Tangible Rewards for More Than Just Productivity: Examining Canadian Public Accounting Firms' Rewards Programs*
Accepted by Camillo Lento and Leslie Berger. Thanks to Leslie Berger, Theresa Libby, Brad Pomeroy, Adam Presslee, Alan Webb, and participants at the 2016 CAAA Annual General meeting, 2017 AAA Audit Midyear meeting, 2017 AAA Ethics Symposium, 2019 ASAC Annual Conference, 2019 NBES Annual Conference, and the University of Alberta Accounting Workshop Series. Financial support was gratefully received from a CPA–CAAA Research Grant and the CPA Ontario Centre for Capital Markets and Behavioural Decision Making.
ABSTRACT
enCompanies spend significant amounts of money on tangible rewards programs, even during the economic turmoil of the COVID-19 pandemic. The prevalence, growth, and significance of these expenditures highlight the importance of understanding the purpose and use of these programs by organizations. Research on public accounting (PA) firms' compensation plans has focused on the balance between professional and commercial incentives in partner profit-sharing schemes but has failed to examine the incentives for nonpartner audit professionals. However, it is exactly these professionals who do a substantial amount of work on audit engagements. This paper has three main purposes. First, we investigate the nature and composition of PA firms' tangible rewards programs and provide a detailed description. Second, we examine the use of firms' tangible rewards programs to provide evidence of what actions are being rewarded. We use Almer et al.'s (2005, Behavioral Research in Accounting 17: 1–22) framework, which presents dimensions of the auditors' professional contribution, and explores whether firms recognize these dimensions using tangible rewards. Third, we develop future research questions to help explore the use of tangible rewards in firms without structured output. We collect archival data on the use of tangible rewards from each of the Big 4 PA firms and three of the next four largest international accounting firms in Canada. We find that firms use their tangible rewards programs for “building a culture of recognition,” for performance incentives, and for employee and firm development, thus rewarding a broad set of measures beyond the incentive measures for hours worked.
RÉSUMÉ
frPrimes tangibles récompensant plus que la simple productivité : Examen des programmes de primes des cabinets d'experts-comptables canadiens
Les entreprises dépensent d'importantes sommes d'argent pour des programmes de primes tangibles, et l'ont fait même dans le cadre des perturbations économiques associées à la pandémie de COVID-19. La prévalence, la croissance et la signification de ces dépenses mettent en relief l'importance de comprendre le but de ces programmes et leur utilisation par les organisations. La recherche sur les plans de rémunération des cabinets comptables s'est penchée sur l'équilibre entre les incitatifs professionnels et commerciaux des régimes de participation aux bénéfices des partenaires, sans toutefois s'attarder aux incitatifs visant les auditeurs professionnels tiers. Cependant, ce sont précisément ces professionnels qui accomplissent un travail considérable lors des missions d'audit. Le présent article a trois objectifs principaux. Tout d'abord, nous examinons la nature et la composition des programmes de primes tangibles des cabinets comptables et en fournissons une description détaillée. Nous nous penchons ensuite sur l'application de ces programmes pour fournir des données probantes sur les actions qui sont récompensées. Nous nous appuyons sur le cadre élaboré par Almer et coll. (2005, Behavioral Research in Accounting 17: 1–22), qui présente divers aspects de la contribution professionnelle des auditeurs et cherche à déterminer si les cabinets reconnaissent ces aspects à l'aide de primes tangibles. Enfin, nous élaborons des questions pour orienter la recherche à venir sur l'utilisation de primes tangibles dans les cabinets n'ayant pas de résultats structurés. Nous recueillons des données archivées sur le recours aux primes tangibles par chacun des quatre grands cabinets comptables et trois des quatre plus vastes cabinets d'experts-comptables internationaux du Canada après les quatre grands cabinets. Nous établissons que les cabinets d'experts-comptables se servent de leurs programmes de primes tangibles pour « bâtir une culture fondée sur la reconnaissance », récompenser le rendement et assurer le développement des employés et du cabinet, récompensant ainsi un large ensemble de mesures allant au-delà du nombre d'heures travaillées.
1 INTRODUCTION
Organizations are increasingly using tangible rewards, which are noncash incentives that have a monetary value (Condly et al. 2003), in their compensation programs. Tangible rewards include such things as trips, merchandise, concert tickets, and gift cards. McAdams (1999, 243) notes that tangible rewards have a dual function in that they “are of sufficient value and attractiveness to motivate people to improve performance, and they provide the recognition that is increasingly important to today's workforce.” Existing accounting research has focused on tangible rewards as a form of incentive to improve performance (Presslee et al. 2013; Kelly et al. 2017; Mitchell et al. 2018; Choi and Presslee 2016, 2020). These studies focus on organizational settings where employee output is measurable and the tasks are relatively structured, such as call centers and retail settings. We build on this research by gathering archival data from public accounting (PA) firms to understand the nature of tangible rewards programs in less structured environments.
Our investigation of tangible rewards has three primary purposes. First, we provide a detailed description of the nature and composition of PA firms' tangible rewards programs. We examine the use of tangible rewards in audit practice, where results are not easily measured due to the externally unobservable nature of audit quality, since “it is not possible to ‘know’ the residual risk of an engagement” (Knechel, Krishnan et al. 2013, 386). We extend the existing research by providing a detailed description of how firms implement their programs in practice, the features of these programs, the purposes of these programs, and the communication of awarded rewards both to the recipient and throughout the firm. Second, we use Almer et al.'s (2005) framework to examine the use of firms' tangible rewards programs to provide evidence of what actions are being rewarded. We provide a snapshot of the dual-nature use of tangible rewards in a context where little is known about employee recognition and where output is often not measurable. Third, we use the foundation we provided to develop future research questions to help explore the use of tangible rewards in firms without structured output.
