Shielding the Workforce: Does Subordinate Contract Frame Induce Leniency in Superiors’ Decisions?

Abstract

Organizations use penalty contracts to deter negative behavior, but these contracts are rarely used for subordinate performance, even though they can provide a positive motivating effect. Prior studies focus on subordinates’ reactions to contract frame to address this paucity of penalty contracts. We examine how subordinates’ contract frame affects superiors’ behavior, specifically their target-setting decisions, and whether a penalty contract increases superiors’ leniency, which could provide a potential explanation for the lack of performance penalty contracts in practice. Using an experiment, we predict and find that superiors’ set more lenient targets for subordinates under a penalty contract compared to a bonus contract, as superiors can project their negative perceptions of penalties onto subordinates and seek to mitigate these perceptions. This finding provides insight into the limited use of penalty contracts in practice, despite the positive effect that penalty contracts have on effort. Further, we find that increasing the salience of subordinates’ contract choice to the superior mitigates leniency under a penalty contract, which could increase the appeal of penalty contracts in practice. We also find that these effects are present only in low Dark Triad superiors, as high Dark Triad superiors set similar targets regardless of subordinates’ contract frame and choice.