E. Wiersma

Conditions That Shape the Learning Curve: Factors That Increase the Ability and Opportunity to Learn

Prior studies examining factors that influence the learning curve mainly focus on settings in which firms adopt new products or technologies or open new plants or assembly lines. Less is known, however, about how more mature firms learn, when they are further down the learning curve. To gain insight into factors that enhance learning in this situation, I examine factors that increase both the ability and the opportunity to learn. I hypothesize that the ability to learn is enhanced by the presence of a moderate amount of temporary employees in the workforce and by providing employees with related variation in tasks, measured by product heterogeneity. In addition, I hypothesize that opportunities for learning are created when there is some slack in resources and when there are no problems in other important performance dimensions that consume employee attention. These hypotheses are examined using data of the Royal Dutch Mail, which has 27 geographically dispersed regions. Although these 27 regions are homogeneous with respect to their tasks, internal organization, type of products delivered, and technology used, their learning rates differ considerably. In the sample of 972 observations used for this analysis, I find that this variation in learning rates is explained by the percentage of temporary employees used, the level of excess capacity, the degree of product heterogeneity, and the degree to which regions face problems in other important performance dimensions. These findings provide insight into strategies that help managers in designing work processes to maintain a positive learning curve.

Investment Decisions and Depreciation Choices Under a Discretionary Tax Depreciation Rule

Prior studies have shown limited impact of the US bonus depreciation rules on firm investments during economic downturns. In this article we study the effects of a set of more flexible rules – discretionary tax depreciation (DTD) – introduced in the Netherlands during the 2009–2011 economic crisis. Our simulation results show DTD, which allows firms to accelerate and also to postpone depreciation, to be much more effective than bonus depreciation in reducing the expected value of tax payments, especially in crisis periods. Using a sample of 325 clients of a single office of a Dutch accounting firm, we show that DTD has led to higher investments in assets qualifying for discretionary depreciation for firms that faced the highest marginal tax rate. For other firms, the additional investments crowd out investments in assets that do not qualify for DTD. Our analysis on the actual depreciation choices reveals that firms postpone depreciation when facing losses or loss carry forwards, or to smooth taxable income under the progressive tax system. Our results suggest that a fiscal policy that permits firms to postpone depreciation, as well as to accelerate, may stimulate investment.

The relationship between purposes of budget use and budgetary slack

This chapter examines the relationship between purposes of budget use and budgetary slack, and the extent to which this relationship is mediated by two (potentially) slack-reducing mechanisms, budget participation and budget emphasis. In a sample of survey responses from 44 Dutch listed firms, intensity of budget use is negatively related to budgetary slack, and this relationship is partially mediated by both budget participation and budget emphasis. Furthermore, three purposes of budget use are identified: budget usage for (a) planning and communication purposes, (b) coordination and allocation purposes, and (c) evaluation and rewarding purposes. The direct effect of purposes of budget use on budgetary slack seems especially due to budget usage for planning and communication purposes, which is also the case for the mediating effect via budget emphasis, whereas the mediating effect via budget participation seems especially due to budget usage for coordination and allocation purposes. Exploratory analyses do not show similar relationships with purposeful slack, that is, with slack that was purposefully allowed in the business units’ budgets by the firms’ top management.

When One Size Does Not Fit All: Mitigating Heterogeneous Compensation Risk Through Subjective Evaluations

Firms typically use a ‘one-size-fits-all’ (OSFA) compensation contract that specifies a common formulaic relation between performance and compensation (i.e., a performance bonus) for non-executive managers in similar jobs. However, a contract that is appropriate on average, may be suboptimal for individual managers if heterogeneity in the operating environment creates varying compensation risk. We use field data from a retail firm that introduced an OSFA bonus compensation plan for its store managers. The common bonus formula is based on a weighted sum of objective measures of sales performance (i.e., sales per hour, sales-to-goal) and a subjective rating made by supervisors. The firm intended the supervisors’ discretionary subjective rating to evaluate performance on dimensions that are difficult to measure (e.g., store appearance). We test and find that supervisors use their discretion to also address heterogeneity of compensation risk through the subjective rating. Supervisors give uniformly higher subjective ratings to managers whose objective performance measures are measured with greater noise. This result obtains after controlling for manager ability and performance, and for alternative mechanisms to mitigate differences in compensation risk (e.g., salary changes, sales target changes, and bonus adjustments). The evidence suggests that in addition to the dimensions of performance that the firm intends for subjective ratings to evaluate, supervisors use discretion in subjective ratings to provide manager-specific risk premium for non-executive managers who are subject to an OSFA contract.Firms typically use a ‘one-size-fits-all’ (OSFA) compensation contract that specifies a common formulaic relation between performance and compensation (i.e., a performance bonus) for nonexecutive managers in similar jobs. However, a contract that is appropriate on average, may be suboptimal for individual managers if heterogeneity in the operating environment creates varying compensation risk. We use field data from a retail firm that introduced an OSFA bonus compensation plan for its store managers. The common bonus formula is based on a weighted sum of objective measures of performance and a subjective rating made by supervisors. The firm intended the supervisors’ discretionary subjective rating to evaluate performance on dimensions that are difficult to measure (e.g., store appearance). We test and find that supervisors give uniformly higher subjective ratings to managers whose objective measure of sales performance is measured with greater noise, and to managers who face higher performance target difficulty, the latter assessed both prior to (ex ante) and subsequent to (ex post) the evaluation period. These results obtain after controlling for manager ability and performance, and for alternative mechanisms to mitigate differences in compensation risk (e.g., salary changes, sales target changes, and bonus adjustments). The evidence suggests that supervisors use discretion in subjective ratings to provide manager-specific risk premiums for non-executive managers who are subject to an OSFA contract.