Incentive Compensation Research Articles

Research on Corporate Innovation and Compensation Incentives

The optimal contract theory believes that the compensation contract can alleviate the agency contradiction between executives and shareholders. By making the interest goals of executives and shareholders converge, it can enhance the innovation willingness of senior executives to a certain extent, increase the innovation investment of enterprises, and then improve the performance of the company. However, the increase of investment in innovation will not necessarily improve the companys performance, and there may be an endogenous relationship between the two factors, which further complicates the issue of compensation incentive. This article sorts out the relevant literature on enterprise innovation and salary incentive, and discusses the relationship between salary incentive and enterprise innovation and its influence on the endogenous relationship between enterprise innovation and company performance. In addition, the possible influence of executive attachment characteristics on compensation incentive is also discussed.

A job ladder model of executive compensation

This paper examines the impact of managerial labor market competition on executive incentive contracts. I develop a dynamic contracting model that incorporates moral hazard, search frictions, and poaching offers. The model generates a job ladder along which executives can either use outside offers to renegotiate with the current firm or transition to outside firms. I show that poaching offers generate a new source of incentives, which explains a novel empirical finding whereby larger firms give executives a higher proportion of incentive compensation.

Does enterprise digital transformation contribute to green innovation? Micro-level evidence from China

The synergy of digitalization and greening has emerged as a prominent means to achieve the goal of “carbon peaking and carbon neutrality”. Given its significant contribution to carbon emissions, the impact of digital transformation on green innovation in manufacturing enterprises remains a longstanding research hotspot. Therefore, based on the data from China A-share listed manufacturing companies spanning from 2007 to 2022, this paper empirically analyzes the influence and mechanism of digital transformation on green innovation. Our findings reveal that digital transformation can significantly promote green innovation in manufacturing enterprises, with a particularly pronounced effect on substantive green innovation. These conclusions withstand rigorous robustness tests. Mechanism analysis shows that digital transformation can facilitate green innovation by improving internal control quality and fostering industry-university-research cooperation. Moreover, our moderation analysis reveals that both equity incentives and compensation incentives strengthen the positive relationship between digital transformation and green innovation in manufacturing enterprises. Heterogeneity analysis proves that digital transformation exerts a more pronounced impact on green innovation of state-owned manufacturing enterprises, non-heavily polluted manufacturing enterprises, and enterprises located in regions with strong intellectual property protection. Furthermore, the transformation of digital underlying technologies is more conducive to fostering green innovation compared to practical application transformation. Subsequent investigation into the economic and social effects of green innovation indicates that it effectively reduces pollution emissions from manufacturing enterprises without compromising their development. Additionally, the emission reduction and income-generating effect resulting from digital transformation primarily manifest through substantive green innovation. This research expands upon the theory regarding the impact of digital transformation on green innovation in micro-manufacturing enterprises, providing empirical support for facilitating low-carbon transformations among manufacturing enterprises under the goal of “carbon peaking and carbon neutrality”.

Corporate financialization and export product quality: evidence from China

We examine the impact of corporate financialization on export product quality using data from Chinese A-share listed companies from 2000 to 2015. Our findings indicate that corporate financialization inhibits the upgrading of export product quality through ‘innovation crowding out’ and ‘factor substitution’ effects. Heterogeneity tests reveal that this negative effect is pronounced for firms with strong motivations for market arbitrage, precautionary savings, tunneling, as well as higher managerial overconfidence. Additionally, firms exporting to high-income countries, engaging in general trade in less digitally developed regions, and adopting compensation incentives are more susceptible to the disincentive effects of corporate financialization on export product quality.

Executive pay restrictions, political promotion, and firm efficiency: Evidence from China

Using the mandatory reform in executive pay restrictions within Chinese state-owned enterprises (SOEs) as a quasi-natural experiment, we investigate the effects of compensation incentives and political promotion on firm efficiency. Our difference-in-differences analyses reveal that firm efficiency significantly decreases following the reform, and political promotion can attenuate this negative association. Firm risk-taking is a potential mechanism underlying this observed phenomenon. The negative relationship and mitigation effect are more pronounced for central SOEs and commercial class II SOEs. Furthermore, these findings exhibit variations based on distinctive attributes in compensation structures, CEO characteristics, and political promotion ranks. Overall, our study underscores the complementary roles of explicit and implicit incentives within SOEs, providing a strong rationale for government regulation and reform of executive compensation.

