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Setting financial performance thresholds, targets and maximums in bonus plans

Merchant, KA, Stringer, CP and Shantapriyan, PT ORCID: 0000-0001-8998-9094 2018 , 'Setting financial performance thresholds, targets and maximums in bonus plans' , Journal of Management Accounting Research , pp. 1-40 , doi: 10.2308/jmar-52116.

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This study uses both archival and field evidence from one multidivisional firm to examinehow the three commonly used financial performance standards used to calibrate short-term bonuspayouts—thresholds, targets and maximums—are set. The setting of the standards results fromcomplex negotiating processes. Consistent with prior research, we find that performance targets—the middle parameter—are set to be exceeded by most organizational entities. Contrary to someexisting normative theory, actual performance is often outside the incentive zone, which is definedby the range between the maximum and threshold. The reasons for this include desires to raisemanagers’ aspiration levels, concerns about bonus payment affordability, and trade-offs in gainingmanager commitment to the standards. Often the target is not in the middle of the incentive zone.We identify three additional factors that provide partial explanations of where and why thesestandards are set where they are: employee risk mitigation, desire for cross-entity equity, andmanager operating style.

Item Type: Article
Authors/Creators:Merchant, KA and Stringer, CP and Shantapriyan, PT
Keywords: incentive compensation, bonuses, performance targets, thresholds, maximums, performance evaluations
Journal or Publication Title: Journal of Management Accounting Research
Publisher: American Accounting Association
ISSN: 1049-2127
DOI / ID Number: 10.2308/jmar-52116
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© 2018 American Accounting Association. All rights reserved.

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