Intertemporal Choices: The Role of Feedback Frequency and Reward Timing.
| Autor | Braga de Aguiar, Andson |
1 Introduction
Performance management typically demands a significant amount of time from financial executives (Agrawal, Dinneen, & Seth, 2016). The time dedicated to performance management includes measuring and evaluating employees' performance as well as providing feedback that drives employees' behavior to the achievement of both short- and long-term goals (Malmi & Brown, 2008; Merchant & Van der Stede, 2012). In particular, when designing performance management systems, one aspect that organizations should recognize is that, on one side, different levels of each of the performance management system components may have different effects on how employees allocate their time between the short- and the long-term tasks, that is, their intertemporal choices; and, on the other side, the effect of each of the performance management system components may depend on the level of other components (e.g., Chenhall, 2003; Malmi & Brown, 2008; Otley, 1980).
The literature in management and accounting emphasizes the importance of understanding what explains intertemporal choices in an organizational context. In this respect, Laverty (1996) presents a framework in which he identifies three different levels of factors to explain managerial intertemporal choices: organizational, individual, and economic. In an empirical investigation based on Laverty's framework, Marginson and McAulay (2008) suggest that the understanding of managerial short time orientation may consider not only the economic dimension (capital market pressure and performance management systems), but also the individual (e.g. cognitive processes) and organizational dimensions. Yet most empirical evidence on managerial intertemporal choices focus on economic factors; in particular, the impact of performance management system design choices, such as: (i) different performance measures (e.g., Abernethy, Bouwens, & Lent, 2013; Aguiar, Pinheiro, & Oyadomari, 2014; Farrel, Kadous, & Towry, 2008), and (ii) different types of rewards (e.g., Matta & Beamish, 2008; Souder & Shaver, 2010).
In this paper, we investigate the role of two components of the performance management system embedded in the individual dimension. Performance management systems are formal systems useful for providing information that influence decision-making and managerial action (Merchant & Van der Stede, 2012; Otley, 1980), comprising elements such as performance feedback and reward structure (Bonner & Sprinkle, 2002; Luckett & Eggleton, 1991; Malmi & Brown, 2008). In particular, we examine the effects of feedback frequency on intertemporal choices and the moderating role of reward timing.
Feedback has been recognized by the literature on work motivation as an important motivation tool that contributes to goal achievement and task performance (Latham, 2012). Feedback allows employees to compare their actual performance to pre-set goals, not only driving employees' behavior in a backward fashion by indicating when actions are needed to reduce deviations, but also driving employees' behavior in a feed-forward fashion by allowing them to learn better ways to perform their tasks (Pitkanen & Lukka, 2011). As one of its dimensions, the frequency with which individuals receive feedback information is expected to affect individual behavior and task performance (Luckett & Eggleton, 1991). Feedback frequency has also been identified as a performance management practice organizations should revise in order to adapt to changes in the work environment (Ewenstein, Hancock, & Komm, 2016). Thus, the importance of feedback frequency for organizations resides in its potential for leading to suboptimal decisions if feedback information is not provided at appropriate intervals (Latham, 2012). Prior research has dedicated a great deal of attention to the role of feedback frequency in individual decision making (e.g., Chhokar & Wallin, 1984; Lam, DeRue, Karam, & Hollenbeck, 2011; Lurie & Swaminathan, 2009; Thornoch, 2016).
As to the reward structure, prior literature on economics and psychology has recognized the motivational effects of providing monetary incentives to individuals (Latham, 2012; Prendergast, 1999). As one of the components of the reward structure, reward timing refers to the amount of time managers have to wait before receiving their rewards (Bonner & Sprinkle, 2002). Individuals typically prefer to receive their rewards immediately due to delay discounting (Kirby & Santiesteban, 2003) because waiting for a reward requires mental effort (Thaler, 1981). Thus, immediate rewards may have higher motivational effects than delayed rewards. For the purposes of this research, the importance of reward timing for organizations lies in its effects on risk-taking behavior, such as long-term decision making (Hartmann & Slapnicar, 2016; Prelec & Loewenstein, 1991).
