The Effects of Compensation Structures and Monetary Rewards on Managers’ Decisions to Blow the Whistle

  • Jacob M. Rose
  • Alisa G. Brink
  • Carolyn Strand Norman
Article

Abstract

Recent research indicates that compensation structure can be used by firms to discourage their employees from whistleblowing. We extend the ethics literature by examining how compensation structures and financial rewards work together to influence managers’ decisions to blow the whistle. Results from an experiment indicate that compensation with restricted stock, relative to stock payments that lack restrictions, can enhance the likelihood that managers will blow the whistle when large rewards are available. However, restricted stock can also threaten the effectiveness of whistleblowing systems without the presence of large financial rewards for whistleblowing. Thus, the large potential rewards for whistleblowing enacted by the Dodd–Frank Act appear timely as firms are moving toward compensation agreements that include greater proportions of restricted stock.

Keywords

Stock compensation Restricted stock Rewards Whistleblowing 

References

  1. Awner, J., & Dickins, D. (2011). Will there be whistleblowers? Regulation, 34, 36–40.Google Scholar
  2. Bebchuk, L., & Fried, J. (2010). Paying for long-term performance. University of Pennsylvania Law Review, 158, 1915–1960.Google Scholar
  3. Bebchuk, L., & Sparmann, H. (2009). Regulating bankers’ pay. Georgetown Law Journal, 98(2), 247–287.Google Scholar
  4. Bhagat, S., & Romano, R. (2009). Reforming executive compensation: Focusing and committing to the long-term. Yale Journal on Regulation, 26(2), 359–372.Google Scholar
  5. Bowen, R., Call, A., & Rajgopal, S. (2010). Whistle-blowing: Target firm characteristics and economic consequences. The Accounting Review, 85(4), 1239–1271.CrossRefGoogle Scholar
  6. Brumberg, B. (2012). Restricted stock, performance shares, and trends in equity compensation. Retrieved July 9, 2012, from http://www.mystockoptions.com/pdfs/RS&Trends.pdf.
  7. Call, A., Kedia, S., & Rajgopal, S. (2015). Rank and file employees and the discovery of misreporting: The role of stock options. Working paper. Columbia Business School.Google Scholar
  8. Chapman, G. (1996). Temporal discounting and utility for health and money. Journal of Experimental Psychology-Learning Memory and Cognition, 22(3), 771–791.CrossRefGoogle Scholar
  9. Choe, C., & Yin, X. (2006). Should executive stock options be abandoned? Australian Journal of Management, 31(2), 163–179.CrossRefGoogle Scholar
  10. Dasgupta, S., & Kesharwani, A. (2010). Whistleblowing: A survey of literature. The IUP Journal of Corporate Governance, 9(4), 57–70.Google Scholar
  11. Dworkin, T. (2007). SOX and whistleblowing. Michigan Law Review, 105, 1757–1780.Google Scholar
  12. Dworkin, T., & Near, J. (1997). A better statutory approach to whistle-blowing. Business Ethics Quarterly, 7(1), 1–16.CrossRefGoogle Scholar
  13. Dyck, A., Morse, A., & Zingales, L. (2007). Who blows the whistle on corporate fraud? The Journal of Finance, 65(6), 2213–2253.CrossRefGoogle Scholar
  14. Elliott, W., Hodge, F., Kennedy, J., & Pronk, M. (2007). Are MBA students a good proxy for nonprofessional investors? The Accounting Review, 82(1), 139–168.CrossRefGoogle Scholar
  15. Ethics Resource Center. (2012). 2011 National Business Ethics Survey: Workplace ethics in transition. Arlington, VA: Ethics Resource Center.Google Scholar
  16. Ethics Resource Center. (2014). 2013 National Business Ethics Survey of the U.S. workforce. Arlington, VA: Ethics Resource Center.Google Scholar
  17. Frederick, S., Loewenstein, G., & O’Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40(2), 351–401.CrossRefGoogle Scholar
  18. Frey, B., & Jegen, R. (2001). Motivation crowding theory. Journal of Economic Surveys, 15(5), 589–611.CrossRefGoogle Scholar
  19. Hall, B. (2004). Transferable stock options (TSOs) and the coming revolutions in equity-based pay. Journal of Applied Corporate Finance, 16(1), 8–17.CrossRefGoogle Scholar
  20. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  21. Kaplan, S., Pope, K., & Samuels, J. (2010). The effect of social confrontation on individuals’ intentions to internally report fraud. Behavioral Research in Accounting, 22(2), 51–67.CrossRefGoogle Scholar
  22. Kirby, K., & Marakovic, N. (1996). Modeling myopic decisions: Evidence for hyperbolic delay-discounting within subjects and amounts. Organizational Behavior and Human Decision Processes, 64(1), 22–30.CrossRefGoogle Scholar
  23. Knoll, M. (2006). The Section 83(b) election for restricted stock: A joint tax perspective. SMU Law Review, 59(2), 721–750.Google Scholar
  24. Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2), 443–477.CrossRefGoogle Scholar