The use of tangible rewards in the United States has increased substantially over the years. The Incentive Marketing Association's survey reveals an increase of 16% in the use of employee tangible rewards since its previous survey, with estimated total employee tangible rewards spending of $22.9 billion (Incentive Federation 2016). Despite the negative financial effects of the COVID-19 pandemic, companies continue to spend significant amounts of money on rewards programs (Incentive Research Foundation 2020). McAdams (1999) identifies two purposes of tangible rewards: rewarding performance to increase motivation (incentives) (Bonner et al. 2000) and recognizing behavior consistent with firm values to increase awareness, role modeling, and retention of recipients (recognition).1 Although incentives focus on motivating employees to optimize performance (Bonner et al. 2000; Bonner and Sprinkle 2002) and are typically based on objective measures, recognition focuses on rewarding a broader set of employees' accomplishments (McAdams 1999) and is typically based on subjective dimensions of performance. Recognition is increasingly important to meeting the motivational needs of the growing knowledge-worker segment (McAdams 1999; Brun and Dugas 2008; Montani et al. 2017). We add to the current accounting literature by identifying how professional accounting firms use tangible rewards to promote behaviors of auditors beyond objective performance and by identifying additional unexamined benefits of these programs.
Professional judgment in the auditing profession requires both knowledge and professional values such as integrity, due care, and objectivity (Gibbins and Mason 1988). Prior research on PA firms' compensation plans has focused on the balance between professional and commercial incentives in partner profit-sharing schemes across the firms (Burrows and Black 1998; Knechel, Krishnan et al. 2013; Coram and Robinson 2016; Vandenhaute et al. 2020). Auditors must balance commercial pressures with professional pressures when making decisions. As businesses, their goals are to increase revenue and decrease costs, whereas as professionals they must maintain their reputation and ensure high audit quality (Pierce and Sweeney 2004). Regulators (PCAOB 2013; CPAB 2014) and academics (Zeff 1987; Wyatt 2004) have expressed concerns over the commercialization of the auditing profession and the possible loss of professionalism that this may cause. PA firms rely heavily on audit staff to achieve their commercial and professional goals, as audit staff do a significant amount of the work on audit engagements (CPAB 2015). However, the rewards used to direct and motivate audit staff are largely unexplored. Furthermore, the accounting industry is facing ongoing labor shortages and staff burnout and PA firms are exploring ways to attract and retain accounting professionals (Wilkins 2021). Recognition programs, such as tangible rewards, can increase employee motivation and retention (McAdams 1999; Mann and Dvorak 2016) so it is important to understand why PA firms are using these programs and what behaviors they hope to motivate. We expand on the literature and suggest avenues of future research by examining how PA firms' audit practices use tangible rewards. Audit practice tasks are generally unstructured, audit quality is not directly observable (Samuel et al. 2009), and the inputs to the audit process are noisy proxies for auditors' level of effort and quality of judgment. This allows us to examine and explore tangible rewards in a setting where incentives may be difficult to implement.
We use Almer et al.'s (2005) professional contribution construct, a multidimensional construct composed of the auditor's “technical work performed for the client, engagement management, subordinate development, administrative and recruiting activities, training, quality control, and practice development” (Almer et al. 2005, 7) to frame our analysis of rewards. Taken together, these dimensions cover both efficiency and audit quality as noted by Jenkins et al. (2008). Research has not yet explored the influences on professional contribution that PA firms value and reward (Almer et al. 2005); therefore, we explore whether PA firms recognize these dimensions using tangible rewards. We pave the way for future research on the recognition purposes of tangible rewards and add to the audit literature by identifying types of audit behaviors that are internally rewarded through the firms’ reward systems.
We find that tangible rewards programs are prevalent in PA firms: all Big 4 PA firms and three of the four next-largest non–Big 4 international PA firms have a tangible rewards program. PA firms use their tangible rewards programs for “building a culture of recognition,” for performance incentives, and for employee and business development. Consistent with Coram and Robinson's (2016) examination of partner remuneration, we find evidence that PA firms incorporate a broad set of measures into their employee tangible rewards programs beyond hours worked, such as quality of work, client service, self-development, and practice development. We also find that firms are recognizing employees for behaviors such as coaching, mentoring, and teamwork. Consistent with Holmes and Marsden (1996), we find similarities and differences in firms' use of rewards. Overall, tangible rewards provide internal incentives not only for behaviors that directly increase firm profitability, such as increasing audit efficiency, but also for increasing audit quality, and for developing the firm and its employees. These findings, along with future research on the effectiveness of tangible rewards programs in motivating desirable behaviors, can inform the accounting literature on auditor remuneration. In addition, our findings provide practitioners with comparative information on reward design and scope within the profession that may be useful in designing and refining their compensation programs. Understanding the competitive landscape for employee rewards may be significant to firms given the current labor market.
The contributions of this paper can be summarized as follows. First, we collect archival data on the use of tangible rewards in Canadian PA firms to understand the nature of tangible rewards programs in less structured environments. Understanding how these rewards are used to direct and motivate audit staff has been largely unexplored to date. Second, we extend the existing research by describing how firms implement their programs in practice, the features of these programs, the purposes of these programs, and the communication of awarded rewards both to the recipient and throughout the firm. It is important for practitioners to understand how these programs are implemented and used in all firms to improve use in their own firms and eventually lead to best practices. Third, we provide a snapshot of the dual-nature use, reward and recognition, of tangible rewards in a context where little is known about employee recognition, and output is often not measurable. Fourth, we provide a foundation upon which future research can be based and suggest specific future research questions. Fifth, we add to the current accounting literature by identifying how professional accounting firms use tangible rewards to promote behaviors of auditors beyond objective performance and by identifying additional unexamined benefits of these programs.
The remainder of the paper is organized as follows. Section 2 discusses the relevant literature on tangible rewards and auditor remuneration. Section 3 describes the research method and sample. Section 4 presents the results and discussion divided into two parts: Part 1 is a description of the program, including the programs features, the purposes of the programs, and the communication of rewards awarded; Part 2 examines the rewards awarded for a 12-month period using the lens of professional contribution. Future research questions are addressed throughout section 4. Section 5 concludes.
2 LITERATURE REVIEW
Tangible Rewards
Tangible rewards are noncash rewards that have a monetary value (Condly et al. 2003) and are used by a significant number of organizations. A 2015 Incentive Marketplace Study (Incentive Federation 2016) reports that 72% (2013: 56%) of US businesses surveyed use tangible rewards. The report estimates spending at approximately $18.8 billion (2013: $9.3 billion) each year on merchandise and gift cards and $3.9 billion (2013: $8.8 billion) per year on travel. Updated surveys show that companies continue to spend significant amounts of money on rewards programs, despite the negative impact of the COVID-19 pandemic on businesses around the globe (Incentive Research Foundation 2020). The prevalence, growth, and significance of these expenditures highlight the importance of understanding the purpose and use of these programs by organizations.