To examine the effects of feedback frequency on intertemporal choices and the moderating role of reward timing, we collect survey data from 78 middle-level managers working at a Brazilian company. The main contribution of this research to the management and accounting literature on intertemporal choices is twofold. First, little is known about the effect of feedback frequency on intertemporal choices. Bhojraj and Libby (2005) investigate the effect of disclosure frequency of mandatory external report on myopic behavior in the presence of capital market pressure and find that, in the presence of strong capital market pressure, managers behave more myopically when more frequent disclosure is provided. We then verify if the same pattern of results holds in a setting in which feedback is not mandatory, provided for internal purposes, and in which there is no capital market pressure. Second, previous literature investigating how feedback frequency affect individual decision making does not disentangle its effect on intertemporal choices from the effect of reward timing (Bellemare, Krause, Kroger, & Zhang, 2005; Gneezy & Potters, 1997). We disentangle these two components and offer empirical evidence on the relation between feedback frequency and intertemporal choices and on the moderate role of reward timing in this relation.
The paper is structured as follows: in the next section, we review the relevant literature on intertemporal choices and develop our two hypotheses; we then describe our sample and data collection process, followed by the data analysis; finally, we discuss the main implications, limitations, and opportunities for future research.
2 Literature Review and Hypotheses Development
2.1 Intertemporal choices
Intertemporal choices represent the trade-offs individuals make between benefits and costs occurring in the short- versus long-term (Frederick, Loewenstein, & O'Donoghue, 2002). The practical importance of understanding these choices is its potential effects on organizations. Intertemporal choices causing short-term benefits may also result in long-term harm, such as when a decision maker opts for postponing an investment (e.g., purchase of a new equipment), even though this choice may compromise the organizational capacity of creating long-term value. A great debate exists over the harmful effects of short-termism, that is, intertemporal choices in which organizations focus on short-term financial results at the expense of long-term value creation. The problem with organizational short-termism is that long-term oriented organizations are shown to perform better than those focusing on short-term results (Rajgopal, 2017).
When trying to understand the determinants of intertemporal choices, the literature in psychology has dedicated attention to the role of cognitive processes associated with incentive schemes (Berns, Laibson, & Loewenstein, 2007; Soman, et al., 2005; Frederick et al., 2002). In turn, the business literature suggests three main determinants to explain intertemporal choices: organizational, individual, and economic (Laverty, 1996). Marginson and McAulay (2008) show that the understanding of managerial short-termism may consider not only economic dimensions, such as capital market pressure and performance management systems, but also individual (e.g., cognitive processes) and organizational dimensions.
The accounting literature has mostly focused on economic motives to explain intertemporal choices (Aguiar, 2011). In particular, the focus has been on identifying the best way to combine different performance measures in order to induce managers to balance their effort between the short- and long-term financial consequences of their actions (Abernethy et al., 2013; Aguiar et al., 2014; Banker & Datar, 1989; Farrel et al., 2008; Feltham & Xie, 1994; Pinheiro, Galdi, & Oyadomari, 2012; Santos, 2015). The main expectation of this literature is that the use of financial performance measures (e.g., profit) leads managers to focus on short-term actions; while the inclusion of either non-financial or return measures induces them to better balance intertemporal choices (Abernethy et al., 2013).
In this paper, we examine the effects of two components of performance management systems, that is, feedback frequency and reward timing. These components entail economic, motivational and cognitive effects on individual behavior generally and on managerial intertemporal choices specifically. We extend prior literature in accounting by examining components of performance management systems that have not only economic effects, but also cognitive influences due to the way performance and rewarding information is framed.
2.2 Feedback frequency and intertemporal choices
Feedback affects motivation by providing individual performance information (Latham & Locke, 1991; Locke, Shaw, Saari, & Latham, 1981). Feedback information changes the individuals' beliefs that the minimal level of performance will be achieved and that the performance-contingent rewards will be received (Luckett & Eggleton, 1991). Decision makers typically rely on...
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