Asset impairments surrounding chief financial officer turnover

We examine the effect of chief financial officer (CFO) turnover on the likelihood and size of asset impairments. Using Australian data, we find evidence consistent with incoming CFOs recording larger asset impairments, particularly when they are external hires with prior listed experience, or receive equity-based compensation. Our results also indicate that outgoing CFOs report higher profits in the year prior to their departure by reporting fewer and smaller asset impairments. This effect is larger when outgoing CFOs move to another listed firm or receive equity-based compensation, consistent with reputational and compensation incentives to maximise earnings. Overall, our results provide evidence of the independent influence CFOs have on financial reporting. JEL Classification: M41, G34, M40

Charity begins at the office: issuing cheap stock and stock options to employees and insiders before going public

PurposePress reports have indicated that firms frequently underprice restricted stock and employee stock options. I test for underpricing of stock and options.Design/methodology/approachI examined a sample of 5,333 private firm stock and option issuances between 1985 and 2017. I tested for underpricing using two approaches: assuming investors have no special market-timing ability and assuming instead they have perfect market-timing ability.FindingsI find evidence of widespread stock and option underpricing by private firms before they go public reflecting large discounts that exceed reasonable compensation for lack of marketability. Unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded, but the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect. Underpricing is still detected even when the actual DLOMs are tested against a benchmark that assumes investors have perfect market-timing ability.Research limitations/implicationsFirms frequently underprice restricted stock and employee stock options. Firms tend to underprice stock options more frequently than restricted stock, but restricted stock tends to be priced at deeper discounts when recipients are assumed not to have any special market-timing ability.Practical implicationsPrivate firms issue restricted stock and options as incentive compensation. Lowballing the valuation transfers wealth from outside stockholders to employees/insiders. Wealth transfers take place through the issuance of equity claims to employees/insiders before firms go public. I found that more than a quarter of the DLOMs exceed the theoretical maximum by, on average, between 16% (median) and 20% (mean). This finding raises two questions worthy of investigation. First, to what extent do the frequency and magnitude of DLOMs above the theoretical maximum depend on whether a board of directors obtains an independent appraisal of a stock’s fair market value? Second, if DLOMs above the theoretical maximum are observed even when the stock is independently appraised, how do appraisers justify such large DLOMs?Social implicationsThe wealth transfers that take place through the issuance of equity claims to employees/insiders before firms go public benefit employees/insiders at the expense of outside shareholders.Originality/valueMy paper is the first to furnish evidence of widespread stock and option underpricing by private firms before they go public; demonstrate that the unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded and show that the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect.

Top Management Team Heterogeneity, Top Management Incentives, and ESG Performance: Evidence from Chinese Listed Companies

The challenge of balancing economic and social benefits has emerged as a critical issue for corporate sustainable development. Environmental, social, and governance (ESG) criteria are key considerations for enterprises aiming to enhance both social and economic benefits simultaneously. Based on the upper echelons theory, differences in cognitive foundations and values brought about by top management team heterogeneity can influence corporate decisions. Taking A-share listed companies in China from 2011 to 2022 as samples, we construct a two-way fixed-effects model by firm and year to explore the impact of top management team heterogeneity on corporate ESG performance, and we introduce top management incentives as a moderating variable to further analyze the underlying mechanisms. Our results demonstrate that the gender heterogeneity, functional background heterogeneity, and overseas background heterogeneity of top management teams have significant positive impacts on corporate ESG performance, and monetary compensation incentives and control incentives to top management teams play a positive moderating role, while equity incentives exhibits a negative moderating effect. These findings remain robust across alternative measures of corporate ESG ratings and monetary and control incentives, and through the SYS-GMM model test and instrumental variable approach to address endogeneity. This research contributes to the literature on corporate ESG by validating and extending the understanding of how top management team characteristics affect organizational outcomes, and it provides practical guidance for enhancing corporate ESG practices. The implications of this study suggest that to enhance corporate ESG performance, enterprises should prioritize the promotion of top management team heterogeneity and tailor their incentive mechanisms accordingly.

