The effects of pay schemes and ratchets on budgetary slack and performance: a multiperiod experiment

Article Abstract:

The effects of using a truth-inducing (TI) pay scheme and a ratchet in standard-setting were investigated, and their effects on budgetary slack and subordinates' performance were studied. Fifty-five accounting and finance students were asked to translate 3-digit codes into alphabetic characters, and they were then asked to record their self-imposed performance standards for the subsequent production period. The results indicated that, when superiors did not have information on subordinates' performance capabilities, subordinates with self-imposed standards under the TI pay scheme added considerably less budgetary slack than the subordinates with a non-TI pay scheme. The imposition of a ratchet was just as effective as a TI pay scheme in reducing slack when superiors had information on subordinates' past performance.

Psychological aspects, Performance, Usage, Budget, Budgeting, Budgets, Wage payment systems, Production standards, Pay structure

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Financial decisions: why financial managers should avoid the perils of human judgment

Article Abstract:

Financial decision-making may be hindered by overconfidence, the use of rules of thumb, short frames of reference or a failure to consider the probability of statistical regressions to the mean. Lack of consideration of new data may cause faulty judgment, and the manner of framing alternatives may influence selection as well. The decision-making process may be improved by decomposing complex decisions into smaller parts, and by using problem-solving tools like "fault trees." Subjective judgment can be improved by statistical training, and by the use of mathematical models like multiple regressions. The assessments of decision-makers may be combined, either through their interaction or by mathematical composition.

Methods, Management, Finance, Corporations, Corporate finance

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An experimental examination of the effects of SFAS No. 2 on R&D investment decisions

Article Abstract:

The impact of Statement of Financial Accounting Standards 2 (SFAS) on decentralized managers' R&D investment decisions was investigated. SFAS 2 requires corporations to expense R&D expenditures. The subjects, consisting of 51 executive MBA and second-year MBA students, were asked to choose from menus of R&D and property, plant, and equipment (PPE) projects. The results indicated that accounting treatment had an effect on suboptimizing behavior, or the selection of inferior PPE projects over superior R&D projects. All groups exhibited suboptimizing behavior, varying levels of suboptimal behavior were identified only for R&D projects.

Research, Industrial research, Accounting and auditing, Accounting

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