Expertise and Discretionary Bonus Decisions

We examine the association between managers’ expertise and their discretionary bonus decisions in a hospital setting. We hypothesize that high-expertise managers make decisions that encourage cooperation among their subordinates. However, low-expertise managers cannot do so because their lower levels of knowledge, experience, and domain expertise prevent them from having sufficient personal influence to persuade other professionals to cooperate. We find that high-expertise managers make two types of bonus decisions: (1) keep a smaller share of the bonus pool than what they are entitled to retain and (2) allocate the remainder to subordinates more evenly after adjusting for the underlying heterogeneity in their productivity. We also find evidence that high-expertise managers whose bonus decisions reflect their support for cooperation have higher department performance than all other managers. This paper was accepted by Suraj Srinivasan, accounting.