The Determinants of Performance Plan Adoption

Executive compensation schemes are expected to reduce agency costs by aligning the interests of stockholders and managers. We attempt to determine the characteristics of companies that adopt long-term performance plans. Using a matched-pair design, we conduct a multivariate logit analysis that is weighted to take into account the choice-based nature of the sample. Our results suggest that performance plans may have been adopted to complement the inadequate compensation derived from stock options. In addition, we find that performance plans are more likely to be adopted by companies who have smaller investment opportunity sets and have older managers who are underinvesting in R&D expenditures.

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Incentive Effects and Managerial Compensation Contracts: A Study of Performance Plan Adoptions

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x9200700203 ◽

1992 ◽

Vol 7 (2) ◽

pp. 137-156 ◽

Cited By ~ 13

Author(s):

Jennifer J. Gaver

Keyword(s):

Strategic Change ◽

Stock Option ◽

Managerial Compensation ◽

Logit Analysis ◽

Investment Opportunity ◽

Compensation Contracts ◽

Opportunity Sets ◽

Long Term Performance ◽

Term Performance

This study examines the relation between manager-shareholder agency costs and the decision to adopt a long-term performance plan. It is argued that firms with mature investment opportunity sets adopt performance plans to equate manager-shareholder planning horizons. It is also argued that firms undergoing strategic change adopt plans to reduce managerial exposure to risk. Logit analysis on a sample of 81 performance plan adoptions and a random sample of 78 nonadoptions indicates that firms with stagnant investment opportunity sets and firms undergoing strategic change tend to be performance plan adopters. There is also evidence that performance plan adopters have a higher incidence of lapsed stock option plans than nonadopters. Overall, the results indicate that there are systematic differences between performance plan adopters and non-adopters which appear to be related to the manager-shareholder agency problems faced by the firm.

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The contrasting moderating effect of exploration on the relationship between stock options/stock ownership and a firm’s long-term performance

Management Decision ◽

10.1108/md-07-2017-0645 ◽

2018 ◽

Vol 56 (9) ◽

pp. 1956-1968 ◽

Cited By ~ 2

Author(s):

Gun Jea Yu ◽

Joonkyum Lee

Keyword(s):

Stock Options ◽

Chief Executive ◽

Moderating Effect ◽

Stock Ownership ◽

Content Type ◽

And Performance ◽

Long Term Performance ◽

Term Performance ◽

The Relationship

Purpose The purpose of this paper is to investigate the contrasting moderating effect of a firm’s exploration on the relationship between the two types of long-term incentives (stock options/stock ownership) for the chief executive officers and a firm’s long-term performance. Even though the two types of incentives are designed to improve long-term performance, the degrees of impact on long-term performance differ. Based on behavioral agency theory, this study theoretically and empirically examines the role of a firm’s exploration on the above relationship. Design/methodology/approach This study used three archival sources to obtain data on stock options, stock ownership, patents and exploration, financial measures, and others. Based on a sample of 1,963 firms in various industries from 1995 to 2006, this study tested the moderating effect of a firm’s exploration on the relationship between stock options/ownership and a firm’s performance. Findings This study reveals the contrasting moderating effect of a firm’s exploration on the relationship between stock options/ownership and a firm’s long-term performance: a positive moderating effect on the relationship between stock options and performance and a negative moderating effect on the relationship between stock ownership and performance. In addition, empirical evidence was added on the inverted U-shaped relationship between stock ownership and a firm’s long-term performance. Originality/value There is little research on a firm’s internal characteristics that strengthen or weaken the effects of stock options and stock ownership on firm performance. This study demonstrates the differential moderating effects of exploration on the relationship between stock options/stock ownership and long-term performance. Such effects of exploration come from the different risk features of stock options and stock ownership. The key implication is that stock options could be more effective than stock ownership to enhance a firm’s long-term performance when a firm has a strong exploration orientation.

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The Role of Risk in Executive Compensation

Journal of Management ◽

10.1177/014920639702300402 ◽

1997 ◽

Vol 23 (4) ◽

pp. 517-540 ◽

Cited By ~ 72

Author(s):

Samuel R. Gray ◽

Albert A. Cannella

Keyword(s):

Executive Compensation ◽

Risk Taking ◽

Time Horizon ◽

Agency Problems ◽

Total Compensation ◽

Long Term Performance ◽

Strategic Context ◽

Term Performance

The present study was designed to investigate the role of risk in executive compensation. We argue that compensation arrangements may be used to mitigate agency problems by encouraging risk taking behavior and providing incentives for optimizing long-term performance. We examine total compensation, compensation risk, and compensation time horizon. Consistent with our theory, the evidence indicates that these dimensions vary with the financial and strategic context of the firm and with the risk-taking propensity of the CEO.

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