Do Managers Perform for Perks?

Abstract

We examine how the managerial consumption of perquisites is determined and whether and how it impacts firm value. On the one hand, if the consumption of perks is a result of agency conflict, then it represents managerial excesses and is value-destroying. On the other hand, when the transaction cost of monetary compensation is high due to information asymmetry, government regulations and media scrutiny, perks can provide incentives for managers to work hard to create shareholder wealth. Using manually-collected data on direct monetary compensation and perks for firms in China, we find that perks are provided when the relative pay between top managers and average employees is low, in firms with high free cash flows, high economic rent and growth. Further, perks are positively associated with firm value, but to a much lesser extent than monetary compensation. Therefore, while perks appear to motivate managers to work hard to create shareholder wealth, they are not as effective as monetary compensation. In addition, the predicted or the “optimal” portion of perks motivates managers better than the unpredicted portion of perks. Finally, the effect of perks in enhancing firm value is more pronounced in firms with high economic rent, high growth and low relative pay between top managers and average employees.