Incentive Compensation Research Articles

Does executive compensation mechanism balance performance with risk-taking? Evidence from China's banking system

PurposeIn this study, the authors demonstrate the inherent connections between bank risk-taking, performance and executive compensation in the banking sector of China by developing a theoretical model and performing empirical tests with simultaneous equation models.Design/methodology/approachThe authors construct a multi-task principal-agent model to capture agency problems in China, and the model can be extended to various cases. In empirical tests, simultaneous equation models are used to examine the theoretical predictions by eliminating endogenous concerns efficiently compared with the methods in the existing literature.FindingsThe results indicate that the regulator fails to provide bank managers with positive incentives to control risk, whereas the compensation guidance policy (2010) proposed by the CBRC alleviates this problem in China. Additionally, the authors established that shareholders reward bank managers for better and more stable performance. The authors propose the introduction of restricted stock options into the compensation design, as the existing compensation design fails to balance the performance and risk-taking of banks.Research limitations/implicationsFirst, the executive compensation structure and details in China are not available. In addition, the equity-based incentive compensation is forbidden. Therefore, this paper cannot provide more details about how the compensation structure affects bank manager behaviours. Secondly, the database consists only 25 listed commercial banks. Luckily, the assets of these banks could account for the vast majority of China's banking assets. The authors also expect that new methodologies such as machine learning and deep learning will be adopted in the research on bank risk management.Practical implicationsFirst, the regulator should optimise the compositions and payment rule of bank executive compensations. Secondly, it is advisable to adopt restricted deferred share reward or stock option compensation in due course. Thirdly, the regulator can require the banks that undertake excessive risks and troubled by moral hazard to increase the independent director proportion on the bank board according to the authors' empirical tests that higher independent proportion prevents the risk accumulations effectively. Fourthly, except for absolute compensation, the gap between executives' salary and average employee's income should be taken account.Originality/valueThis study provides a theoretical framework that incorporates the manager behaviours, executive compensation and bank regulations, and it provides empirical tests by solving endogenous concerns. Additionally, this study examines the effects of China's compensation guidelines issued in 2010. The authors believe that this study adds value to the existing literature by illustrating the compensation mechanism in China.

Venture Capital, Compensation Incentive, and Corporate Sustainable Development

Innovation is one of the primary approaches by which companies address the progressively severe social, environmental, and market pressures that they face, and it is a crucial route for companies to maintain sustainable development. Venture capital (VC) plays a significant role in promoting enterprise innovation, especially breakthrough innovation. Venture capital can increase executive compensation and corporate innovation. Previous studies have also indicated that compensation incentives can be beneficial to corporate innovation. Although the relationships between two of these three variables have been validated, the relationship between VC, executive compensation, and corporate innovation has not yet received ample consideration. Our research focuses on the connections among these three variables, and we chose corporate for our sample, which listed corporations on the Shenzhen and Shanghai stock exchanges in the period from 2009 to 2017. We found that VC has a mediating effect on innovation through executive compensation incentives, although not necessarily a full mediation effect—merely a partial one. Moreover, we found that VC primarily plays the role of a compensation incentive by amplifying the internal salary gap of corporate. By employing invention patents to replace explanatory variables, using a Heckman two-stage method, and utilizing propensity score matching (PSM) for robustness testing, the validity of the conclusion was confirmed. In addition, we discovered that experienced VC or companies with lower governance quality are more likely to use compensation incentives to promote corporate innovation. This study provides valuable insight for VC in cultivating corporate innovation, as well as for corporates looking to boost their innovation.

Executive Compensation Incentives and Corporate R&D Investments: An Analysis Based on the Moderating Effect of Managerial Power

ABSTRACT Using data on Chinese A-share listed companies, this paper explores the interactive effects of managerial power and executive compensation incentives on corporate R&D investments. We find that higher executive monetary compensation and perquisite consumption help increase corporate R&D investments, while a large compensation gap within the management team can inhibit corporate R&D investments. We further show that managerial power has different moderating effects on the relation between management incentives and corporate R&D investments. Managerial power weakens the positive effects of explicit and implicit incentives of executives on corporate R&D investments, while it strengthens the negative effect of the compensation gap within the management team on corporate R&D investments.

Research on Compensation Incentive Mechanism of State-Owned Enterprises - A Case Study of Chinese Enterprises

The sudden change in the global economic situation has brought about changes in internal and external market conditions. In this context, China's state-owned enterprises continue to use the traditional salary management model in the salary system, which has many shortcomings in the degree of market openness, distribution mechanism and supervision, which is not conducive to our economic development. It is very important to establish and improve the salary incentive mechanism of state-owned enterprises. A scientific and perfect incentive mechanism can effectively stimulate the enthusiasm and creativity of employees and play a vital role in the healthy and sustainable development of public enterprises. However, with the progress and development of the times, the traditional wage incentive mechanism has exposed some problems that cannot fully function. To this end, this paper analyzes the problems in the current salary management model of state-owned enterprises and finds that performance-based salary incentives actually reflect the wealth created by employees for their work. The consistency of goals among employees, managers and shareholders. Finally, from the existing problems, measures are proposed to improve the current wage management model of SOEs in order to enhance their economic development.

