The effect of bonus deferral on managers' investment decisions

This experiment examines the impact of deferred bonus payments and employment horizon on managers' investment decisions. Deferred bonus is an important element of a "bonus bank" scheme designed to mitigate managers' tendency to avoid long-term investments that can reduce their bonuses (the "impatient manager" problem). Consistent with construal level theory from
psychology, we find that bonus deferral increases managers' willingness to make a Bonus decreasing investment. Using a moderated mediation model we find that bonus deferral influences managers' investment decisions by encouraging managers to place greater importance on advancing their company's long-term interests and on improving their reputation within the company; but these mediation effects are significant only when participants have short
employment horizon. Our study contributes to the debate on effective managerial compensation by showing that a simple deferral of bonus payments can reduce the negative consequences related to managerial myopia.