Quality bonuses have a counterproductive effect for majority of auditors

Measures regarding compensation incentives for auditors have a different effect on their judgment and decision-making. This effect depends on factors such as various personality traits. This is one of the conclusions reached by Herman van Brenk in his dissertation titled “Compensation Incentives and Personality Traits: Three studies on their Joint Effects on Auditor Judgment and Decision Making”, for which he received his doctorate from Nyenrode Business Universiteit on Wednesday 6th of December. Van Brenk’s advice for accounting offices in The Netherlands is to focus less on pay and more on intrinsic motivation.

The paper from one of the studies conducted as part of Van Brenk’s doctoral research involves an investigation into the effects of a bonus on audit quality among auditors in the Netherlands. This earned Van Brenk and his doctoral supervisor Barbara Majoor the Best Paper Award at the European Auditing Research Network Symposium in Leuven last September.

Intrinsic motivation
Herman van Brenk was surprised by the results of his research: “I didn’t expect the effect of compensation incentives to be so nuanced. My research shows that bonus structures hinder audit quality among intrinsically motivated auditors. The majority of auditors in the Netherlands already have a high level of intrinsic motivation by nature, meaning that an additional financial incentive is entirely unnecessary for them to deliver quality work. In fact, it can even have a counterproductive effect. This finding is intriguing, because it runs counter to the tendency to place quality at the center of auditors’ pay.” Van Brenk philosophizes: “Try to stimulate this motivation and focus less on pay-based compensation. That also fits very nicely with the role that auditors play in society.”

From general to specific
In his research, Van Brenk also focuses on the effect of fixed versus variable profit sharing for audit partners. “A fixed profit sharing arrangement only has a positive effect on an auditor’s decision-making if he or she is dealing with a small client and the audit partner is sensitive to both rewards and punishment,” Van Brenk concludes. This sensitivity is measured based on the characteristics of extraversion and neuroticism. He therefore argues that “when it comes to compensation, it is important to consider auditors’ specific personality traits.” This also leads him to believe that his research can contribute to the current societal debate on pay within the accounting sector.

Herman van Brenk was awarded his doctorate on Wednesday 6 December 2017 at Nyenrode Business Universiteit.

The summary of his dissertation “Compensation Incentives and Personality Traits: Three studies on their Joint Effects on Auditor Judgment and Decision Making” can be downloaded in both Dutch and English here.