McAdams (1999), a practice leader in compensation consulting, explains that rewards are multipurpose in that they provide both motivation for improved future performance and recognition of prior performance. Tangible rewards, like cash rewards, can motivate employees to perform their duties in accordance with the goals of the organization, generally to maximize effort and output (i.e., the purpose is to incentivize). In contrast to cash rewards, which are often not publicly announced by employees due to “social proscriptions against it” (Jeffrey and Shaffer 2007, 45), tangible rewards' high visibility enhances awareness of exemplary performance throughout the organization, highlights potential role models for other employees, and increases morale (i.e., the purpose is to recognize; Jeffrey and Shaffer 2007). Brun and Dugas (2008) describe this as acknowledging and expressing gratitude to employees for the work that they have done, with a focus on strengthening employees' feelings of belonging to a community and feelings of having provided a unique contribution to that community, leading to increased employee retention.
Use of Tangible Rewards for Incentive Purposes
Prior research focuses on tangible rewards used as performance output incentives. Tangible rewards have been found to have hedonic attributes, such as enjoyment and pleasure, and can lead to stronger affective responses and generate higher levels of anticipated satisfaction than cash (Dhar and Wertenbroch 2000; O'Curry and Strahilevitz 2001). This has the potential to create motivational differences between tangible and cash rewards. Research has explored differences in the measurable performance of employees under tangible rewards and monetary rewards programs. These studies find that employees value noncash rewards differently than cash rewards, and, as such, the reward type leads to differences in employee motivation and outcomes. Common to this research is a focus on objectively measured performance, such as number of units produced, as opposed to subjective performance, such as the quality of the process by which employees complete their work.
Research on the performance output incentive benefits of tangible versus cash rewards has been mixed. Some find no differences between performance under cash versus tangible rewards (Shaffer and Arkes 2009) while others find that tangible rewards lead to better performance (Alonzo 1996; Jeffrey 2009). Accounting studies have shown that tangible rewards appear to be more effective than cash rewards at sustaining effort in a competitive environment (Kelly et al. 2017), whereas cash rewards outperform tangible rewards in a setting where employees can set their own goals because cash rewards lead to more challenging goal selection (Presslee et al. 2013). Accounting studies have also begun to explore mechanisms that drive the differential effects of tangible versus cash rewards on motivation and performance. Compared with cash-based incentives, tangible rewards are perceived as more distinct from salary, more hedonic and more novel, but less fungible (Choi and Presslee 2020). This research also finds that more distinct, novel, and hedonic incentives lead to stronger performance (Mitchell et al. 2018; Choi and Presslee 2016, 2020). In a multidimensional task environment, tangible rewards have a stronger spillover effect on the performance of the uncompensated task dimension than do cash rewards (Xu 2021). Collectively, these studies shed light on why so many companies are choosing to use tangible rewards for incentive purposes by demonstrating some of their positive effects on performance.
Use of Tangible Rewards for Recognition Purposes
The purpose of tangible rewards goes beyond incentivizing measurable output, as they are also effective for recognition (McAdams 1999; WorldatWork 2013; Engage2Excel 2020). Recognition is becoming increasingly important in today's workplace, with employees expecting more frequent recognition than the standard annual or semi-annual reviews (Sturt 2017). Sturt (2017) stresses the need for everyone in an organization to become involved in building a culture of recognition, and a 2016 Gallup Poll suggests that recognition is key to employee engagement. Recognition can motivate employees, provide a sense of accomplishment, and increase productivity, company loyalty, and employee retention (Mann and Dvorak 2016).
Recognition programs “honor outstanding performance after the fact and are designed for awareness, role modeling, and retention of recipients” (McAdams 1999, 242). The visibility and social reinforcement provided by tangible rewards make them a widely used recognition tool (Jeffrey and Shaffer 2007). For example, tangible rewards can be used to recognize innovation and continuous improvements to work methods, coaching, mentoring, and overtime (Brun and Dugas 2008). The rewards involved may include social reinforcers, such as a mention in the company newsletter, plaques or letters of commendation, learning and development opportunities, merchandise or travel prizes, or extra time off (McAdams 1999). Tangible rewards that employees value and recall increase perceived organizational support (Silbert 2005), which in turn is negatively related to employee turnover (Eisenberger et al. 2002).
The diversity of purpose found in practice (Alonzo 1996; Achor 2016) highlights the fact that organizations use tangible rewards for more than incentive compensation. However, this diversity has not been reflected in accounting research. One common element in the prior research on tangible rewards has been the focus on the incentive purpose of tangible rewards in a context where employee output is measurable and rewards are designed to improve performance. Jenkins et al. (2008) argue that audit staff rewards systems should explicitly recognize both efficiency and audit quality to ensure the performance of an effective audit. Therefore, we provide a snapshot of the dual-nature use of tangible rewards in a context where little is known about employee recognition and output is often not measurable: professional accounting firms. To do this, we use a theoretical framework developed by Almer et al. (2005) where the value received by the firm from the staff auditor is considered professional contribution. Professional contribution is a multidimensional construct composed of the auditor's “technical work performed for the client, engagement management, subordinate development, administrative and recruiting activities, training, quality control, and practice development” (Almer et al. 2005, 7). Taken together, these dimensions cover both efficiency and audit quality as noted by Jenkins et al. (2008). Research has not yet explored the influences on professional contribution that PA firms value and reward (Almer et al. 2005); therefore, we explore whether PA firms recognize these dimensions using tangible rewards.
Employee Rewards in Canadian PA Firms
We examine the use of tangible rewards in Canadian PA firms and specifically focus on employees working in auditing. Working in the auditing profession requires employees to uphold their professional values of integrity, due care, and objectivity in applying their knowledge and professional judgment (Gibbins and Mason 1988). Concerns have arisen that commercialism in the audit profession may reduce focus on professionalism, sacrificing audit quality and ethics (Zeff 1987; Wyatt 2004; PCAOB 2013; CPAB 2014). The perception of audit quality depends on which stakeholders' view you take, making audit quality difficult to define and measure (Knechel, Krishnan et al. 2013). “The objective of gathering sufficiently persuasive evidence to provide reasonable assurance that financial statements are not materially misstated includes many professional judgments” leading to difficulty and often an inability to contract and directly reward quality and output (Peecher et al. 2013, 601). Little empirical evidence exists on the rewards firms provide to auditors for fulfilling their professional responsibilities (Peecher et al. 2013).
