Home / Summaries / Class notes - Judgment & Decision Making in Accounting / compensation-bonus-contracts

Brink & Rankin (2013)

4 important questions on Brink & Rankin (2013)

Why is the design on incentive compensation an important and controversial in today's economic environment?

Many feel that existing compensation systems fail to motivate upper-level management to act in the best interest of shareholders. As a result, firms are redesigning their compensation plans by for instance, cut bonuses, placing penalties and clawbacks, to match executive compensation with firm performance.

Which two types of contracts are examined?

1. A contract where meeting target results in receiving a bonus, and failing to meet the target results in a penalty.
2. Clawback setting, where a bonus may be clawed back when the target is not met.

What are the judgment(s) and decision(s) studied in this paper?

Decision(s): individuals decisions regarding different framed incentive compensation contracts which include bonuses, penalties and clawback provisions.
Judgment(s): judgments about the two types of combination incentive compensation schemes: 1) combination of penalty and bonus for failing or meeting targets, 2) contract with clawback provision

What is/are the (normative) benchmark(s) against which the judgment(s) or decision(s) are compared?

In this experiment the authors focus on comparing contracts that are economically equivalent, but have different framing (e.g. flat salary, flat salary plus bonus, flat salary plus penalty). Differences in the choices of participants could therefore be attributed to the framing of the contract, rather than the economic value of the contracts.

The question on the page originate from the summary of the following study material:

Judgment & Decision Making in Accounting

View summary