The effect of variable compensation on job performance has been well established, although the examination of incentive plans relating to performance against budget targets has received limited attention. A study of the Australian manufacturing sector examined the role of organizational commitment and trust-in-supervisor in the relationship between budget-based incentive compensation schemes and employee job performance and found that such schemes can lead to greater trust-in-supervisor, which in turn leads to greater subordinate job performance and organizational commitment.
Key Topics: Variable compensation plans; Trust-in-supervisor; Organizational commitment; Job performance
Title of Reviewed Article: The effect of a budget-based incentive compensation scheme on job performance: The mediating role of trust-in-supervisor and organisational commitment
Researchers: Vincent K. Chong (The University of Western Australia) and Maggie B.C. Law (AmBank Group, Malaysia).
Publication: Journal of Accounting & Organizational Change, 2016, Vol. 12 No. 4 pp. 590 – 613.
Setting the Scene
While prior research has provided strong support for the value of variable compensation plans, increasingly research is highlighting the nuanced and complex relationship between variable compensation and employee performance, and indeed some studies have found that monetary incentives can be detrimental to employee performance (e.g. Bonner et al., 2000).
Budget-based incentive compensation plans, are those variable compensation plans in which performance is measured primarily against achievement of budget related targets. While such plans are prevalent in many companies, they have received limited research attention. While there are studies to suggest that the presence of goals, combined with pressure to achieve budget targets, motivates additional effort and performance in employees (Lau & Tan, 2003), some studies indicate that mediating variables may exist (e.g. Jenkins et al., 1998).
Research indicates that trust-in-supervisor plays an important role in subordinate job performance (Colquitt et al., 2007), and that the way in which a compensation plan is structured can affect a subordinates’ trust in their supervisor (Christ et al., 2012), with higher trust leading to higher subordinate performance (Li & Tan, 2013). Organizational commitment is another factor which appears to have implications for job performance, with various studies showing that higher organizational commitment is related to higher job performance (e.g. Subramaniam et al., 2002).
To further understand these relationships, the following hypotheses were examined as part of this study:
Hypothesis 1 – “A budget-based incentive compensation scheme is positively related to subordinate trust-in-supervisor.”
Hypothesis 2 – “A budget-based incentive compensation scheme is positively related to organizational commitment.”
Hypothesis 3 – “Trust-in-supervisor is positively related to organizational commitment.”
Hypothesis 4 – “Trust-in-supervisor is positively related to job performance.”
Hypothesis 5 – “Organizational commitment is positively related to job performance.”
Hypothesis 6 – “A budget-based incentive compensation scheme is positively associated with job performance.”
How the research was conducted
This study collected data via a survey of 120 managers working in the Australian manufacturing industry. The managers who participated in the study held senior executive positions at their companies, had budget-setting responsibility, and their company’s annual sales turnover was greater than AUD$200m. Participants worked in various departments, including marketing, sales, production, and finance.
Information was collected on budget-based incentive compensation schemes using survey questions developed by Searfoss (1976), whereby participants rated the extent to which their compensation was linked to budget performance. The Read (1962) instrument was used to measure trust-in-supervisor. Mowday et al.’s (1979) organizational commitment questionnaire (OCQ) was used to measure organizational commitment.
Job performance, the participants’ age and work experience were also measured.
Key Research Findings
Participants had an average age of 44, had 5 years’ tenure in their current positions, and had been employed for 10 years with their companies.
A relationship was found between budget-based incentive compensation schemes and subordinate trust-in-supervisor, which supported Hypothesis 1.
Hypotheses 3 and 4 were also supported, with the results indicating that there was a positive relationship between subordinate trust-in-supervisor and both organizational commitment and job performance.
A positive relationship was found between organizational commitment and subordinate job performance, supporting Hypothesis 5.
Budget-based incentive compensation schemes were not found to relate to organizational commitment or subordinate job performance, and as such support was not found for Hypotheses 2 and 6.
An indirect relationship was found between budget-based incentive compensation schemes and job performance via subordinate trust-in-supervisor and organizational commitment.
The results highlight the value of factors such as trust-in-supervisor and organizational commitment in understanding how incentive schemes impact on work behaviour. The findings suggest that budget-based incentive compensation schemes do not directly influence levels of employee job performance, but that such schemes can influence job performance through trust-in-supervisor and organizational commitment.
The results further suggest that budget-based incentive compensation schemes can have influence over the levels of perceived trust that subordinates have in their supervisor, which can in turn lead to greater organizational commitment. Consistent with prior research, it can be considered that trust-in-supervisor can act as an antecedent to increased organizational commitment, and in turn to greater job performance.
Organizational and Reward Implications
This study helps to identify the importance of designing variable compensation plans which promote high interpersonal trust and organizational commitment among employees, as developing such a climate can lead to improved employee job performance. Companies should consider designing plans which have a transparent, understandable, and equitable methodology in order to cultivate this increased trust between management and their employees, which can then lead to improved employee organizational commitment and job performance.
This study provides valuable insight into the role of trust-in-supervisor and organizational commitment in the success of variable compensation plans, and how plan design can impact on these factors. As this study was carried out in the manufacturing industry the results are most generalizable to that industry, although it is expected that similar relationships would be found within other industries; further research would be helpful in validating the universality of the relationships highlighted in this study.
Source Article: Chong, V. K., & Law, M. B. (2016). The effect of a budget-based incentive compensation scheme on job performance: The mediating role of trust-in-supervisor and organizational commitment. Journal of Accounting & Organizational Change, 12(4), 590 – 613.
Published by: Emerald Group Publishing Limited
For further details and access to the full journal article Click Here (subscription or payment may be required).
Bonner, S. E., Hastie, R., Sprinkle, G. B., & Young, Y. M. (2000). A review of the effects of financial incentives on performance in laboratory tasks: implications for management accounting. Journal of Management Accounting Research, 12(1), 19-64.
Christ, M. H., Emett, S. A., Summers, S. L., & Wood, D. A. (2012). The effects of preventive and detective controls on employee performance and motivation. Contemporary Accounting Research, 29(2), 432-452.
Colquitt, J. A., Scott, B. A., & LePine, J. A. (2007). Trust, trustworthiness and trust Propensity. Journal of Applied Psychology, 92(4), 909-927.
Jenkins, G. D. Jr., Mitra, A., Gupta, N., & Shaw, J. D. (1998). Are financial incentives related to performance? A meta-analytic review of empirical research. Journal of Applied Psychology, 83(5), 777-787.
Lau, C. M., & Tan, S. L. (2003). The effects of participation and job-relevant information on the relationship between evaluative style and job satisfaction. Review of Quantitative Finance and Accounting, 21(1), 17-34.
Li, A. N., & Tan, H. H. (2013). What happens when you trust your supervisor? Mediators of individual performance in trust relationships. Journal of Organizational Behavior, 34(3), 407–425.
Mowday, R. T., Steers, R. M., & Porter, L. W. (1979). The measurement of organizational
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Read, W. H. (1962). Upward communication in industrial hierarchies. Human Relations, 15(1), 3-15.
Searfoss, D. G. (1976). Some behavioral aspects of budgeting for control: An empirical Study. Accounting, Organizations and Society, 1(4), 375-385.
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