The Effects of Incentive Compensation on Moral Awareness – An Explorative Study

Abstract

In the aftermath of the financial crisis 2008, numerous experts have offered explanations to what actually caused this massive collapse of the world economy. This paper explores an alternative suggestion. Using data from 178 alumni from a business school in Sweden, we empirically test if formula bonuses lower moral awareness and whether subjectivity as a basis for evaluation mitigates the predicted negative side effects. We have not found evidence to support that formula bonuses lower moral awareness. However, results suggest that alumni with both subjective and formula bonuses demonstrate higher moral awareness than alumni with only formula bonuses. This explorative study contributes specifically to the research on how moral awareness is affected by the different parts in the compensation package and more generally to the literature on how reward schemes affect behaviour.