An examination of the relationship between incentive compensation and deceptive performance reporting

This dissertation examined the relationship between incentive compensation and deceptive performance reporting. A substantial body of literature primarily in accounting, economics, and psychology examined how motivation is affected by goals, standards, and economic compensation for superior performance. Relatively little research, however, has investigated reactions to substandard performance or outright failure. In this dissertation, comprised of three papers, prior literature is reviewed on motivation by goals and incentives to form predictions of how incentive compensation contracts differentially motivate deceptive behavior that may be harmful to firm stakeholders. The results of two experiments are reported in which the relationships are empirically tested between the structure of incentive compensation contracts and relative compensation information on deceptive performance reporting.; Empirical results indicated that quota compensation structures or those in which the bonus is not earned until a challenging level of performance is achieved are more likely to lead to intentional performance overstatement than bounded piece-rate structures. I also found that although auditing reduces the frequency of deception, auditing does not reduce the desire to engage in such behavior but instead is effective because it reduces the likelihood of being discovered acting deceptively. Together, the results generally provide support that the structure of performance based incentive compensation structures may impact the accuracy of reported performance information, thereby adversely impacting the reliability of accounting information for decision-making purposes.