Passive Investment and Share Repurchases

SYNOPSIS We investigate the association between passive investment and share repurchases, both of which are at historically high levels and the subject of increased scrutiny. We first document that firms with more passive ownership exhibit higher levels of repurchase activity. Next, and more importantly, we find that firms with passive ownership conduct more “suspect” repurchases that result in reported earnings that meet or beat analysts’ earnings forecasts, and this effect is more pronounced for firms with performance-based equity compensation incentive plans. We also find that repurchase activity more negatively affects firms’ future employment, capital expenditures, and performance when the firm has more passive owners. We conclude that passive investment is associated with an increase in the quantity and a reduction in the quality of firms’ repurchase activities. Our study provides evidence that passive institutional investment may allow opportunistic management behavior rather than serving the monitoring role traditionally associated with institutional ownership. Data availability: Data are available from the public sources cited in the text. JEL Classifications: M41; G32; G35.

Compensation incentives, geographical distance, and the successful exit of indirect CVCs

PurposeThe literature suggests that increasing the intensity of compensation incentives for corporate venture capital (CVC) managers can contribute to successful exits of direct CVCs. This study explores the impact of compensation incentives on the successful exits of indirect CVCs under different geographical distances between parent companies and indirect CVC managers.Design/methodology/approachThe authors observed the compensation terms of CVC managers through investment announcements made by listed companies and used a probit regression model to test the hypotheses from a sample of 241 investment events with indirect CVCs in China.FindingsThe results show that if parent companies are geographically close to the managers of indirect CVCs, increasing the intensity of compensation incentives for managers will help the successful exit of indirect CVCs. However, if parent companies are not geographically close to indirect CVC managers, increasing the intensity of compensation incentives for managers will not promote the successful exit of indirect CVCs.Originality/valueThis study contributes significantly to the CVC literature. First, it sharpens our understanding of the differences in operational mechanisms between direct and indirect CVCs. Second, we find that the threshold returns of indirect CVC managers are non-negligible compensation incentives. Finally, the empirical evidence supports that in indirect CVC investments, the geographical distance between parent companies and managers is concerning because it affects whether compensation incentives contribute to the successful exit of indirect CVCs.

How Large Is the Pay Premium from Executive Incentive Compensation?

ABSTRACT We estimate the pay premium associated with CEO incentive compensation. Using explicit detailed U.S. CEO compensation contract data and simulation analysis, we find that CEOs with riskier pay packages receive a premium for pay at risk that represents 13.5 percent of total pay. The premium is positively correlated with proxies for CEO risk aversion, but implied risk aversion values suggest that the premium is economically smaller than suggested by prior studies. We perform our tests using a variety of proxies to measure the variance of pay and find consistent evidence of economically small pay risk premiums. These results are consistent with recent findings suggesting that risk may have a more limited influence over the level of pay than previously thought. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D81; G30; J33.

Preference dynamics and risk-taking incentives

This study explores the relationship between executive compensation and the preference dynamics of managers and shareholders. Our analysis centers on the theoretical prediction that changes in firms' asset value can differentially affect the risk-taking preferences of the two groups, potentially influencing the optimal compensation policy. Utilizing local real estate price changes to identify variations in firms’ asset value, we find that a decrease in asset value leads to more risk-taking incentives in compensation, and this effect is more pronounced in firms that are more likely to be influenced by the hypothesized mechanisms. In the second empirical setting, we provide corroborating evidence using a natural experiment involving disaster-induced negative shocks to the firm fundamentals. Collectively, our findings suggest that the design of compensation contracts facilitates incentive alignment by incorporating the dynamic preferences of the contracting parties.

