MONKEY SEE, MONKEY DO? VICARIOUS LEARNING UNDER IMPLICIT CONTRACTS Jongwoon (Willie ...gsm. 2019-12-16آ 

MONKEY SEE, MONKEY DO? VICARIOUS LEARNING UNDER IMPLICIT

CONTRACTS

Jongwoon (Willie) Choi

University of Pittsburgh

jchoi@katz.pitt.edu

Gary Hecht

University of Illinois at Urbana-Champaign

ghecht@bus.wisc.edu

Ivo Tafkov

Georgia State University

itafkov@gsu.edu

Kristy L. Towry

Emory University

kristy.towry@emory.edu

June 2013

We thank workshop participants at Michigan State University and Emory University’s

Behavioral Brownbag Series. We are especially grateful for helpful comments from Susanna

Gallani, Joan Luft, Kathryn Kadous, Ranjani Krishnan, Eric Marinich, Amy Swaney, and for

research assistance from Jordan Bable, Eric Chan, and Stuart Smith. We gratefully acknowledge

financial support from our respective universities.

MONKEY SEE, MONKEY DO? VICARIOUS LEARNING UNDER IMPLICIT

CONTRACTS

ABSTRACT

Performance-based contracts often allow for managerial discretion, such that the manager

decides after observing an employee’s performance how that employee will be rewarded or

punished. Importantly, the effects of such performance-based outcomes can extend beyond the

employee(s) directly affected, because such outcomes can be observed by peer employees within

the firm. The net benefit of such vicarious learning as an indirect control depends on the

inferences employees make after observing a peer’s performance-based outcome. In this study,

we use an experiment to investigate whether the inferences observer-employees make depend on

whether the valence of the observed outcome is positive or negative (i.e., a promotion versus a

demotion). Using the setting of a strategic performance measurement system, we test and find

support for a causal model, in which the valence of the observed outcome influences observer-

employees’ inferences and subsequent behavior via their psychological distance from, and their

construal of, the observed outcome. Our results suggest that how observer-employees respond

after observing a peer employee’s performance-based outcome is asymmetric. Specifically,

employees who observe positive outcomes plan actions designed to maximize specific measures

within the strategic performance measurement system, whereas those who observe negative

outcomes plan actions that are more strategy-oriented.

Keywords: vicarious learning; strategic performance measurement systems; psychological

distance; construal level theory

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I. INTRODUCTION

Accounting scholars have traditionally focused on the use of formal controls and explicit

contracts for eliciting desired behavior from employees. However, contracts are typically

incomplete, because it would be impossible to anticipate all possible outcomes and to specify

contingencies. For this reason, firms often allow for discretion in lieu of (or in addition to)

explicit contracts, such that managers decide after observing performance how employees will be

rewarded or punished. Importantly, these performance-based outcomes (e.g., promotions,

demotions, special recognitions, dismissals) are often observable by others in the organization,

and so the potential for such outcomes to influence future behavior spans well beyond the

employees directly affected (Trevino 1992; Butterfield et al. 1996). According to Wood and

Bandura (1989, 362), the observation of others’ outcomes can be invaluable, as “virtually all

learning phenomena resulting from direct experience can occur vicariously by observing

people’s behavior and the consequences of it.” In fact, prior research documents that individuals

potentially learn better from observing others’ experiences, as interpretation of their own

experiences (i.e., successes and failures) is potentially biased (Merlo and Schotter 2003).

Further, managers themselves view their decisions to reward or punish one employee as an

opportunity to signal desired behavior to other employees (Butterfield et al. 1996).

By influencing employee behavior, vicarious learning serves as an important informal

control. However, the effectiveness of this control element might be limited, because the links

between actions and outcomes are likely less obvious when they are the result of managerial

discretion than they would be with explicit contracts. Therefore, it is unclear how performance-

based outcomes will be interpreted affect future actions. In this study, we examine how

employees who observe another employee’s performance-based outcome interpret these

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outcomes, and how these observations affect subsequent behavior. We do so in the context of a

strategic performance measurement system (e.g., The Balanced Scorecard). Such a setting is

particularly relevant for the study of vicarious learning, because it allows for inferences both at a

measurement level (e.g., “My colleague was promoted because she exceeded the target for most

of the measures on her division’s performance scorecard”), and at a strategic level (e.g., “My

colleague was demoted because he failed to move his division in the strategic direction preferred

by management”). In this paper, we propose that the level at which inferences are made will

depend on whether the observed performance-based outcomes are positive (i.e., a promotion) or

negative (i.e., a demotion) in nature.

We rely on social psychology theory to make our predictions. Specifically, we posit that

employees who observe another employee’s positive outcome (e.g., promotion) are motivated to

decrease the psychological distance between themselves and various aspects of the situation,

whereas those who observe a negative outcome (e.g., demotion) are motivated to increase the

psychological distance. Using construal level theory (Liberman et al. 2007; Trope and Liberman

2010), we further predict that psychological distance affects the level at which the situation is

construed. That is, employees who observe positive outcomes will tend to focus their

attributions on the specific performance measures that may have led to the outcome, whereas

those who observe negative outcomes will tend to focus more on underlying strategies and

constructs. As a result, those who observe positive (negative) outcomes will adopt a more

narrow (broad) interpretation and understanding of the outcomes, and this differential

interpretation and understanding will lead to differences in future behavior. Ultimately,

employees who observe positive outcomes will plan actions designed to maximize specific

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measures, whereas those who observe negative outcomes will plan actions that are more

strategy-oriented.

To test our theory, we use an experiment that involves a hypothetical case. In our

experiment, graduate business students (averaging more than 4 years of work experience)

assume the role of a division president within a hypothetical gaming and hospitality firm. The

case describes the firm’s background and organizational structure, a shift in the firm’s strategy,

and the firm’s strategic performance measurement system (i.e., performance scorecard). The

case also describes the performance of a peer who is the president of another division within the

firm. Holding available performance information constant, we manipulate whether the peer

manager is promoted or demoted within the firm. Aware of this outcome, participants assess

their relation to the peer and the event, thereby allowing us to measure participants’

psychological distance from various aspects of the scenario. Then, participants make eight

independent choices between two performance cues, identifying which cue they feel senior

management considered more in their promotion / demotion decision. We strategically designed

these choices to measure the level at which participants construed the situation. Participants also

describe what actions they would take, had they been in the peer’s situation, allowing us to

examine the behavioral implications of vicarious learning.

The results support our predictions. More specifically, a path analysis suggests that the

valence of a performance-based outcome (i.e., promotion versus demotion) influences the

psychological distance from which others observe various aspects of the situation. Thus, those

who observe positive outcomes generate less psychological distance from the situation than those

who observe negative outcomes. In turn, those who observe positive outcomes construe the

situation at a more detailed level, focusing more on performance measures, whereas those who

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observe negative outcomes construe the situation at a broader level, focusing more on strategies

and constructs. The behavioral implications are that employees who observe positive outcomes

change their future behavior to manage specific performance measures that they judge to be

responsible for the rewarded employee’s success. By contras