Research examining the internal rewards systems of auditors in PA firms has focused almost exclusively on the compensation plans of partners. Both Burrows and Black (1998) and Coram and Robinson (2016) find that partners in large PA firms share profits based on partner performance, which is evaluated using a variety of both professional and commercial metrics. Vandenhaute et al. (2020) show that commercial partner performance metrics tend to be weighted more heavily than professional metrics in general, although large firms weigh professional metrics more heavily than do smaller firms. Performance-based partner compensation reduces audit quality, but integrating non–profit-related performance measures can mitigate this problem (Ernstberger et al. 2020). Finally, Knechel, Niemi et al. (2013) show that the amount of partner compensation is positively associated with client size, the acquisition of new clients, and industry specialization, and negatively associated with audit failures.
To our knowledge, only one study has explored auditor rewards below the partner level. Pruijssers et al. (2020) collect survey data from nonpartners on their perceptions of the amount of competition for promotion to partner. They find that as the perceived competition for promotion increases, so do quality-reducing behaviors such as lack of cooperation and skepticism. However, this study does not directly explore the rewards of nonpartner auditors. Examining the rewards system for audit staff is important because staff auditors do a significant amount of the work on audit engagements (CPAB 2015) contributing to audit quality. As such, prior literature provides an incomplete picture of the rewards programs for audit staff (Jenkins et al. 2008). We explore in a holistic fashion the behaviors nonpartner auditors are being rewarded for, without focusing on the narrowing binary focus of commercialism versus professionalism.
3 METHOD AND SAMPLE
We invited the eight largest accounting firms across Canada to participate in our study. Seven of the eight firms use tangible rewards programs in their audit practice (including all Big 4 firms), and all seven agreed to participate in our study. This not only points to the prevalence of tangible rewards use across PA firms, but it also enables us to collect data from the firms comprising the largest proportion of the Canadian auditing market. To maintain the anonymity of the firms, we identify the firms throughout the paper only as Big 4 and non–Big 4 firms, so confidentiality can be maintained. We distinguish between Big 4 and non–Big 4 firms because prior research has identified that Big 4 firms differ from non–Big 4 firms along a variety of dimensions (Pratt et al. 1993; Soeters and Schreuder 1988; Chow et al. 2002; Chand 2012).
We obtain firm-level archival information on the tangible rewards programs of the PA firms. We collect data from the representative within the firm who had access to the firm-level data and supporting internal documentation on the reward program. Our data therefore reflect objective information from the firms' documentation and records rather than the opinions of the individuals completing the information form, providing us with a snapshot of how Canadian PA firms use tangible rewards.
The firms supplied the data by completing an archival data collection form which detailed the information requested. The data collection form consists of 31 questions arranged in two segments. Segment one contains questions regarding the policies and procedures in place for the tangible rewards program, including its stated (documented) purpose and administration procedures. Segment two contains questions about the distribution of awards for a sample year; in this case, their most recently completed reporting year at the time of the data collection. The collection form was developed from our research focus and informal, unstructured interviews with a senior manager and a partner, one from each of two Big 4 PA firms, and a senior manager from one non–Big 4 PA firm. The interviews established the existence of tangible rewards programs within the PA firms and provided background information on these programs to inform our data collection and are not part of the results below. After the initial analysis of the responses, we contacted respondents by email and phone with follow-up questions to clarify ambiguous responses.
To gain participation from the firms, the authors first used their personal contacts to connect with individual partners or senior managers at each firm. We explained the purpose and focus of the study to the contacts, who then directed the request for participation to the individual within the firm with authority over and access to the necessary data. Individuals within the firms' human resources department who are responsible for oversight of the programs' administration, and therefore have knowledge of the program details, provided the archival data (national directors of the tangible rewards program, HR senior managers, or a regional human resources manager). The data were collected using Qualtrics and data originated from the firms' archival records, which is comprised of their internal firm documentation.2,3
4 RESULTS AND DISCUSSION
This section is divided into two parts. Each part presents results and then a discussion. The first part describes our findings with respect to the tangible rewards program itself, including the similarities and differences across firms. The tangible rewards program is discussed using three dimensions: the features of the program, the purpose of the program, and the communication of rewards. The second part describes our findings with respect to what behaviors are being rewarded in the program, including the categories rewarded and their respective proportions, for the most recently completed reporting year at the time of the data collection. This allows us to ascertain what behaviors are typically rewarded more heavily, gaining insight into behaviors the firms value.
Part 1: Tangible Rewards Program
4.1 Tangible Reward Program Features
The firms vary in the extent to which they offer tangible rewards programs across locations/offices. Four of the firms' tangible rewards programs are offered at the national level (three Big 4), and two are offered at the regional level (one Big 4). Finally, one non–Big 4 firm has a tangible rewards program only at one of their largest urban centers.
All seven of the firms include all auditors below the partner level in the tangible rewards program, and employees can receive multiple rewards throughout the year. In five of the seven firms (four Big 4), employees are given a budget of points that they are allowed to reward each period and cannot exceed this budget. In all seven firms, employees with authority to award tangible rewards can do so to individuals who are senior and junior to themselves, allowing for both upward and downward evaluation. This is consistent with Brun and Dugas's (2008) contention that peers and subordinates in the organizational hierarchy are often best able to identify an individual's achievements. Unlike the cash-based rewards program, which is typically rewarded infrequently, often just once in a year, the tangible rewards system is used throughout the year. Six of the seven firms provided a breakdown of the percentage of rewards rewarded during each quarter. No quarter had less than 10% of rewards across all the firms; however, three firms (all Big 4) rewarded over 40% of their tangible rewards during the period April to June, coinciding with the end of busy season. This is consistent with firms' desire to provide immediate feedback for good performance.
