Fair and Square: A Retention Model of Managerial Compensation

2021 ◽  
Author(s):  
Tore Ellingsen ◽  
Eirik Gaard Kristiansen
Keyword(s):  
Behavioral Economics ◽  
Stock Option ◽  
Managerial Compensation ◽  
Risk Averse ◽  
Perceived Fairness ◽  
Retention Model ◽  
Compensation Contracts ◽  
Severance Pay ◽  
Variable Pay ◽  
Empirical Regularities

We propose a model of how the retention motive shapes managerial compensation contracts. Once employed, a risk-averse manager acquires imperfectly portable skills whose value is stochastic because of industry-wide demand shocks. The manager’s actions are uncontractible, and the perceived fairness of the compensation contract affects the manager’s motivation. If the volatility of profits is sufficiently large and outside offers are sufficiently likely, the equilibrium contract combines a salary with an own-firm stock option. The model’s predictions are consistent with empirical regularities concerning contractual shape, the magnitude of variable pay, the lack of indexation, and the prevalence of discretionary severance pay. This paper was accepted by Axel Ockenfels, behavioral economics and decision analysis.

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

1992 ◽  
Vol 7 (2) ◽  
pp. 137-156 ◽  
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.

Negotiated Transfer Pricing and Divisional vs. Firm-Wide Performance Evaluation

1999 ◽  
Vol 74 (1) ◽  
pp. 87-104 ◽  
Author(s):  
Regina M. Anctil ◽  
Sunil Dutta
Keyword(s):  
Risk Sharing ◽  
Transfer Pricing ◽  
Linear Functions ◽  
Managerial Compensation ◽  
Risk Averse ◽  
Compensation Contracts ◽  
Optimal Contracts ◽  
Total Surplus ◽  
Specific Investments ◽  
Optimal Linear

A firm with two divisions, each run by a risk-averse manager, contracts with the two managers to operate their divisions and possibly engage in interdivisional trade. Each division can increase the total surplus generated through interdivisional trade by making costly relationship-specific investments. The terms of trade are determined through negotiations between the two managers. Managerial compensation contracts are linear functions of divisional profit and firm-wide profit. If managers are compensated solely on the basis of their divisional profits, they invest less than the first-best amounts. While compensation contracts based on firm-wide profits alone can induce first-best investments, they impose extra risk on risk-averse managers. Therefore, we find that optimal linear compensation contracts will contain both divisional and firm-wide components. Our analysis also identifies a feature of negotiated transfer pricing, namely interdivisional risk sharing, and characterizes its impact on the design of optimal contracts.

Determinants of CEO Pay: A Comparison of ExecuComp and Non-ExecuComp Firms

2010 ◽  
Vol 85 (5) ◽  
pp. 1511-1543 ◽  
Author(s):  
Brian Cadman ◽  
Sandy Klasa ◽  
Steve Matsunaga
Keyword(s):  
Executive Compensation ◽  
Stock Returns ◽  
Institutional Ownership ◽  
Stock Option ◽  
Ownership Concentration ◽  
Positive Relation ◽  
Stock Liquidity ◽  
Compensation Contracts ◽  
Cash Compensation ◽  
Ceo Pay

ABSTRACT: We document that firms included in the ExecuComp database tend to be larger, more complex, followed by more analysts, have greater stock liquidity levels, and have higher total, but less concentrated, institutional ownership than other firms. Based on these differences, we test and find support for three predictions. First, ExecuComp firms rely more heavily on earnings and stock returns in determining CEO cash compensation. Second, the weight on earnings is more sensitive to differences in the extent of growth opportunities for ExecuComp firms. Third, the positive relation between institutional ownership concentration and the value of stock option grants is stronger for ExecuComp firms. Overall, our results suggest that ExecuComp and non-ExecuComp firms operate in different contracting environments that lead to differences in the design of their executive compensation contracts. As a result, care should be taken in extending results based on ExecuComp samples to non-ExecuComp firms.

scholarly journals Accounting For Stock Based Employee Compensation: A Continuing Controversy

2011 ◽  
Vol 3 (4) ◽  
Author(s):  
William Wrege ◽  
Mark Myring ◽  
Joe Schroeder
Keyword(s):  
Executive Compensation ◽  
Stock Options ◽  
Accounting Standards ◽  
Market Value ◽  
Stock Option ◽  
Font Size ◽  
Significant Component ◽  
Employee Compensation ◽  
Compensation Contracts ◽  
History Of

