An experimental study of the interaction effects of incentive compensation, career ambition, and task attention on Chinese managers' strategic risk behaviors

• Author: Joyce Cong Ying Wang,Daniel Han Ming Chng
• Date: 01 July 2016
• DOI: http://doi.org/10.1002/job.2062
• Published date: 01 July 2016

An experimental study of the interaction effects of

incentive compensation, career ambition, and task

attention on Chinese managers’strategic risk

behaviors

DANIEL HAN MING CHNG

1

*AND JOYCE CONG YING WANG

2

1

China Europe International Business School, Shanghai, China

2

University of Texas at Dallas, Richardson, Texas, U.S.A.

Summary Building on the person–pay interaction model, we developed and tested a model for the influence of managers’

career ambition and task attention on their responses to incentive compensation under different conditions of

firm performance. We argued that managers with greater career ambition and task attention will be more

responsive to incentive compensation, thereby engaging in more strategic risk behaviors, such as strategic risk

taking and strategic change. Results of our experiment using a managerial decision-making game with a sam-

ple of Chinese managers partially supported this contingency perspective. Under the condition of performance

decline, managers’career ambition only accentuated the positive relationship between incentive compensation

and strategic change. By contrast, task attention strengthened the positive relationships between incentive

compensation and both strategic risk taking and strategic change. However, under the condition of

performance growth, neither managers’career ambition nor their task attention influenced their responses to

incentive compensation. We discuss the implications for how organizational leaders can use incentive compen-

sation to influence the strategic risk behaviors of managers. Copyright © 2015 John Wiley & Sons, Ltd.

Keywords: incentive compensation; career ambition; task attention; strategic risk taking; strategic change

As managers’compensation significantly increased over the last three decades, executive compensation and its

effects on managerial behaviors and organizational outcomes have not only garnered tremendous interest among

management scholars, practitioners, and the general public but also generated considerable controversy. Although

management scholars agree that managers, particularly those with strategic decision-making authority and

accountability, should be provided with appropriate financial incentives for organizations to achieve their objectives

(e.g., Cyert & March, 1963; Jensen & Meckling, 1976; Lawler, 1990; Murphy, 1999), the effectiveness of executive

compensation in influencing appropriate managerial behaviors and enhancing firm performance is highly conten-

tious (Devers, Cannella, Reilly, & Yoder, 2007; Finkelstein, Hambrick, & Cannella, 2008; Gomez-Mejia, Berrone,

& Franco-Santos, 2010). Instances of corporate mismanagement and business failures in the early and late 2000s

(e.g., Enron and Lehman Brothers), along with studies that show certain forms of incentive compensation can

induce undesirable organizational behaviors, such as earnings manipulations (e.g., Harris & Bromiley, 2007;

Zhang, Bartol, Smith, Pfarrer, & Khanin, 2008), have only intensified the debate on the role of executive compen-

sation (Bebchuk, Cohen, & Spamann, 2010; Bebchuk & Fried, 2004).

Despite extensive studies, the cumulative evidence on the effects of executive compensation on managerial be-

haviors and firm performance is disappointingly mixed—the effects of executive compensation are equivocal and

often highly complex (Devers et al., 2007; Finkelstein et al., 2008; Gomez-Mejia et al., 2010). Clearly, compensa-

tion scholars need to reevaluate a central premise of normative agency theory (e.g., Holmström, 1987) in which

*Correspondence to: Daniel Han Ming Chng, Department of Strategy and Entrepreneurship, China Europe International Business School, 699

Hongfeng Road, Pudong, Shanghai, 201206, China. E-mail: dchng@ceibs.edu

Copyright © 2015 John Wiley & Sons, Ltd.

Received 28 September 2013

Revised 8 October 2015, Accepted 15 October 2015

Journal of Organizational Behavior, J. Organiz. Behav. 37, 719–737 (2016)

Published online 10 November 2015 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/job.2062

Research Article

executive compensation is expected to uniformly motivate appropriate managerial behaviors and enhance firm

performance. Therefore, the key problem facing compensation scholars and practitioners is not whether executive

compensation will work in the manner envisaged in normative agency theory but when (i.e., under what conditions)

it will work as such.

In this study, we build on and advance a contingency perspective of the effects of executive compensation. Draw-

ing on the emerging studies on executive compensation related to the person–pay interaction model (Chng, Rodgers,

Shih, & Song, 2012; Wowak & Hambrick, 2010), we contend that the efficacy of incentive compensation to affect

managerial behaviors depends on the person being offered the incentives. Wowak and Hambrick (2010) explained in

their theoretical model that managers significantly differ in their individual characteristics, such as motives,

cognition, self-confidence, and abilities; these differences will in turn influence their individual responses to

executive compensation. Therefore, the effects of compensation depend on the fit between managers’characteristics

and compensation arrangements. Exploring a similar notion of fit, Chng et al. (2012) developed and tested an

integrative model that incorporates compensation arrangements, managers’characteristics, and situational factors.

They concluded that the efficacy of incentive compensation to motivate managerial behaviors that are generally

preferred by shareholders, such as perseverance and ethical behavior, depends on both managers’self-confidence

and the firm’s performance.

Building on the aforementioned studies, we develop and test a person–pay interaction model that considers how

the characteristics of managers will influence their responses to incentive compensation. Specifically, we examine

the influence of managers’career ambition and task attention on the relationship between incentive compensation

and managers’strategic risk behaviors under different conditions of firm performance. We contend that managers

with greater career ambition and task attention will be more responsive to incentive compensation, thereby engaging

in more strategic risk behaviors, such as strategic risk taking and strategic change. We examine our person–pay

interaction model (Figure 1) using the larger data set collected by Chng et al. (2012) in an experiment using a

managerial decision-making game with a sample of experienced Chinese managers.

Our study is a direct response to calls by compensation scholars to develop contingency models of compensation

effects and to move closer to the action by examining “more proximal outcomes associated with executive compen-

sation, rather than on distal performance measures”(Devers, McNamara, Wiseman, & Arrfelt, 2008, p.562;

Gomez-Mejia et al., 2010). As such, we contribute to the important process of building a contingency perspective

of executive compensation in several aspects. First, we develop and test a specific person–pay interaction model

by focusing on the key relationship between incentive compensation and managers’strategic risk behaviors

(Finkelstein et al., 2008; Gomez-Mejia et al., 2010). Incentive compensation, which is compensation that depends

on meeting specificfirm performance goals, is uniformly prescribed by agency theory to encourage managerial risk

taking in every situation. However, this risk-enhancing effect is both equivocal and controversial (Gomez-Mejia

Figure 1. Person–pay interaction model of managers’strategic risk behaviors

720 D. H. M. CHNG AND J. C. Y. WANG

Copyright © 2015 John Wiley & Sons, Ltd. J. Organiz. Behav. 37, 719–737 (2016)

DOI: 10.1002/job