Three Big 4 and two non–Big 4 firms use a points-based rewards program, whereby employees receive points that they can redeem for merchandise and experiences chosen from a catalog of possible rewards. The remaining two firms give rewards in the form of gift cards for specific locations, such as coffee houses, or prepaid Visa/Mastercard gift cards. Refer to Table 1 for a breakdown of program details by firm.
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | |
|---|---|---|---|---|---|---|---|
| Category of firm | Big 4 | Big 4 | Big 4 | Big 4 | Non–Big 4 | Non–Big 4 | Non–Big 4 |
| Level of program reach | National | Regional | National | National | Regional | National | Office |
| What is awarded? | Gift cards | Points | Points | Points | Points | Points | Gift cards |
| Examples of things for which awards can be redeemed | Coffee house, prepaid Visa card | Merchandise, experiences, RRSP contributions | Merchandise, gift cards, experiences, memberships, donations | Merchandise, experiences | Gift cards, electronics, vacation packages, home goods | Merchandise | — |
| Range of reward values | $25–$250 | $25–$2,000 | $13–$3,500 | $10–$3,750 | $10–$2,700 | $50–$400 | $25–$500 |
| % of rewards awarded January–March | 23% | 20% | 16% | 20% | 25% | 27% | — |
| % of rewards awarded April–June | 51% | 20% | 51% | 43% | 23% | 29% | — |
| % of rewards awarded July–September | 10% | 42% | 13% | 14% | 22% | 16% | — |
| % of rewards awarded October–December | 16% | 18% | 20% | 23% | 30% | 28% | — |
- Notes: — indicates information was not provided by the firm. RRSP: registered retirement savings plan.
Discussion
The tangible rewards programs are set up differently across firms, and these differences may impact the level of effectiveness and satisfaction with the programs. Future research could investigate whether points or gift card programs are more effective at meeting the objectives of the tangible rewards program. This research provides us a first glimpse into auditor reward systems below the partner level. As previously noted, staff auditors do a substantial amount of work on audit engagements, but previous research has focused on the incentive systems for partners alone. In these tangible rewards programs, individuals are allowed rewarding at all levels: up, down, or parallel. Future research could investigate if this leads to gaming the reward system through reciprocal rewarding behavior. Alternatively, does this allow for more timely and accurate recognition of valued objectives?
4.2 Purpose of Tangible Rewards Programs
All seven PA firms that provided data for our study stated multiple purposes of their tangible rewards program, and all seven include a purpose consistent with building a culture of recognition. For example, all firms include a goal to use the program as a vehicle to “say thank you” or to “show appreciation,” with all firms using the terms “recognition,” “appreciation,” or “thank you”/“thanking people.” One firm states their goal is to “use recognition to show appreciation,” to “build trust within the organization,” and to show they “care for their employees.” These responses demonstrate a social appreciation aspect to PA firms' tangible rewards programs and are consistent with their use for recognition purposes.
In addition to creating a culture of recognition, the firms also state a variety of other purposes for their tangible rewards programs. These purposes vary across the firms, and there are no patterns between Big 4 versus non–Big 4 firms with respect to the number or type of purposes. The purposes of firms' programs include rewarding employees for great results, contributions to the firm, and years of service. Furthermore, six of the seven firms indicate that a purpose of the tangible rewards program is to reward actions consistent with firm values and/or going above and beyond (three Big 4 and three non–Big 4). For example, one Big 4 firm reports that one purpose of their tangible rewards program is to “recognize those who deliver great results,” and another Big 4 firm includes a program purpose that rewards employees “who demonstrate behaviours that support the [firm's] strategy.” Consistent with prior tangible rewards research, the purposes for firms' programs include incentivizing performance goals.
As previously noted, prior research has explored the differences between cash and tangible rewards programs. As such, we asked the firms whether the purpose of the tangible rewards program and the cash bonus program differ. Four of seven firms (two Big 4 and two non–Big 4) state that the purpose of their tangible rewards program is not the same as the purpose of their cash bonus program. Each of these four firms indicates that the cash incentive program recognizes performance over a longer term than does the tangible rewards program. Two firms state that the cash bonus program is based on objective measures, is “outcome based” and “depends on the financial results of the firm,” such as chargeable hour targets, business development, or goals related to the business strategy. Other firms note that they use a cash bonus to reward employees for long-term goals and consistent annual performance, whereas they use the tangible rewards program to provide immediate rewards for “specific accomplishments or actions” or “sporadic behavior”; these are awarded after the fact and not for a specific goal set in advance. As a result of these differences, only two of the firms surveyed (both Big 4) include tangible rewards received in auditors' annual performance appraisals. Overall, cash bonus programs appear to focus more on incentivizing long-term employee performance, whereas the tangible rewards programs aim to provide both recognition and performance incentives throughout the year.
4.2.1 Discussion
Tangible rewards can fulfill a dual purpose. Not only do they incentivize employees to improve their performance and to meet corporate objectives, but they are also used to recognize employee milestone achievements, to create role models, and to improve employee retention. An important purpose of tangible rewards used by Canadian PA firms, but yet to be researched extensively, is to recognize and show appreciation for employees, as well as recognize and incentivize a broad range of behaviors, suggesting future research would be beneficial in this area. This is important in all organizations, but particularly in PA firms where auditor turnover tends to be high. As tangible rewards vary in value, it is unclear how material they are to an auditor's behaviors and turnover intentions, so future research would benefit from exploring the optimal structure of the tangible rewards system. Recognition is increasingly important to meeting the motivational needs of the growing knowledge-worker segment (McAdams 1999; Brun and Dugas 2008; Montani et al. 2017), so future research may benefit from exploring how effectively tangible rewards meet the recognition needs of auditors. All seven firms state “building a culture of recognition” as a purpose of their tangible rewards programs. Future research could consider the influence of tangible rewards programs on PA firms' culture. This is especially important given that a distinctive characteristic of PA firms is their reliance on organizational culture to control auditors' behavior (Almer et al. 2005), and that “culture encapsulates the essence of an audit firm” (Jenkins et al. 2008, 49). Finally, we find that the monetary and tangible rewards programs within Canadian PA firms serve different purposes, and most of the firms surveyed do not include tangible rewards received in auditors' annual performance appraisals. Understanding the nature and effects of differing program objectives will provide researchers, practitioners, and regulators a clearer picture of PA firms' complete reward structures and opportunities to improve them. Furthermore, future research could explore whether inclusion of tangible rewards in auditors' overall performance appraisal has a differential effect on motivation, behavior, and/or turnover intentions.