<p class="MsoBlockText" style="text-align: justify; margin: 0in 0.6in 0pt 67.5pt;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">Stock options represent an increasingly significant component of executive compensation. Theoretically, the inclusion of stock options in executive compensation contracts motivates managers to take actions that increase the market value of the firm's stock. Accounting standards regulating the treatment of stock options continue to be controversial. The focus of this paper is to examine the accounting treatment of stock options. We begin by outlining the controversial history of accounting for stock options.<span style="mso-spacerun: yes;">&nbsp; </span>Next, we examine the alternative accounting treatments for stock option.<span style="mso-spacerun: yes;">&nbsp; </span>Finally, we critique the proposed changes to the methods of accounting for stock options.<strong style="mso-bidi-font-weight: normal;"></strong></span></span></p>

Motivating high‐impact innovation: Evidence from managerial compensation contracts

2019 ◽  
Vol 28 (3) ◽  
pp. 291-318 ◽  
Author(s):  
Bill B. Francis ◽  
Iftekhar Hasan ◽  
Zenu Sharma ◽  
Maya Waisman
Keyword(s):  
High Impact ◽  
Managerial Compensation ◽  
Compensation Contracts

Shareholder Composition and Managerial Compensation

2016 ◽  
Vol 51 (5) ◽  
pp. 1719-1738 ◽  
Author(s):  
Shinya Shinozaki ◽  
Hiroshi Moriyasu ◽  
Konari Uchida
Keyword(s):  
Stock Options ◽  
Good Governance ◽  
Stock Option ◽  
Managerial Compensation ◽  
Controlling Shareholders ◽  
Japanese Firms ◽  
Governance Practices ◽  
Governance Practice ◽  
Industry Peers

Stock options are used only sparingly in Japan. Japanese firms are more likely to adopt new stock option plans when they are more (less) owned by arms-length investors (stable and controlling shareholders). Those firms have significantly more independent boards and pay higher dividends surrounding the adoption year than their industry peers. These results suggest that firms adopting stock options endeavor to meet demands for good governance practice from arms-length shareholders and to follow good governance practices in other dimensions. The coexistence of arms-length, stable, and controlling shareholders generates a situation in which stock options are not widely used in Japan.

Clawback Provisions in Executive Compensation Contracts

2021 ◽  
Vol 18 (4) ◽  
pp. 669-696
Author(s):  
Johanna Stark
Keyword(s):  
Executive Compensation ◽  
Financial Crises ◽  
Recent Past ◽  
Compensation Contracts ◽  
Corporate Scandals ◽  
Good Corporate Governance ◽  
Ex Post ◽  
The Us ◽  
Variable Pay ◽  
Triggering Conditions

Abstract Clawbacks are contractual provisions in executive compensation contracts that allow for an ex post recoupment of variable pay if certain triggering conditions are met. As a result of regulatory responses to financial crises and corporate scandals, as well as growing shareholder pressure to implement effective measures against executive misbehaviour, the prevalence of such clauses has risen considerably in the recent past, beginning in the US after the 2000 financial crisis. As clawbacks have become a buzzword in the European debate about also ensuring good corporate governance beyond the financial sector, it is time to critically discuss the hopes that have been associated with various types of such provisions.

scholarly journals AVERSION TO THE VARIABILITY OF PAY AND THE STRUCTURE OF EXECUTIVE COMPENSATION CONTRACTS

2015 ◽  
Vol 16 (4) ◽  
pp. 712-732 ◽  
Author(s):  
Pierre Chaigneau
Keyword(s):  
Executive Compensation ◽  
Practical Implication ◽  
Performance Measure ◽  
Managerial Compensation ◽  
Necessary Condition ◽  
Managerial Incentive ◽  
Compensation Contracts ◽  
Agent Model ◽  
Principal Agent Model ◽  
Mean Variance

This paper presents a new implication of an aversion toward the variance of pay (“risk aversion”) for the structure of managerial incentive schemes. In a principal-agent model in which the effort of a manager with mean-variance preferences affects the mean of a performance measure, we find that managerial compensation must be such that the variance of payments is decreasing in effort. From an ex-ante perspective, which is relevant for effort inducement, this maximizes the rewards associated to high effort, and the punishments associated to low effort. An important practical implication is that convex incentive contracts do not satisfy this necessary condition for optimality, which calls into question the practice of granting executive stock options. The paper therefore contributes to the debate on the efficiency of executive compensation.

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