An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Wendy J. Bailey
University of South Carolina

Gary Hecht
Emory University

Kristy L. Towry
Emory University

Abstract: Research indicates discretionary bonus plans can be effective incentive contracts when managers incorporate non-contracted information into performance evaluations. The use of managerial discretion, however, draws concern about whether non-contracted information is used appropriately in performance evaluations. In this paper, we investigate managers’ reliance on an anchoring and adjustment heuristic instead of comprehensive calculations to allocate bonus pools. We contend that bonus plan type (full or partial discretion) influences the managers’ choice of anchors and the ability to fully incorporate non-contracted information. Using an experiment to manipulate bonus plan type and non-contracted information, we find that most participants anchored and insufficiently adjusted for non-contracted information. Although some participants performed comprehensive calculations to allocate bonuses, only participants with full discretion fully incorporated non-contracted information.

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