  25. Laibson, D., Repetto, A., & Tobacma, J. (1998). Self-control and saving for retirement. Brookings Papers on Economic Activity, 1, 91–196.CrossRefGoogle Scholar
  26. Libby, R., Bloomfield, R., & Nelson, M. (2002). Experimental research in financial accounting. Accounting, Organizations and Society, 27(8), 775–810.CrossRefGoogle Scholar
  27. Martin, B., & Rifkin, W. (2004). The dynamics of employee dissent: Whistleblowers and organizational jiu-jitsu. Public Organization Review: A Global Journal, 4, 221–238.CrossRefGoogle Scholar
  28. Mesmer-Magnus, J., & Viswesvaran, C. (2005). Whistleblowing in organizations: An examination of correlates of whistleblowing intentions, actions and retaliation. Journal of Business Ethics, 62, 277–297.CrossRefGoogle Scholar
  29. Miceli, M., & Near, J. (1984). The relationship among beliefs, organizational position, and whistle-blowing status: A discriminant analysis. Academy of Management Journal, 27, 687–701.CrossRefGoogle Scholar
  30. Miceli, M., & Near, J. (1992). Blowing the whistle: The organizational & legal implications for companies and employees. New York: MacMillanGoogle Scholar
  31. Miceli, M., Near, J., & Dworkin, T. (2008). Whistle-blowing in organizations. New York: Lea’s Organization and Management Series, Routledge; Taylor & Francis Group.Google Scholar
  32. Mischel, W. (1974). Processes in delay of gratification. In L. Berkowitz (Ed.), Advances in experimental social psychology (Vol. 7, pp. 249–292). New York: Academic Press.Google Scholar
  33. Mischel, W., Ebbesen, E., & Raskoff Zeiss, A. (1972). Cognitive and attentional mechanisms in delay of gratification. Journal of Personality and Social Psychology, 21, 204–218.CrossRefGoogle Scholar
  34. Mischel, W., Shoda, Y., & Rodriguez, M. (1989). Delay of gratification in children. Science, 244, 933–938.CrossRefGoogle Scholar
  35. O’Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89(1), 103–124.CrossRefGoogle Scholar
  36. Oyer, P., & Schaefer, S. (2006). Costs of broad-based stock option plans. Journal of Financial Intermediation, 15, 511–534.CrossRefGoogle Scholar
  37. Petra, S., & Dorata, N. (2012). Restricted stock awards and taxes. Journal of Accountancy, 213(2), 44–48.Google Scholar
  38. Robinson, S. N., Robertson, J. C., & Curtis, M. B. (2012). The effects of contextual and wrongdoing attributes on organizational employees’ whistleblowing intentions following fraud. Journal of Business Ethics, 106, 213–227.CrossRefGoogle Scholar
  39. Rocha, W., & Kleiner, B. (2005). To blow or not to blow the whistle? That is the question. Management Research News, 28(11/12), 80–87.CrossRefGoogle Scholar
  40. Schubert, W., & Barenbaum, L. (2008). Equity-based executive compensation. Journal of Leadership, Accountability and Ethics, Fall, 28–40.Google Scholar
  41. Taylor, E., Bierstaker, J., & Brazel, J. (2010). Correspondence from the Auditing Standards Committee of the American Accounting Association and Elizabeth M. Murphy of the SEC regarding: Proposed rules for implementing the whistleblowing provisions of Section 21F of the Securities Exchange Act of 1934 (December 17).Google Scholar
  42. U.S. House of Representatives. (1986). False Claims Amendments Act of 1986. Public Law 99–562, 100 [S. 1562]. Washington, DC: Government Printing Office.Google Scholar
  43. U.S. House of Representatives. (2002). The Sarbanes-Oxley Act of 2002. Public Law 107–204 [H. R. 3763]. Washington, DC: Government Printing Office.Google Scholar
  44. U.S. House of Representatives. (2008). Emergency Economic Stabilization Act of 2008. Public Law 110–343 [H. R. 1424]. Washington, DC: Government Printing Office.Google Scholar
  45. U.S. House of Representatives. (2010). Dodd–Frank Wall Street Reform and Consumer Protection Act. Public Law 111–203 [H. R. 4173]. Washington, DC: Government Printing Office.Google Scholar
  46. Verschoor, C. (2010). Increased motivation for whistleblowing. Strategic Finance, 92(5), 16–19.Google Scholar
  47. Verschoor, C. (2011). New whistleblower rules broaden opportunities. Strategic Finance, 93(3), 13–15.Google Scholar
  48. Wainberg, J., & Perreault, S. (2015). Whistleblowing in audit firms: Do explicit protections from retaliation activate implicit threats of reprisal? Behavioral Research in Accounting (in press).Google Scholar
  49. Zauberman, G., Kim, K., Malkoc, S., & Bettman, J. (2009). Discounting time and time discounting: Subjective time perception and intertemporal preferences. Journal of Marketing Research, 46(August), 543–556.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  • Jacob M. Rose
    • 1
  • Alisa G. Brink
    • 2
  • Carolyn Strand Norman
    • 2
  1. 1.School of Accounting and Commercial LawVictoria University of WellingtonWellingtonNew Zealand
  2. 2.School of BusinessVirginia Commonwealth UniversityRichmondUSA

Personalised recommendations