Clawback enforcement heterogeneity and the horizon of executive pay: empirical evidence

Purpose Clawback provisions entitle shareholders to recover previously awarded incentive compensation after the discovery of accounting manipulation or misconduct. The author evaluates the impact of clawback enforcement heterogeneity on the horizon of executive compensation. Design/methodology/approach The author provides empirical tests to evaluate the impact of clawback adoption decisions. The author deals with the endogeneity of clawback adoption decisions through an instrumental variables strategy that exploits the transmission of governance choices within firms’ networks. Findings While the author finds that clawback adoption reduces the frequency of accounting manipulation, this reduction is accompanied by heterogeneous effects on the horizon of executive pay across firms. Clawback adopters with high director independence, high leverage, high managerial termination payments and low executive ownership tilt their compensation toward the short-term. Practical implications The results, robust to alternative specifications, suggest that clawbacks allow strong-enforcement firms to tilt compensation toward the short-term, offsetting some of the direct manipulation disincentives generated by the clawback. The stock market reacts positively to the adoption in firms with weak enforcement, suggesting that clawbacks significantly reduce the managers’ rent-extraction capacity. Originality/value Using a novel empirical and identification approach, the results suggest that clawbacks allow strong-enforcement firms to tilt compensation toward the short-term, offsetting some of the direct manipulation disincentives generated by the clawback.

CEO inside debt and industry specialist auditor

PurposeThis paper aims to examine the effect of executive compensation incentives, specifically CEO inside debt holdings, on the choice of industry specialist auditor.Design/methodology/approachHigh inside debt holdings are expected to constrain excessive managerial risk-taking and align the interests of managers and outside debtholders. The authors hypothesize that reduced debtholders’ expropriation concerns will decrease the demand for high audit quality, measured by industry specialization. The authors investigate a sample of US firms from 2006 to 2018 using OLS regression and use CEO relative leverage to proxy for CEO inside debt holdings. The authors conduct an additional two-stage least squares regression analysis to address potential endogeneity issues.FindingsThe paper finds that firms with higher levels of CEO inside debt tend not to appoint an auditor with industry specialization. This result is consistent with the notion that inside debt mitigates agency conflicts between managers and debtholders, reducing the demand for high-quality audits as a monitoring mechanism. The paper also finds that among firms which are excessively leveraged, those with higher levels of CEO inside debt tend to appoint an industry specialist auditor.Originality/valueThe findings contribute to the literature on agency cost and auditor choice by demonstrating that CEO inside debt has both substitutive and complementary effects on demand for industry specialist auditors.

Impact of environmental, social, and governance rating disagreement on real earnings management in Chinese listed companies

This study examines the impact of environmental, social, and governance (ESG) rating disagreement on real earnings management in Chinese companies. Using ESG ratings from Huazheng, Wind, SynTao Green Finance, and Bloomberg, we find that increased disagreements in ESG rating lead to higher real earnings management in the current period and over the next 1 to 2 years. This effect is driven by external attention, compensation incentives, and reputational pressure. Furthermore, companies with a financial management background and younger management show a stronger correlation. Specifically, ESG rating disagreement has a significant impact on the manipulation of discretionary expenses and production costs but not on operating cash flows. Additionally, high ESG-rated companies tend to manage their earnings through discretionary expenses when rating disagreements arise. Overall, this study reveals the potential incentive mechanisms for such companies, providing theoretical support for understanding the factors influencing real earnings management. It also suggests that regulators and investors should fully consider the impact of ESG rating disagreement when assessing company performance.

Underwriter incentives and IPO pricing

We examine the impact of incentive fees paid to IPO underwriters at issuers' discretion on IPO pricing and short-term performance. We expect that better-incentivized underwriters produce more information required for IPO pricing reducing underwriters' reliance on investors' information production which requires compensation through IPO underpricing. Using a novel dataset, we find that incentive compensation mitigates the partial-adjustment phenomenon. IPOs with stronger incentives have more informative price ranges, higher price revisions, longer road shows and lower initial returns largely due to interaction effects between underwriters' incentives and their information-production capabilities. Using a battery of tests and addressing endogeneity, our results remain robust.

