Essays On The Design And Consequences Of Relative Performance Evaluation Incentives In Ceo Compensation Contracts
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Executive Compensation, Strategic Competition, and Relative Performance Evaluation
| Author | : Raj Aggarwal |
| Publisher | : |
| Total Pages | : 90 |
| Release | : 1996 |
| Genre | : Executives |
| ISBN | : |
We argue that strategic interactions between firms in an oligopoly can explain the puzzling lack of high-powered incentives in executive compensation contracts written by shareholders whose objective is to maximize the value of their shares. We derive the optimal compensation contracts for managers and demonstrate that the use of high-powered incentives will be limited by the need to soften product market competition. In particular, when managers can be compensated based on their own and their rivals' performance, we show that there will be an inverse relationship between the magnitude of high-powered incentives and the degree of competition in the industry. More competitive industries are characterized by weaker pay-performance incentives. Empirically, we find strong evidence of this inverse relationship in the compensation of executives in the United States. Our econometric results are not consistent with alternative theories of the effect of competition on executive compensation. We conclude that strategic considerations can preclude the use of high-powered incentives, in contrast to the predictions of the standard principal-agent model.
CEO Risk-Taking Incentives and Relative Performance Evaluation
| Author | : Dirk E. Black |
| Publisher | : |
| Total Pages | : 37 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
This paper examines how changes in CEO risk-taking incentives are associated with changes in the use of relative performance evaluation (RPE) in CEO contracts. Using a shock to the accounting for executive stock options (FAS 123R), I confirm that risk-taking incentives and option grants declined following FAS 123R using a within-firm design, but not a within-CEO-firm design. Decreased risk-taking incentives lead executives to invest in projects with lower systematic risk and can result in reduced incentives to hedge exposure to systematic risk in CEO compensation contracts via RPE. However, CEO relative risk-aversion increases with decreases in risk-taking incentives, potentially increasing incentives to protect CEO wealth from systematic performance via RPE. Testing these competing predictions, I find modest evidence consistent with reduced RPE surrounding FAS 123R, suggesting that when CEO risk-taking incentives are reduced, so are incentives to shield CEO pay from systematic performance.
Executive Compensation: Empirical Essays on the Antecedents and the Consequences, and the Role of Executive Personality
| Author | : Steffen Florian Burkert |
| Publisher | : BoD – Books on Demand |
| Total Pages | : 233 |
| Release | : 2023-03-10 |
| Genre | : Business & Economics |
| ISBN | : 3947095104 |
Top managers have a significant impact on organizations because they are responsible for the formulation and implementation of corporate strategies, have the visibility and influence to shape the opinions of internal and external stakeholders, and coin the culture of their organizations, affecting employees at every level of the organization. Research has focused on the drivers and consequences of top managers' actions, with a particular focus on executive compensation, but important questions remain unanswered. This dissertation contributes to the literature on top executives by examining the antecedents of executive compensation, the influence of executive compensation on executive behavior, and the interplay of executive compensation and top executive personality. The first study introduces the role of compensation benchmarking for determining executive compensation to the management literature. It finds that benchmarking leads to compensation convergence. The second study examines the impact of executive compensation complexity on firm performance. The results show that compensation complexity is negatively related to accounting-based, market-based, and ESG-based metric of firm performance. The third study explores the implications of relative performance evaluation (RPE) on the imitation behavior of firms. It finds that the introduction of RPE is positively related to the imitation of the strategic actions of peer firms. The fourth study contributes to the growing literature on the impact of corporate social performance (CSP) goals in CEO contracts. Specifically, it examines how and when CSP incentives influence the CEO's attention to corporate social responsibility topics. The final essay examines the role of CEO personality; it finds that differences in CEO personality explain differences in the level of strategic conformity. Taken together, the essays in this dissertation make a significant contribution to the scholarly discourse on the influence of top managers on their companies. The empirical evidence presented expands the current understanding of how top executives affect strategic firm behaviors, and it provides insights for policymakers, managers, and investors.
