Contract Framing, Expected Disappointment, and Effort: The Moderating Role of External Locus of Control

Abstract

Incentive contracts are among the most prescribed means for alleviating agency problems. Accordingly, understanding when and why certain types of incentive contracts are effective is of crucial importance to organizations. Prior research documents that while employees generally prefer to work under contracts that include bonuses, employees exert more effort under economically equivalent penalty contracts. One reason for this is that penalties cause employees to experience greater expected disappointment than do bonuses. This study extends prior research in this area by documenting that external locus of control (ELOC), an individual characteristic, helps explain why employees respond to incentive contracts. We predict and find that, compared to individuals with higher ELOC, individuals with lower ELOC are less susceptible to contract frame-induced differences in expected disappointment and are thus not as motivated by penalty contracts compared to bonus contracts. This finding extends theory on contract framing and has important implications for how organizations implement incentive contracts in practice.

High Expectations: How Tourists Cope With Disappointing Vacation Experiences

“…Prior research finds that agent locus attribution results in more negativities such as dissatisfaction, discrete negative emotions, and demands for compensation than situation locus (Drewery and McCarville 2022; Majerczyk, Owens, and Waddoups 2020). Agent/provider locus is also found to contribute more toward disappointment (Majerczyk, Owens, and Waddoups 2020; Pacheco, Becker, and Brei 2017), and to consequently have behavioral ramifications (Nazifi et al 2021; Um and Kim 2018).…”

“…Prior research finds that agent locus attribution results in more negativities such as dissatisfaction, discrete negative emotions, and demands for compensation than situation locus (Drewery and McCarville 2022;Majerczyk, Owens, and Waddoups 2020). Agent/provider locus is also found to contribute more toward disappointment (Majerczyk, Owens, and Waddoups 2020;Pacheco, Becker, and Brei 2017), and to consequently have behavioral ramifications (Nazifi et al 2021;Um and Kim 2018). It is thus expected that attribution of the negative experience to an agent (e.g., the service provider) will make the discrepancy between expectations and the actual outcome more salient and consequently will make it more likely that the consumer will display coping behaviors.…”

Personality characteristics, preferences for rewards and the propensity to choose an auditing job

“…This is because externals feel they will not be able to meet others' expectations, i.e. they shield themselves from the possibility of being, in their minds, a potential disappointment (Majerczyk et al, 2020) by rejecting the situation from the outset to avoid feeling anxious (Spector, 1982). Rewards in general (financial, extrinsic, support and intrinsic) are assigned to employees to motivate them, so rewards aim to reach a positive outcome.…”