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The Impact of Financial Incentives on Decision Making

Lookup NU author(s): Professor Ian Dobbs, Tony Miller


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Accounting information can inform decision-makers about significant factors affecting future performance that should be taken into account in reaching a decision and it can evaluate past performance and thus provide incentives for employees to perform well in anticipation of that future evaluation. Empirical corroboration of the importance of these two roles for information has, until recently, focussed mainly on their separate investigation. An interesting question is whether, in more complex environments, formal performance-related rewards enhance the use decision-makers make of valuable decision-related information and, in turn, improve task performance. A handful of experimental studies on this question have appeared in the accounting and social psychology literatures. The results are mixed, and a consensus view on the their meaning has not yet been reached, partly because of differences in experimental environments selected for examination and partly because of alleged deficiencies in some of the experimental designs employed. This suggests potential benefits from implementing replication studies with improved research designs. Further factors that may help to understand any diversity of findings, and that have not been previously investigated, are the personal attributes of experimental subjects, such as sex, age, innate task ability, etc. Measuring and incorporating some of these factors into analyses may increase our understanding of past findings. Moreover, any systematic differences between experimental subjects in the formal mechanisms that effectively motivate them raise the prospect of enabling more informed design of employment contracts and performance measurement systems in natural occurring environments. We set out to replicate a recent American study, using a significantly larger sample size, and making improvements to both experimental design and statistical analysis of data. The report provides evidence on the robustness of previous work to variation in experimental design, and suggests statistical analyses, not routinely practised in the experimental accounting literature, that can be usefully applied.

Publication metadata

Author(s): Dobbs IM, Miller AD

Publication type: Report

Series Title: Commissioned Report by the Institute of Chartered Accountants in Scotland

Year: 2006

Source Publication Date: April 2006

Institution: Institute of Chartered Accountants of Scotland

Place Published: Edinburgh, Scotland