Even when lying, people are unselfish

Companies with shareholders are required to report earnings, and these performance reports are an important indicator of the company’s financial health. Good figures can invite investors to jump in – and poor results warn them to stay away, so accurate and honest information is crucial.

But it’s said that managers often lie in these performance reports, both internally and externally. Van Rinsum did an experiment that showed there’s a lot of lying going on with 47 per cent of participants always being honest, but the other 53 per cent choosing to lie. And what’s more, of this huge proportion that chose to lie, 37 per cent of the liars lied to get the maximum bonus.

Van Rinsum’s research (co-authored by V.S. Maas) reveals that the timing and extent of managers’ deceits in their performance reports depend on how their colleagues are affected by the results. Managers are more likely to overstate their numbers if it means colleagues get some kind of benefit. But they are less likely to lie if it means colleagues get less.

Group bonuses can turn people into ‘unselfish liars’. If a group bonus increases when people lie, resulting in higher bonuses for all, people lie more. This can happen when companies use ‘profit sharing’ plans. But if the team bonus is set at a fixed total amount and is divided between employees based on how well they performed, then people are less likely to lie because this can take away from the bonus earnings of someone else, which is seen as unfair. This is the case when companies use ‘relative performance evaluation’.

But when making the results public there are fewer overstatements, especially when managers have to make their performance reports known to others. People are afraid to be exposed as a liar – it’s a sin against social norms. When internal reports are not anonymous, lies occur less frequently.

These factors potentially affect how companies could stop accounting scandals where managers are ‘cooking the books’. Therefore, Van Rinsum suggests to use a pre-set amount for group bonus pools, since managers are reluctant to gain by lying at another person’s expense. And he also suggests making individual performance reports transparent within the company.