The role of information accuracy and justification in bonus allocations

Previous literature shows that managers, evaluating employees, insufficiently differentiate between strong and weak performers, which causes disadvantageous organizational outcomes. Bol et al. (Acc Organ Soc 51:64–73, 2016) demonstrate in an independent bonuses context that when these managers can base their evaluations on accurate information, they differentiate more when allocating bonuses, but only when evaluation outcomes are transparent. Our experiment replicates and extends Bol et al. (2016) in a fixed bonus pool context. We investigate the effects of information accuracy and whether managers get the opportunity to write a justification to their different employees when making their bonus allocations as an alternative way to create transparency. We hypothesize and find that justification increases managers’ differentiation in bonus allocations, but only—as in Bol et al. (2016)—when performance information accuracy is high. With a path analysis we disentangle the underlying process: we find that justification increases managers’ expectations that employees will perceive the differentiation in the bonus allocations as fair, especially when information accuracy is high. Finally, such managers’ expectations are positively related to the degree to which they differentiate in their bonus allocations.