Multitasking and Incentive Contracting: an Empirical Study in the Context of Accounting Activities

It is generally accepted in economic theory that incentives can encourage managerial effort by aligning the manager and the firm’s goals and thereby increase firm performance. However, it is also recognized that the relationship between incentive compensation and performance becomes more complicated when the task involves multi-tasking wherein a single manager works on many activities or works on a single activity that has multiple sub-components. Economic theory suggests that in such a case, incentive compensation can have detrimental effects on performance. These detrimental effects arise when the multiple sub-components of a task are substitutes in the manager’s cost function. In such a case, higher effort on one dimension does not increase the output of the other dimensions. Furthermore, when some of the dimensions are less easily measured relative to others, then incentive compensation based on the more easily measured dimensions will cause a sub-optimal allocation of effort away from the less easily measured dimensions and have a negative effect on overall performance. Although the theory of multi-tasking is intuitively appealing and analytically robust, empirical testing of this theory using archival data has been a problem because of the lack of availability of task-level data. We make use of a novel data set from a large publicly traded company. Our dataset contains details about the sub-activities performed by accountants in three roles: accounts payable, credit reviews, and accounts receivable.  An analysis of task inventory based on detailed activity surveys as well as field interviews reveals the following: the accounts payable activity is comprised of a large set of sub-tasks that require tradeoffs in managerial effort (such as accuracy, timeliness, and people management), which are hard to measure, credit reviews require a smaller set of hard to measure judgmental tasks (such as design, monitoring, and analysis), and the accounts receivable activity is comprised of a smaller set of easily measurable sub-tasks (such as invoice processing). Based on the task inventory and using economic theory, we develop hypothesis about the performance effects of incentive compensation in the presence of multitasking. As predicted, inventive compensation in the presence of multitasking has detrimental effects on performance in accounts payable and credit reviews. As against this, inventive compensation in the presence of multitasking has no effect on performance in accounts receivable tasks.  Our study sheds light on the effect of incentive compensation in the presence of multitasking in accounting activities.

Alexander Brüggen is an Assistant Professor at the Department of Accounting and Information Management at Maastricht University. He holds a PhD Degree in accounting from Maastricht University. His current research interests are design and effects of managerial incentive schemes, performance measurement and evaluation and managerial decision-making and control.

Paolo Perego

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