sharing (decreased honesty) can be mitigated through interdependency from pooled plans. The results have practical implications, given that organizations have flexibility in establishing both the size and scope of their profit sharing plans. Our study also contributes to our understanding of reporting behavior, particularly in multi-agent settings.

Publication Date

6-1-2018

Publication Title

Contemporary Accounting Research

Volume

35

Issue

2

Number of Pages

696-715

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1111/1911-3846.12400

Socpus ID

85047556358 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85047556358

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