4.3 Visibility of Tangible Rewards
Communication of tangible rewards can affect the visibility of the reward program and the behaviors being awarded. Disclosure practices are important, as they can affect the motivational benefits of the tangible rewards program (Jeffrey and Shaffer 2007). The social reinforcement aspect of tangible rewards may be particularly valuable to auditors to the extent that they garner respect from colleagues, which provides utility to many professionals (Almer et al. 2005). Therefore, we explore how firms communicate tangible rewards to employees within the firm to get a glimpse of the programs' visibility.
We asked PA firms whether the rewards were publicized and, if so, to what extent. We find that the visibility, or publicity, of tangible rewards varies across firms. All seven firms disclose the name of the individual receiving a tangible rewards to members of the firm, and all but one Big 4 firm disclose the reason why the individual is receiving the reward, making both the recipient and behavior rewarded visible.4 None of the firms disclose the amount of the reward. Firms use various means to publicize the rewards throughout the organization, with one firm disclosing through an “office presentation” and four firms publicizing through a rolling online newsfeed or website dedicated to the rewards program. There are also differences between the firms as to whether rewards are publicized nationally, regionally, or at the office level, and within or across lines of service.
4.3.1 Discussion
We identify diversity in the level and method of disclosure of tangible rewards across the firms, which may affect the effectiveness of the programs. The WorldatWork (2013) survey finds that awards are presented most frequently in one-on-one meetings with the manager (71%), but that highly visible events, such as special events (61%), staff meetings (55%), and companywide meetings (41%) are also commonly used. Low-visibility forms of communication, such as internet announcements (29%) or email (36%) are used less frequently. Comparing these disclosure methods to PA firms' disclosure methods reveals a stark difference, as PA firms commonly employ internet announcements (via rolling online newsfeeds and/or rewards program websites), but less frequently employ public, in-person presentations. Future research could examine whether differential publication methods affect the motivational properties of the reward. For example, does using a digital form of communication versus a public verbal form affect the recognition value that employees attach to tangible rewards? How does the disclosure of rewards affect overall motivation of both the recipient and other employees?
Part 2: Behaviors Canadian PA Firms Are Rewarding
We further explore the incentive and recognition uses of tangible rewards programs in Canadian PA firms by providing a picture of the specific types of behaviors they reward. We examine this by first asking the firms if and how they organize their tangible rewards and whether they tie them to overall categories. Five of the seven firms (three Big 4 and two non–Big 4) indicated that they classify rewards according to categories, increasing the internal consistency of application of the program. These five firms further provided a description of each category and examples of behaviors rewarded within each category, based on documented rewards within the system. They also provided data on the percentage of awards, distributed by category, for their most recent 12-month period at the time of data collection. The categories are multidimensional and reward a variety of behaviors that the firms value. Although the categories and their descriptions differ by firm, there are many consistencies across the firms in the types of behaviors that the programs intend to reward, and information can be gleaned by examining and classifying these categories according to an overarching framework.
We use Almer et al.'s (2005) framework to classify and discuss rewards. Within this framework, the value PA firms receive from the staff auditor is considered a professional contribution, which is a multidimensional construct composed of the auditor's “technical work performed for the client, engagement management, subordinate development, administrative and recruiting activities, training, quality control and practice development” (Almer et al. 2005, 7). We use the detailed descriptions of categories and behaviors rewarded within each category to map the firms' categories onto the framework. Although many of the firm categories reward a variety of different behaviors, most can be mapped onto one of the dimensions highlighted in the framework. Only three of the 22 categories described by the firms were coded into more than one dimension in the framework.5 Coding of the firms’ categories into the dimensions of professional contribution was done independently by two of the researchers. Inter-rater reliability was 0.82 which exceeds the 0.75 threshold to be considered excellent per Cohen's kappa (Fleiss and Cohen 1973). Coding differences were resolved by discussion between the researchers. We collapse subordinate development and training from Almer et al.'s (2005) framework into one dimension, as firms inextricably and predictably collapsed behaviors related to these dimensions together. We also collapse the quality control and technical work dimensions for the same reason. Therefore, rewards were categorized into the following five professional contribution dimensions: (i) engagement management; (ii) quality control and technical work (quality/technical); (iii) subordinate development and training (development/training); (iv) practice development; and (v) administrative and recruiting. This allows us to understand which dimensions of “professional contribution” firms reward using tangible rewards and provides insight into the relative amounts the firms are rewarding each dimension. The results of each dimension are presented first, followed by the overall discussion of all dimensions at the end of this section.
4.1 Dimension 1: Engagement Management
Research on auditor performance evaluation that informed the development of Almer et al.'s (2005) professional contribution framework suggests that engagement management considers factors that affect the execution of the assurance engagement and the relationship with the audit client. Examples of such factors from the literature include billable hours (Maher et al. 1979), planning and revising audit programs (Jiambalvo 1979), work cooperation within the engagement team (Maher et al. 1979) and cooperating and working with present clients (Jiambalvo 1979; Maher et al. 1979). These factors encompass both professional and commercial objectives, as they enhance both audit quality and client relationships. All five firms awarded between 27% and 61% of their tangible rewards for engagement management, with non–Big 4 firms (M = 49%) rewarding this dimension more frequently, on average, than Big 4 firms (M = 32%).6 However, Big 4 firms demonstrated less variation in rewarding this dimension (range = 27%–34%) than did the non–Big 4 firms (range = 37%–61%).7 Examples of engagement management behaviors that the PA firms reward include “providing exceptional services to our client,” “listening carefully to understand client needs and taking action,” “displaying exceptional adaptability and capability in anticipating and responding quickly to client requirements,” “demonstrating client service excellence,” “meeting a client commitment with a sense of urgency,” and “anticipating and exceeding client's expectations.” These examples and data suggest that the firms are communicating the importance of audit engagement and client relationship management through their tangible rewards program.
