Well It’s Only Fair: How Perceptions of Manager Discretion in Bonus Allocation Affect Intrinsic Motivation

• Date: 01 September 2019
• Published date: 01 September 2019
• DOI: http://doi.org/10.1111/joms.12445
• Author: Rebecca Hewett,Hannes Leroy

© 2019 The Authors. Jour nal of Manageme nt Studies publis hed by Society for the Adva ncement of Managment Stud ies

and John Wiley & S ons Ltd.

Well It’s Only Fair: How Perceptions of Manager

Discretion in Bonus Allocation Affect Intrinsic

Motivation

Rebecca Hewett and Hannes Leroy

Erasmus University

ABST RACT Perceptions of manager d iscretion in incentive allocation are t heoretically and

practical ly important to help explain the much-debated rel ationship between performance-re-

lated bonuses and intr insic motivation. We argue, and demonstrate, that perceive d managerial

discretion is a key moderat or to this relat ionship because of its releva nce to procedural fairness.

In a fir st study, we developed a measure for perceived manag er discretion and disting uished it

from related concepts. In a s econd experiment, we found that higher bonuses associate d with

higher levels of perceived mana ger discretion enhanced procedural f airness but those based on

lower discretion did not. In a t hird field study, we found that actual bonuses i mplemented by a

service orga nization enhanced intrins ic motivation indir ectly through procedural fai rness, but

only when employees perceived their bonus to be base d on higher levels of perceived mana ger

discretion. Converse ly, when bonus level was associated with lower perce ived manager discre-

tion, it negatively predicte d of intrinsic mot ivation.

Keywo rds: compensation, int rinsic motivation, manag er discretion, pay-for-performance,

procedural fairness

INTRODUCTION

Organizations are increasingly interested in creating work environments to encourage

passion, purpose, and engagement (Cable, 2018; Pink, 2010). These factors are about

engendering intrinsic motivation – doing a job because it aligns with who you are, and

your core interests and values, rather than pursuing work-related tasks for extrinsic rea-

sons (Deci, 1971). At the same time, organizations invest large amounts of money in

Journal of Man agement Studi es 56:6 September 2019

doi:10. 1111/jo ms .124 45

Address for re prints: Rott erdam School of Management, Erasmus Universit y, Burgemeester Oudlaa n 50,

T Building , Room 8-23, 3062 PA Rotterdam, The Net herlands (hewett@rsm .nl) +31 (0)10 408 8640

This is an op en access article under the t erms of the Creat ive Commo ns A ttri but ion License, which

permits use, d istribution and reproduct ion in any medium, provided the or iginal work is properly cite d.

110 6 R. Hewett and H. Leroy

© 2019 The Authors. Jour nal of Manageme nt Studies publis hed by Society for the Adva ncement of Managment Stud ies

and John Wiley & S ons Ltd.

extrinsic motivators. Pay for individual performance (PFIP), in particular, is one of the

most common forms of workplace financial incentives, used by organizations across

countries and industries ( Willis Towers Watson, 2018) and considered a central com-

ponent of strategic HR management (Heneman et al., 2002; Gerhart et al., 2009). Yet,

there is still a lack of clarity about the relationship between extrinsic incentives and

intrinsic motivation. Our study aims to contribute to the current understanding of how

incentives (i.e., PFIP) enhance or detract from intrinsic motivation in the workplace

(Deci et al., 2017; Gerhart and Fang, 2015).

PFIP, or individual performance-related bonuses, are lump sum payments which rec-

ognize past performance (Milkovich et al., 2013). The use of PFIP to motivate perfor-

mance is underpinned by principles of agency theory (Eisenhardt, 1989), expectancy

theory (Vroom, 1964), and goal-setting theory (Locke and Latham, 1990), which suggest

that individuals are motivated to achieve outcomes which are more instrumental. This is

supported by empirical evidence which has found that extrinsic incentives can increase

effort, productivity, and job performance (e.g., meta-analyses by Cerasoli et al., 2014;

and Jenkins et al., 1998). However, in driving individuals’ attention towards achieving

specified outcomes, the instrumentality of PFIP may also have unintended behavioural

and attitudinal consequences (see discussion by Shaw and Gupta, 2015). Specifically, as

articulated in self-determination theory (SDT; Deci and Ryan, 1985 [and in a similar

vein in crowding-out theory from the economics domain; Frey and Oberholzer-Gee,

1997]), while instrumental incentives drive extrinsic motivation, by directing behaviour

towards a specific outcome, the same instrumentality might undermine individuals’ in-

trinsic motivation, which is driven by interest or enjoyment in the task itself (Deci, 1971;

Deci and Porac, 1979; Ryan and Connell, 1989; Ryan et al., 1983). After much historical

debate on this topic (see reviews from Deci et al., 2017 and Gerhart and Fang, 2015),

in the most recent meta-analysis, Cerasoli and colleagues (2014, p. 996) concluded that:

Incentives alone have little omnibus impact on intr insic motivation (r =.06). However,

incentive contingency has a very strong link to intrinsic motivation (r =.78): More

controlling (directly salient) incentives are associated with lower intrinsic motivation,

while less controlling (indirectly salient) incentives have a positive link.

