Handicapping Bonus Pay for Managers

Editor's note: In March 2021, Professor Shannon Anderson and her co-authors were honored with the Management Accounting Research’s 2020 David Solomons Prize, which recognizes their important contribution to the field of management accounting research.

How can we motivate middle managers to take prudent risks and drive for performance for the organization?

"Subjectivity can be their friend," Anderson says. "If we can do a good job handicapping you, we can make sure good work is rewarded."

Store managers at national brick-and-mortar retail chains offered Professor Shannon Anderson and her co-authors an opportunity to examine how specific subjective ratings can reward such store managers, even if they are employed on a one-size-fits-all contract.

The study, “When one size does not fit all: Using ex post subjective ratings to provide parity in risk-adjusted compensation,” published online in June 2020 in Management Accounting Research, is available here. 

Think about, for example, your store manager or a retailer, all of these middle-level managers that have managerial responsibilities, how can we motivate them to take prudent risks and drive for performance for the organization?

We needed a set, a company that had a large number of middle managers that were compensated similarly, that had similar jobs, so that we could compare. And so, for our setting actually, retail proved to be very powerful because it's not uncommon for large national retailers to have store managers, where every store, yes every store has differences, but it also has strong similarities.

And so we design a compensation contract, what we term in our paper the "one size fits all" compensation contract for all managers at that level. But the reason companies go with a one-size-fits-all contract is it's not quite worth it. When you have hundreds of these managers, we really can't expend the effort to write a unique contract for each one of them. And what we found that they were doing was they used an element of subjectivity.

So, subjectivity is looking at typically messy data and distill it to one number. So now, the regional managers who might have 20 of these store managers within their region, the manager is going to rate these store managers. So, what they decided to do is they put in a subjective rating and they tell the regional managers, you should visit the stores periodically and evaluate their performance according to some checklist items and then give them a rating on a one to five scale.

We found that these regional managers took it upon themselves to assess which stores were handicapped in a particular time period and to give a little more or a little less if those store managers were advantaged or disadvantaged in this manner. With subjectivity, it can be their friend. 

You know, not unlike your golf handicap that, you're going to have a lot of slightly different stores and yet, if we can do a good job handicapping you, we can still make sure that good work is rewarded.