4.2 Dimension 2: Quality Control and Technical Work
Prior research suggests that quality control and technical work includes behaviors such as quality of technical work, review and supervision of others, understanding accounting and auditing standards, and demonstrating competence (Jiambalvo 1979; Maher et al. 1979). Like engagement management, all five firms that categorize rewards use tangible rewards to recognize staff for behaviors relating to technical skill and the quality of audit work performed, but this dimension was rewarded less frequently than engagement management by both Big 4 and non–Big 4 firms. Consistent with our findings for the engagement management dimension, non–Big 4 firms (M = 35%) rewarded quality/technical more frequently than did Big 4 firms (M = 28%), and again experienced more variation (range = 25%–46%) than did Big 4 firms (range = 24%–34%). Examples of behaviors that the PA firms rewarded include “taking ownership for quality at both an individual and collective level,” “applying their energy, creativity, and attention to be and do their personal best,” “demonstrating technical and professional excellence,” “bringing the right team and expertise to the engagement,” “setting high standards and holding yourself accountable,” “displaying a high level of competence and quality in their area of expertise,” and “applying a high level of technical/professional skills and knowledge.”
4.3 Dimension 3: Subordinate Development and Training
Subordinate development includes on-the-job training of assistants whereas training includes activities related to development of the self (Almer et al. 2005). All three of the Big 4 firms and one non–Big 4 firm include rewards for subordinate development and training in their tangible rewards program. Within the three Big 4 firms, the development/training dimension represented 7%, 16%, and 37% of total rewards distributed (M = 20%). The single non–Big 4 firm awarding rewards for these behaviors distributed 17% of their total rewards in this dimension (mean across the two non–Big 4 firms = 9%). Examples provided by the PA firms of behaviors rewarded include “offering coaching/mentoring support,” “demonstrating excellence in coaching,” “supporting others to grow and thrive,” “providing, seeking, and using timely guidance and meaningful feedback that is both candid and direct to help others self-improve and develop,” and “helping others create practical development plans to achieve their full potential.” Most knowledge gained by auditors occurs on the job in an audit team setting where auditors are supervised and perform more complex work as they gain experience (Bedard 1989; Power 1991; Westermann et al. 2019), so rewarding subordinate development and training is in line with recognizing this dimension of professional contribution.
4.4 Dimension 4: Practice Development
Practice development typically includes behaviors consistent with attracting new clients, promoting additional services to existing clients, and public relations/community work (Jiambalvo 1979; Maher et al. 1979; Hooks et al. 1994). Therefore, this dimension focuses on the commercial aspects of PA firms' business. Again, all three Big 4 firms and one non–Big 4 firm reward practice development behaviors, although this was the least often rewarded dimension by both Big 4 firms (M = 18%) and non–Big 4 firms (M = 7%). All three Big 4 firms reward practice development (range = 9%–26%) whereas only one non–Big 4 firm rewards this dimension, representing 14% of total awards distributed. Examples include “taking a leadership role in the profession/community,” “developing and maintaining exceptional client and future client relationships,” “identifying opportunities for growth, such as new service ideas for existing or future clients,” “creating opportunities for growth through community engagement or alumni networks,” “strategically developing networks and relationships internally and externally,” “being a positive, passionate, and proud advocate of [firm] and our brand, so that we differentiate ourselves from our competition,” “building relationships through rich internal and external networks,” and “identifying potential areas of growth through our alumni.” Coping with competition through various practice development strategies is a key concern for PA firms, and, therefore, it is not surprising that it is being rewarded at all levels of the firm (Hooks et al. 1994).
4.5 Dimension 5: Administrative and Recruiting
Administrative and recruiting was only specifically mentioned by one Big 4 firm, and they reward 7% of their awards for behaviors relating to this dimension. Behaviors that this PA firm rewards focus primarily on recruiting and include “referring top talent from your personal and professional networks,” “taking an active role in recruitment, including co-op and intern programs,” and “achieving career and professional milestones.”
4.6 Discussion
By examining the types of behaviors included in PA firms' tangible rewards programs through the lens of Almer et al.'s (2005) professional contribution framework, we find that both quality and commercial aspects are served through these programs. Overall, we find all five firms reward between three and five dimensions of professional contribution. All the firms use the tangible rewards program to reward a diverse set of dimensions, pointing to the multifaceted nature of their values (see Table 2).
| Dimension | Big 4 firms | Non–Big 4 firms | |||||
|---|---|---|---|---|---|---|---|
| A | B | C | Average | D | E | Average | |
| Engagement management | 34 | 27 | 34 | 32 | 61 | 37 | 49 |
| Quality control and technical | 34 | 27 | 24 | 28 | 25 | 46 | 35 |
| Subordinate development and training | 7 | 37 | 16 | 20 | 0 | 17 | 9 |
| Practice development | 18 | 9 | 26 | 18 | 14 | 0 | 7 |
| Administrative and recruiting | 7 | 0 | 0 | 2 | 0 | 0 | 0 |
- Notes: The data in this table were provided by the five firms that distribute tangible rewards according to categories and reflect rewards distributed in a 12-month period.
A breakdown of the firms in Table 2 shows that two of the three Big 4 firms reward four dimensions of the framework, and the remaining Big 4 firm rewards all five dimensions. This indicates that the majority of the dimensions of the framework are rewarded within the Big 4 firms. The two non–Big 4 firms each reward three dimensions, again showing that a significant part of the framework is being rewarded, regardless of size. All dimensions were, on average, rewarded in the same respective rank order across Big 4 and non–Big 4 firms.
All five firms reward the dimensions of engagement management and quality/technical (quality control and technical work), and these two dimensions are rewarded the most, on average, in both Big 4 firms and non–Big 4 firms alike. Engagement management and quality/technical dimensions represent 32% and 28% of all rewards distributed, respectively, in Big 4 firms, and 49% and 35% of rewards distributed, respectively, in non–Big 4 firms, representing 60% or more of all rewards distributed. This is important because it adds insight to the professionalism versus commercialism debate, but this time in nonpartner auditors. As discussed above, engagement management is comprised of factors that encompass both professional and commercial objectives, as they enhance both audit quality and client relationships. The quality/technical dimension is comprised of factors that would be encompassed within the professional objective. This signals that it is not only the development of the business that is important but also the quality of the work done, with a significant portion of rewards allocated to these two key dimensions. Although regulators (PCAOB 2013; CPAB 2014) and academics (Zeff 1987; Wyatt 2004) have expressed concerns over the commercialization of the auditing profession and the possible loss of professionalism that this may cause, these findings show that both objectives are being highly rewarded by all firms for those below partner level, who perform the bulk of the auditing work.
