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

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.

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Fig. 1

Notes

  1. 1.

    Following the findings of Libby et al. (2002) and Elliott et al. (2007), MBA students with work experience are good proxies for professionals, and all of our participants have work experience.

  2. 2.

    We investigated the sizes of previous whistleblowing rewards in order to determine our upper and lower limits to guarantee that our whistleblowing rewards were within the range of expected rewards. The lower reward was selected based upon the lower limit of a potential reward under the Dodd–Frank Act and also represents an amount less than the value of the stock currently held by the participant. The larger reward was selected to clearly exceed the value of stock held by the participant and represents an amount that is well within the range of potential payouts under the Act.

  3. 3.

    The scale in the experimental instrument ranged from −5 to 5, and we convert this scale to 0 to 10 for ease of interpretation of the results.

  4. 4.

    These questions are similar to those used in prior whistleblowing research (e.g., Kaplan et al. 2010).

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Acknowledgments

The authors would like to acknowledge the helpful comments of Reza Barkhi, C. Bryan Cloyd, Mark Dibben, Eric Gooden, Thomas B. Hansen, Larry N. Killough, Anne Magro, Anna Rose, and participants at research workshops at George Mason University, University of Tasmania, Virginia Commonwealth University, and Virginia Polytechnic Institute.

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Correspondence to Jacob M. Rose.

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Rose, J.M., Brink, A.G. & Norman, C.S. The Effects of Compensation Structures and Monetary Rewards on Managers’ Decisions to Blow the Whistle. J Bus Ethics 150, 853–862 (2018). https://doi.org/10.1007/s10551-016-3222-7

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Keywords

  • Stock compensation
  • Restricted stock
  • Rewards
  • Whistleblowing