Mixed ownership reform of state-owned enterprises and executive compensation stickiness: Evidence from China

Optimization of executive compensation incentives is an important part of the reform of state-owned enterprises, but the existence of executive compensation stickiness weakens the effect of compensation incentives. Based on data of state-owned enterprises listed on the Chinese A-shares market over the 2013–2019 period, this paper evaluates the ownership reform, or mixed ownership, of state-owned enterprises by the shareholder ratio of non-state shareholders and the appointed directors, and examines the relationship between the mixed ownership reform of state-owned enterprises and the executive compensation stickiness. The study concludes with the following findings. The shareholder ratio of non-state shareholders has no significant impact on the executive compensation stickiness, whereas directors appointed by non-state shareholders significantly reduce the executive compensation stickiness. Compared to pure central enterprises, the inhibiting effect of the mixed ownership reform on the executive compensation stickiness is more significant in local state-owned enterprises. The inhibiting effect of the mixed ownership reform on the executive compensation stickiness is more significant when managerial power is restricted or regional marketization degree is low. This paper enriches and extends extant studies on the impact of ownership reform on executive compensation incentives from the perspective of executive compensation stickiness, and provides important empirical evidence for the enhanced relationship between reforms of state-owned enterprises and executive compensation.

Effect of Appointed Directors on Corporate Carbon Emission Intensity: Evidence from Mixed-Ownership Reform in Chinese Private Industrial Enterprises

The growing prominence of global warming has led to a worldwide consensus on the need to reduce carbon emissions. Employing a sample of private industrial enterprises listed on the Chinese stock market from 2008 to 2021, this study explores the effect of directors appointed by non-controlling state shareholders (appointed directors), which is a growing type of mixed-ownership reform, on corporate carbon emission intensity. The results show that appointed directors significantly reduce corporate carbon emission intensity. Mechanism tests suggest that this reduction is achieved through developing environmental strategies and increasing executive compensation incentives. Heterogeneity analyses reveal that the effect of appointed directors is more pronounced for firms with lax regional environmental regulation, in non-heavily polluting industries, with low analyst coverage, and with poor green innovation abilities. Our findings shed light on the effectiveness of mixed-ownership reform from the perspective of appointed directors and offer new implications and evidence for environmental protection and the sustainable development of enterprises in emerging markets.

Compensation incentive, misappropriation risk, and startup innovation: the role of corporate venture capital manager in resource transfer

ABSTRACT Existing studies on the impact of corporate venture capital (CVC) on startup innovation primarily focus on the capability of CVC parent to provide resources for startups. This study examines the role of CVC managers’ motivation in facilitating resource transfer to startups. Utilizing a unique disclosure requirement for investments by Chinese public firms in venture capital (VC) funds, and a hand-collected database on CVC managers’ compensation, our study explores the impact of compensation incentives on CVC managers with respect to startup innovation and the moderating effect of misappropriation risk by the CVC parent. Our two-stage regression model reveals that stronger compensation incentives positively impact startup innovation. Moreover, the effects diminish if the misappropriation risk by the CVC parent increases. These findings underscore that while strong compensation incentives for CVC managers enhance their motivation to facilitate resource transfer from the CVC parent to startups, this is mitigated in contexts with a heightened misappropriation risk.

Factors influencing the job embeddedness of new graduate nurses: A multicentre cross‐sectional study

AbstractAimTo identify factors associated with job embeddedness from the perspective of retaining new graduate nurses.DesignThe study was cross‐sectional in design.MethodsConvenience and stratified sampling were used to recruit 415 newly graduated nurses from 12 tertiary hospitals in China. Anonymized data were collected through self‐designed sociodemographic questionnaires, job embeddedness scale, feedback‐seeking behaviour scale, authentic leadership perception scale and decent work scale. Appropriate indicators were used for descriptive statistics and t‐tests, ANOVA, Pearson correlation analysis and multiple linear regression to examine the influencing factors.ResultsThe study showed that monthly income level, decent labour, authentic leadership and feedback‐seeking behaviour were significant predictors of job embeddedness among new graduate nurses.ConclusionThe job embeddedness of new graduate nurses is moderate. Nursing managers need to construct reasonable and fair compensation incentives, adopt positive leadership styles and encourage proactive feedback‐seeking behaviours to improve the job embeddedness of new graduate nurses and alleviate the nursing talent shortage.ImpactExploring the factors influencing the job embeddedness of new graduate nurses provides a reference for establishing new graduate nurse retention strategies to help promote the career development of new graduate nurses and alleviate the nursing brain drain.Reporting MethodWe adhered to the Strengthening the Reporting of Observational Studies in Epidemiology (STROBE) guidelines.Patient or Public ContributionNo patient or public contribution.