Looking at all dimensions provides several additional insights. First, we can see that many of the behaviors rewarded are not directly observable or easily measured, so the tangible rewards program provides the firms the opportunity to recognize behaviors that go beyond incentivizing measurable output. As such, this points to the importance of studying the effectiveness of tangible rewards not only as performance incentives, but also as a tool for employee recognition where output is not easily measurable.
Second, although firms have been criticized for partner compensation practices focusing primarily on commercial measures, the tangible rewards programs do not mirror that focus, nor reward solely for those purposes, as evidenced by the percentages of rewards awarded. Our findings suggest that firms' tangible rewards programs recognize multiple desirable employee behaviors, encompassing both professional and commercial objectives, including quality, practice development, engagement management, and self- and peer-development. Knowledge of the aspects of auditors' contributions to the firm that are included in PA firms' tangible rewards programs provides a starting point for further research on the extent and effectiveness of these types of rewards. For example, how do tangible rewards influence professional judgments in situations where professional and commercial pressures collide? How do multiple program goals affect staff auditor judgment and decision-making? Do tangible rewards have a differential effect on quality of work and client relationship management than do cash rewards? Future studies could also collect data on the frequency with which the different types of behaviors are rewarded over multiple periods to gain insights into what aspects of professional contribution the PA firms value most, and on the efficacy with which tangible rewards can direct auditor behavior.
Third, in the training and development dimension of professional contribution, four of the five firms provide tangible rewards to employees for behaviors that contribute to both self- and peer-development. Individual firms also reward employee contributions to the community and contributions to growth and innovation. Future research may benefit from examining the effectiveness of tangible rewards programs to influence such a diverse set of employee behaviors. Firms are using these programs to signal to their employees that they value community and innovation, so future research may benefit from exploring the effectiveness of recognition as a signal of a firm's values and their effect on employees' commitment to the firm. A summary of research findings and future research questions can be found in Table 3.
| Element/dimension | Key findings | Research questions |
|---|---|---|
| Panel A: The tangible reward program | ||
| Features of program |
|
|
| Purpose of program |
|
|
| Visibility of rewards |
|
|
| Element/dimension | Key findings | Research questions |
|---|---|---|
| Panel B: Dimensions of professional contribution rewarded | ||
| Engagement management |
|
|
| Quality control and technical work |
|
|
| Subordinate development and training |
|
|
| Practice development |
|
|
| Administrative and recruiting |
|
|
| Overall (not relating to any one dimension) |
|
|
5 CONCLUSION
Tangible rewards can be used for recognition, focussed on rewarding a broad set of employees' accomplishments (McAdams 1999) and typically based on largely subjective dimensions of performance; and for incentives, focussed on motivating employees to optimize performance (Bonner et al. 2000; Bonner and Sprinkle 2002) and typically based on objective measures. We contribute to auditing literature and accounting practice in multiple ways. First, we examine tangible rewards in PA firms. The audit setting is ideal for examining the tangible rewards systems because audit practice tasks are generally unstructured and audit quality is not directly observable (Samuel et al. 2009). Audit firms use their tangible rewards programs not only to incentivize and reward performance, but also to recognize behaviors that produce those outstanding results, and to recognize employees' milestones, such as years of service. All the programs' purposes included the desire to say “thank you” to their employees. The firms use tangible rewards to show that they care about and appreciate their employees, which helps build a culture of recognition. These programs may become even more critical given that recognition is increasingly important to meeting the motivational needs of the growing knowledge-worker segment (Brun and Dugas 2008; McAdams 1999; Montani et al. 2017).
Second, our findings contribute to the auditing literature on auditor renumeration, suggesting, consistent with Coram and Robinson's (2016) examination of partner remuneration, that firms' tangible rewards programs recognize multiple desirable employee behaviors, including activities that enhance both professional and commercial purposes. Using Almer et al.'s (2005) framework, we show that all firms are rewarding multiple dimensions of their employees' professional contribution, and four of five firms are rewarding the auditor's technical work, engagement management, subordinate development, training, quality control, and practice development, with the top dimensions rewarded being engagement management and the combination of quality control and technical work. This suggests that although the tangible rewards programs of the firms have a diverse set of objectives and are uniquely organized by firm, they reward similar behaviors. The tangible rewards programs focus on both commercialism and professionalism, indicating that the divide stressed in the literature may not be as strong in practice for nonpartner professionals. Maintaining and improving client relationships can help the firm to maintain both high-quality audit services and profitable client engagements, satisfying both commercial and professional goals. Due to this duality of effects, it is not unexpected that we find that all firms significantly employ tangible rewards to directly reward behaviors that improve audit quality and to reward behaviors that improve both client service and audit quality.
Finally, we provide specific research questions motivated by our findings throughout the discussion of our results that are summarized in Table 3. These research questions build on the existing literature and will inform practitioners on compensation system design. A few important areas include the exploration of the effectiveness of tangible rewards programs in PA firms to meet the recognition needs of employees; how tangible rewards influence professional judgments where professional and commercial pressure collide; and how the multiplicity of focus of tangible rewards in PA firms may allow for growth within the profession. Further research in this area would be beneficial to accounting practitioners determining the appropriate structure of their reward systems, including the optimal balance between monetary and tangible rewards.
Limitations of our research include the applicability of our findings beyond the Canadian marketplace, as well as the timing of the data collection. As described, our data is from audit firms in Canada. We collect data from seven of the eight largest firms, including all Big 4 firms, and believe our findings will provide a basis for insights beyond Canada. Of course, future research will need to consider the extent to which our findings apply to other countries. Also, the data provided by the five firms that categorize their rewards was for their most recent year, which may or may not reflect a typical year. As such, generalizations of the specific statistics presented to other periods must be made with caution. However, this data gives us a glimpse into the behaviors that firms choose to recognize using tangible rewards, providing valuable insights into the largely unexplored area of auditor recognition and remuneration. Future research could explore rewards over a multiyear setting and could explore how reward recognition could change over time.
