Melbourne Accounting Research Seminar - Professor Paula van Veen-Dirks

Professor Paula van Veen-Dirks from the University of Groningen will present a MARS seminar.

Topic: Decision Rights and Variable Compensation at the Production Level

Abstract: We examine the interdependencies between incentive compensation and the delegation of decision rights, using data collected from production managers. In the production setting, contracting difficulties are likely to influence the interrelationship between incentive compensation and the delegation of decision rights. We first hypothesize and find that incentive compensation and decision rights are substitutes in a production setting: production managers with more decision rights receive a lower level of variable compensation. Second, we examine the influence of performance contractibility on the relationship between incentive compensation and delegation. The results show that the negative relation between decision rights and variable compensation is attenuated in a relatively more certain operating environment which facilitates performance contracting. In a similar vein, the results show that the negative relation between decision rights and incentive compensation is weakened when better quality performance measures are available. The findings are different from prior studies at the CEO level or business unit level which show that incentive compensation and decision rights are complements. Our findings suggest that job design, i.e. the responsibility for a broad variety of specific operational tasks, has a crucial influence on whether these two components are complements or substitutes.

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