What is clear, therefore, is that the presence of a performance-contingent incentive, in

itself, does not undermine intrinsic motivation, rather it is the perceived design of the

system which makes the instrumentality of the incentive more or less salient (Fall and

Roussel, 2014; Gagné and Forest, 2008). This has led scholars to suggest that we need

move beyond the debate about whether or not performance-contingent incentives are

detrimental to intrinsic motivation, to provide more insight into when (i.e., under which

contingencies) and why (i.e., through which mediating mechanisms) this undermining

occurs (Cerasoli et al., 2014; Gagné and Forest, 2008; Gerhart et al., 2009; Rynes et al.,

2005; Shaw and Gupta, 2015).

Individuals’ responses to incentives have consistently been found to be informed by

how the incentive is administered (e.g., Folger and Konovsky, 1989; Rynes et al., 2005;

Trevor et al., 2012). In an ideal world, PFIP would recognize employees’ unique con-

tribution to the organization. However, it is widely recognized that this is unobtainable

Bonuses, Perceived Manager Discretion and Intrinsic Motivation 1107

© 2019 The Authors. Jour nal of Manageme nt Studies publis hed by Society for the Adva ncement of Managment Stud ies

and John Wiley & S ons Ltd.

through formal measurement alone (e.g. Lawler, 1971; Rynes et al., 2005; Trevor et al.,

2012) because performance is often complex and difficult to quantify (Gibbs et al., 2004).

To overcome this, and to eliminate the ‘noise’ in measurement accounted for by those

things which cannot be easily measured (Murphy and Oyer, 2001), managers can use

their discretion to decide what they reward and how they reward it (Bol and Smith,

2011; Lawler, 1971; Moers, 2005). In fact, several Fortune 500 companies (Buckingham

and Goodall, 2015; Cappelli and Tavis, 2016) have reported a shift away from standard-

ized bonus allocation schemes towards managers exerting more discretion in pay deci-

sion-making. In this paper, we examine the implications of this phenomenon.

In order to examine how perceived managerial discretion in the allocation of PFIP

informs employees’ responses to their incentive, we turn to individuals’ evaluations of

the fairness of the bonus allocation procedure (Colquitt, 2001; Cropanzano et al., 2007;

Zapata-Phelan et al., 2009). Procedural fairness perceptions have consistently been found

to be an important mechanism through which individuals evaluate their incentives (e.g.,

Folger and Konovsky, 1989; Greenberg, 2003). At first glance, perceptions of managerial

discretion might seem contrary to evaluations of procedural fairness, as the idiosyncratic

nature of discretion undermines the idea of a standardized procedure to evaluate every

employee (Ittner et al., 2003; Lawler, 1971). However, when considering the difficulties

in accounting for the factors that lead to good performance, the recipient of the bonus

may perceive managerial discretion as a fairer way to reflect what she or he uniquely con-

tributes to the organization (Gibbs et al., 2004; Voußem et al., 2016). This is particularly

important in the context of intrinsic motivation, which is nurtured when individuals feel

that their personal contribution is valued (Deci and Ryan, 1985). We therefore predict

a mediated-moderation model in which the indirect effect of the interaction between

bonus level and perceptions of manager discretion on intrinsic motivation is mediated by

procedural fairness. Our hypothesized model is presented in Figure 1.

In specifying this model, we make several contributions to prior literature. First and

foremost, we move beyond the traditional question about whether contingent incentives

undermine intrinsic motivation to when and why undermining or enhancing might take

place. Prior work on SDT has advocated and shown that, while incentives can undermine

intrinsic motivation when designed to control behaviour (for a recent review, see Deci et

al., 2017), this need not be the case if the incentive is perceived to be informational about

how the person contributes to the organization (Thibault-Landry et al., 2018). In fact,

when incentives inform the person about how he or she is personally valued, this may

Figure 1. Theoretical model

Bonus level Intrinsic

Motivation

Procedural

fairness

Perceived

manager

discretion

H1

H2