A test of the effects of incentive compensation plans, uncertainty, and perceptions of fairness on performance, pay satisfaction, and evaluations of incentive plans

This study examines the use of one important component of managerial control systems, the compensation plan, to achieve desired goals. In particular, the study extends prior research by using an experimental setting to examine how a greater or lesser emphasis on accounting information (versus subjective judgments) in determining bonuses is associated with performance, pay satisfaction, and subjects' evaluation of the different incentive plans in the presence or absence of environmental uncertainty. In addition, tests for the effects of the perceived distributive fairness of payouts under different compensation schemes on subjects' pay satisfaction and their evaluation of the incentive plans are conducted.; The results of the study provide no support for performance varying under different incentive plans and different levels of environmental uncertainty. There is weak to moderate support for pay satisfaction for high performers being highest under a profit-based incentive plan, second highest under a subjective plan with disproportionate payouts, and the lowest for a subjective plan with roughly equal payouts. There is strong support for pay satisfaction for low performers being lowest under the subjective plan with disproportionate payouts. In addition there is strong support that perceptions of fair payouts and either absolute or relative pay are positively related to pay satisfaction under each of the incentive plans. The results of the study also indicate that subjects evaluate the profit-based plan more highly than either of the subjective incentive plans in both the presence and absence of uncertainty. Finally, the subjects' perceptions of the fairness of payouts are highly related to their evaluations of all of the incentive plans.