The Effect of Bonus Deferral on Managers' Investment Decisions

What is it about?

There are growing interests by regulators and consultant firms in the use of bonus deferral as an important element of compensation schemes, in order to encourage managers to make decisions that align with their company's long-term interests. There is, however, limited empirical evidence on the effectiveness of bonus deferral in achieving this aim. This experimental study finds that the deferral of bonus payments increases managers' willingness to make an investment that has a detrimental effect on their current bonus but provides long-term benefits to the firm. This is driven by managers' placing greater importance on their responsibility for advancing their company's long-term interests and on improving their reputation within the company. 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.

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