Complex Compensation: Empirical Essays on the Impact of Compensation Design on Firm Performance, Turnover, and Organizational Justice
| Author | : Tobias Oberpaul |
| Publisher | : BoD – Books on Demand |
| Total Pages | : 202 |
| Release | : 2024-01-19 |
| Genre | : Business & Economics |
| ISBN | : 3947095112 |
Compensation contracts have become ever more complex and individualized, particularly in the executive compensation domain, where increasingly diverse stakeholder demands and governance requirements have led to the inclusion of more and increasingly interrelated components into compensation contracts. Even the compensation of lower-level employees has become complex as firms individualize employee compensation and use many different rewards simultaneously. Research has examined elements of compensation in isolation but has attempted to avoid the complexities of compensation. This dissertation examines the consequences of compensation complexity and compensation design dispersion and contributes to a better understanding of compensation and its consequences for firms and employees. The first study examines how the complexity of executive compensation contracts affects firm performance. It finds that CEO compensation complexity negatively affects accounting, market, and ESG (i.e., environmental, social, and governance) metrics of firm performance and explores mechanisms that help explain the relationships. The second study examines the effect of compensation design dispersion within top management teams and its impact on executive turnover. The results show that compensation design dispersion affects executive turnover, both directly and in interaction with relative pay level. The third study addresses the role of compensation design dispersion in the development of procedural justice perceptions. Using two experiments, this study shows that compensation design dispersion causes lower procedural justice perceptions, which appears to be less problematic for participants with relatively easier to understand contracts. In summary, this dissertation provides a nuanced overview of complex compensation design and compensation design dispersion. The findings contribute to a better understanding of the effectiveness of compensation as an incentive and sorting tool for organizations, and of the implications of compensation design for the functioning of teams.
The Presence, Value, and Incentive Properties of Relative Performance Evaluation in Executive Compensation Contracts
| Author | : J. Carr Bettis |
| Publisher | : |
| Total Pages | : 80 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Using data that includes specific contractual details of Relative Performance Evaluation (RPE) contracts granted to executives for 1,833 firms for the period 1998 to 2012, we develop new methods to characterize RPE awards and measure their value and incentive properties. The frequency in the use of these awards has grown over time with 37% of the firms in our sample granting an RPE award in 2012. When RPE awards are used they are typically granted to the five named executive officers and they represent about 32% of total recipient compensation. Stock is most frequently the instrument conveyed, followed by cash, and options are almost never granted. RPE awards are more likely to be used at firms with diversified business lines, less concentrated industries, greater exposure to systematic risk, larger size, lower M/B, higher dividend yield, fewer insiders on the board, greater institutional ownership, and that engage a compensation consultant. The typical award is a rank-order tournament based on three year stock returns compared to a select group of 13 peers (median) and is paid out with stock. Payout functions typically include regions of concavity, convexity, explicit inelasticity, and implicit inelasticity. The median firm achieves a threshold for at least some payout of stock or cash about 70% of the time and target payout about 50% of the time. In general, RPE grant value differs significantly from the fair market value reported by firms. We find that RPE awards convey to executives the incentive to increase shareholder wealth. RPE awards of stock contingent on either stock or accounting performance and RPE awards of cash contingent on accounting performance convey the incentive to increase firm risk, while RPE cash awards do not. These incentives can be significant in comparison to those conveyed by APE grants with similar attributes.
Pay for Results
| Author | : Mercer, LLC |
| Publisher | : John Wiley & Sons |
| Total Pages | : 288 |
| Release | : 2009-03-17 |
| Genre | : Business & Economics |
| ISBN | : 047047811X |
The numerous incentive approaches and combinations and their implications can be dizzying even to the compensation professional. Pay for Results provides a road map for developing and implementing executive incentives that drive business needs and strategy. It is filled with specific analytic tools, including tables, exhibits, forms, checklists. In addition, it uncovers myths in performance measurement strategy and design. Timely and thorough, this book expertly shows businesses how to drive their specific needs and strategy. Human resources and compensation officers will discover how to apply performance metrics that align with shareholder investment.
Inducements in Organizations
| Author | : Nicolas Tichy |
| Publisher | : BoD – Books on Demand |
| Total Pages | : 234 |
| Release | : 2023-03-14 |
| Genre | : Business & Economics |
| ISBN | : 3947095090 |
Executive compensation has inspired controversial debate in both academia and the general public, and many voices criticize that executive compensation designs fail to deliver desired outcomes. Although much research has been devoted to understanding the antecedents and consequences of executive compensation design, important questions remain unanswered. This dissertation contributes to the field by exploring a previously neglected aspect: executive compensation complexity. Given the absence of an established measure of executive compensation complexity, there is an incomplete understanding of how complexity enters executive compensation contracts and what the consequences are for managers and corporations. The essays of this dissertation aim to narrow this gap. The first study presents a novel measure of executive compensation complexity, which is validated and utilized to examine the antecedents of executive compensation complexity. The second study explores the consequences of executive compensation complexity and finds that complexity impairs firm performance, regardless of the performance metric chosen (accounting-based, market-based, or ESG-based performance metrics). The third study explores the link between compensation design dispersion and executive turnover and reveals that executives with riskier compensation packages and fewer performance goals are more likely to move. The fourth study provides experimental evidence on the effect of CSR Fit dimensions and organizational reputation. Taken together, the essays of this dissertation make a significant and valuable contribution to the scholarly discourse on executive compensation. By shedding light on the complex nature of executive compensation and its implications for managers and corporations, this dissertation advances the current understanding of executive compensation and provides insights for policymakers, managers, and investors.
