Improving Perceptions of Fairness and Performance through Explanation and Perspective Taking

Abstract

Employee performance can be negatively impacted due to the occurrence of unforeseen negative events. To filter out the influence of these negative exogenous shocks on employee compensation, management can commit ex-ante to consider performing ex-post adjustments to objectively determined compensation. However, due to compensation interdependence between subordinates common to these types of incentive schemes, management may be reluctant to perform such ex-post adjustments. Employees not receiving ex-post adjustments may feel unfairly treated, suggesting the need to examine how management’s selective exercise of ex-post adjustments impact employee fairness perceptions and subsequent performance. Employees’ reaction to management’s apparent non-helping behaviour may stem in part from a lack of sensitivity to the difficulty management faces in making such adjustments. I therefore examine two interventions, perspective taking and explanation, aimed at improving employee fairness perceptions and performance. To test my predictions, I conduct an experiment with undergraduate business student participants. I find that the announcement of an ex post adjustment policy does not significantly impact participant perceptions of fairness but significantly improves performance when they encounter their first negative shock. In addition, I find that although both explanation and perspective taking significantly improve perceptions of fairness, only perspective taking improves performance after not receiving an ex-post adjustment. The current study contributes to the growing management accounting literature examining how management subjectivity in compensation contracts influence subordinate performance. This study further contributes to organizational justice literature by examining the link between fairness perceptions and task performance. Finally, my results show that perspective taking can be an effective intervention to improve employee perceptions of fairness and performance in response to receiving unfavourable outcomes, which is relevant to practitioners in designing compensation contracts for employees.