Discretionary bonus adjustments allow managers to restore the alignment of employee effort and compensation when bonus amounts are based on noisy objective performance measures. The implications of discretionary adjustments for employees' future efforts and fairness perceptions present important trade‐offs for managers to consider. Adjustments may be used to motivate different types of effort in future periods, but may also create perceptions of unfairness among employees who are not affected by negative events. This study examines the joint influence of the likelihood of future negative uncontrollable events and compensation interdependence (i.e., the extent to which one employee's compensation influences others' compensation) on managers' willingness to make adjustments for the effect of a negative uncontrollable event on a single employee. In our experiment, we manipulate the likelihood of future uncontrollable events and whether bonuses are determined individually or are drawn from a shared bonus pool. Results show that managers are less willing to adjust when the likelihood of future events is high to avoid setting a precedent, thereby motivating employees to adapt to changing conditions. We also find that managers are less willing to adjust, regardless of event likelihood, when compensation interdependence is high, to avoid demotivating unaffected employees. Finally, we find that participants' general attitudes toward compensation significantly influence their adjustment decisions beyond the effects of our independent variables. Our results highlight the unique nature of discretionary adjustments, help explain findings from previous research, and demonstrate important considerations managers must make when using the flexibility provided to them in pay‐for‐performance contracts.

Strategic performance measurement systems operationalize firm strategy with a set of performance measures. A consequence of such alignment is the tendency for managers to lose sight of the strategic construct(s) the measures are intended to represent, and subsequently act as though the measures are the constructs of interest, a phenomenon referred to as surrogation . We investigate how involvement in strategy selection affects managers’ propensity to exhibit surrogation. We predict and find that strategy selection reduces surrogation. Surprisingly, we do not find that engaging in strategy deliberation, a key process underlying strategy selection, reduces surrogation. Thus, managers’ involvement in the actual choice of strategy appears to be both a necessary and sufficient condition to mitigate surrogation. Our paper broadens understanding of factors that influence surrogation, such as the effects of different aspects of managers’ strategic involvement and buy‐in. Further, by documenting how managers behave within (as opposed to simply with ) strategic performance measurement systems, we highlight the potential for managers to endogenously influence the effectiveness of such systems.

We investigate managers’ propensity to engage in strategic promotion behavior. Strategic promotion behavior occurs when managers pursue personal economic interests when contributing to employee promotion decisions, such that the probability that relatively lower performing employees are selected for a promotion is increased. We develop theory about how two important organizational characteristics—transparency about individual performance levels and the presence of group incentives—jointly affect managers’ tendency to strategically influence promotion decisions. Using a stylized lab experiment, we find that transparency about individual performance levels decreases strategic promotion behavior when group incentives are absent but not when group incentives are present. We discuss how our findings contribute to our understanding of management accounting and control systems.