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Article Excerpt
The outcomes of negotiated transfer prices affect profit for the managers involved and can also impact company profit when quantity, as well as price, is an element of the negotiation. Thus, it is important for both companies and managers to understand the variables affecting negotiation outcomes. Prior research in negotiation (see Bazerman et al., 2000) has investigated how negotiators' perceptions of the negotiation situation impacted outcomes. Further, these perceptions seem to influence outcomes and enhance negotiator profit over and above the effect of other important variables in negotiation, like risk preference and competitive behavior (Thompson, 1998). Other recent research has shown that making the optimal payoff salient to negotiators increases negotiator effectiveness beyond that obtained through risk preference alone (Ghosh and Boldt, 2004).
Prior accounting research (e.g., Lipe, 1993; Luft, 1994) has also found that the framing of problems affects managers' judgments and preferences in other tasks and domains (e.g., variance investigation and contract choice). These studies have consistently shown that the presentation of monetarily equivalent options in semantically different ways (i.e., gains and losses, bonuses and penalties) affects how managers frame problems and make judgments. However, some research suggests the framing effect is not consistent and research findings may be limited by contextual and procedural variations (Levin et al., 1998). While Lipe (1993) proposes that future framing studies examine the role of motivation in general, Ghosh and Boldt (2004) list compensation structure as a specific motivation variable that could potentially limit the framing effect in negotiation.
To the extent that a manager is evaluated and compensated based on divisional profit, he or she would like to enhance divisional profit. Not surprisingly, prior research suggests that compensation structure is an important variable associated with transfer pricing (Grabski, 1985; Ghosh, 2000). Specifically, negotiators achieve higher profits when profit is a larger percentage of total compensation (Ghosh, 2000). These findings imply that negotiators see the making of profit from a transfer transaction as a more important goal when profit is a larger percentage of compensation. Still, how the profit goal is framed may affect the manager's likelihood of performing the actions necessary to achieve the goal.
Our research uses an experiment to examine the effect of positive and negative goal framing on sellers' share of profit available from a negotiated transfer for two different compensation structures. Participants were given the role of a seller facing a negotiation for a potentially profitable transfer with another division in the same company. The positive frame condition asked participants to think about the profit to be made from the transaction while the negative frame condition asked participants to think about the profit they would forego to the other division. The amount of management compensation dependent upon divisional profit also varied. The low compensation condition told participants that their bonus compensation was only 3% of divisional profit while the high compensation condition told participants that their bonus was 30% of divisional profit.
The remainder of this article is organized as follows. The next section develops the research hypotheses. The following section discusses the research method. Then, the results of the data analyses are discussed. The last section summarizes the results and provides some conclusions.
THEORY AND HYPOTHESES
Framing
Research evidence indicates the framing effect has an impact on choices and behaviors of negotiators (Bazerman et al., 1985: Bottom and Studt, 1993). Negotiators compare, code and evaluate negotiation outcomes relative to a reference point (Neale and Bazerman, 1991). Evidence from the decision-making literature suggests the adopted reference point impacts how the outcome situation is framed. Further, decisionmaker choices and behaviors depend on the reference point used in evaluating outcomes (Tversky and Kahneman, 1981; Kuhberger, 1998).
Recent accounting research has found similar effects in contract choice. Luft (1994) found that employees prefer bonus contracts to penalty contracts. Ghosh and Boldt (2004) found that making the potential profit outcome salient enhanced negotiator effectiveness. These findings provide additional evidence that the frame affects negotiation outcomes.
In the context of the current study, managers of selling divisions enter negotiations for the transfer sale of a good with the goal of increasing their divisional profits. They essentially face a situation of obtaining more profit or gain (i.e., a positive frame) for their division from the transfer or forego some of the profit or gain (i.e., a negative frame) from the transfer to the other division. Therefore, positive or negative framing of the profit goal from transfer pricing is expected to culminate in sellers claiming different shares of the profit available from the transaction. Thus, the first hypothesis is:
H1: Seller's share of the profit will be higher when the profit goal is expressed in terms of profit foregone (i.e., a negative frame) compared to when the goal is expressed in terms of profit made (i.e., a positive frame).
Compensation Structure
Managing the transfer pricing problem can be difficult because the transfer price affects divisional profit which, in turn, is typically the basis for evaluating and compensating the manager (Eccles, 1985). Also, a firm's compensation plan significantly influences the motivation of organizational members (Schwab, 1973) and stimulates behavior between negotiating divisions by influencing the bargainers' aspiration level (Pruitt and Lewis, 1975). Research in transfer pricing indicates that compensation structure (e.g., basis of the compensation) is a pervasive issue in transfer pricing (Eccles, 1985; Grabski, 1985; Vancil, 1978)...
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