Managerial ability, compensation incentives, and corporate performance

Enterprise managers play a decisive role in management decisions. With the emergence of managerial ability measurement methods, the influence of managerial ability on enterprise development has received wide attention. Taking Chinese A-share listed companies from 2007 to 2019 as samples, this paper uses a fixed-effect model to examine the impact of management abilities on corporate performance and studies the moderating effect of compensation incentives on this impact. It is found that managerial ability has a significant positive correlation with the performance of listed companies, and this positive correlation is more obvious when the management has higher compensation incentives. Further research shows that higher ability management helps improve the performance of firms with low financing constraints but has no significant effect on the performance of firms with high financing constraints. In addition, compared with state-owned enterprises, the managerial ability of non-state-owned enterprises can promote the improvement of enterprise performance. This paper studies the impact of managerial ability on firm performance from the perspective of compensation incentives, enriching the related literature on managerial ability and firm performance.

How to explain stock returns of utility companies from an environmental, social and corporate governance perspective

AbstractSustainability is a major challenge in today's business world, making environmental, social and governance criteria an indispensable tool for business management and investment decisions. Using 2020 data of 47 companies from the STOXX Europe Total Market Utilities Index and qualitative comparative analysis, this study aims to analyse how the combination of CO2 equivalent emissions, sustainability compensation incentives, environmental investments, environment management training, and policy fair competition leads to utility companies' stock market returns. Two subsample models (electricity and non‐electricity utilities) have been considered in the study. The results point to the absence of CO2 equivalent emissions, the absence of incentives, and the presence of environmental investment as key variables to lead to stock market returns. The findings provide relevant information for managers and practitioners of utilities industry to achieve improvements in the environmental, social and governance management practices, maintaining profitability in financial markets and facilitating decision‐making for investors.

Dual Ownership and Risk-Taking Incentives in Managerial Compensation

Abstract This article studies how the three-way interaction among shareholders, creditors, and managers shapes firms’ executive compensation. Firms with a higher ownership share by “dual holders”—institutional investors that simultaneously hold equity and bond of the company—adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that increase or decrease dual ownership for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.

Labor Unemployment Risk and CEO Incentive Compensation

Unemployment risk influences workers’ incentives to invest in firm-specific human capital. This paper investigates the impact of unemployment risk on chief executive officers (CEOs)’ risk-taking incentive compensation. Exploiting state-level changes in unemployment benefits, we find that after unemployment insurance benefits become more generous, boards increase the convex payoff structure of CEO pay to encourage risk taking. The increase in CEOs’ convexity payoff is stronger in firms with more independent and diverse boards, higher ownership of long-term shareholders, and in industries requiring highly skilled labor. Our findings suggest that boards internalize workers’ interests in firms’ risk-taking decisions and executive compensation is one mechanism used. This paper was accepted by David Simchi-Levi, finance. Funding: K. Zhang acknowledges financial support from the National Natural Science Foundation of China [Grants 72272099 and 71902115]. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2023.4714 .

A Study on the Influence of Executive Compensation Incentives on Corporate Performance

As the continuous development of the international economy, the performance of enterprises is affected by a variety of factors. Factors that affect corporate performance include corporate culture, company size, and executive compensation This paper selects scientific research and technology service companies listed in Shanghai and Shenzhen from 2017 to 2021 as the initial sample, and studies the impact of executive compensation incentives on company results from the sides of executive compensation and executive shareholding ratio. The study found that executive compensation and executive shareholding were positively correlated with corporate performance. Based on this conclusion, recommendations were made to use executive compensation incentives to improve corporate performance.

Research on the Compensation Incentive System of Independent Directors in Chinese Listed Companies

The independent director system is one of the important components of modern corporate governance. The huge liability of independent directors in the Kangmei Pharmaceutical case in 2021 has once again become a hot topic of discussion. In the exploration of the causes of the failure of the independent director system, the motivation of independent directors to perform their duties and their incentives are also worth considering. Based on the relevant theories of independent director incentives, this paper conducts a comparative analysis of the incentive models of independent directors in China and other countries and concludes that the legislative level of incentives for independent directors in China is relatively low, and the remuneration forms, standards, and payment subjects are unreasonable and lack implementation. In addition, the establishment of independent directors’ associations and the gradual construction of independent directors’ reputation incentives were proposed.

The Impact of Executive Incentive on Enterprise Performance

This paper empirically examines the relationship between compensation incentive, equity incentive and enterprise performance in executive incentive by selecting the relevant data of listed companies of liquor enterprises from 2010 to 2020. The results show that executive compensation incentive can significantly and positively affect enterprise performance, while executive equity incentive has no significant impact on enterprise performance.

Analysis of the Three Dilemmas and Countermeasures in Compensation Incentive

Analysis of the Three Dilemmas and Countermeasures in Compensation Incentive

Outside directors' equity incentives and strategic alliance decisions

This study examines whether the proportion of equity-based compensation in outside director compensation is associated with corporate strategic alliances. We hypothesize that equity incentives provided to outside directors mitigate potential agency conflicts between outside directors and shareholders that arise from the strategic alliance decision-making process, thus resulting in more alliance activities. Our empirical evidence indicates that the percentage of equity in outside director compensation is positively associated with the incidence and the number of strategic alliance activities. Additionally, when the proportion of outside directors' equity in total compensation is higher, firms with strategic alliances generate better future stock returns. Overall, our findings suggest that providing equity incentives in outside director compensation mitigates the agency problems inherent in corporate strategic alliance decisions and enhances the quality of alliance activities.

Evolutionary Game of Digital-Driven Photovoltaic–Storage–Use Value Chain Collaboration: A Value Intelligence Creation Perspective

In the context of “carbon neutral”, distributed energy, including photovoltaic power generation and energy storage systems, is developing rapidly. Meanwhile, the new generation of information technology, such as “Cloud computing, Big data, the Internet of things, Mobile Internet, AI, Blockchain”, is driving the digital transformation of the energy industry. Under digital drive, how the agents in the photovoltaic–storage–use value chain collaborate and create value intelligently is a question worthy of deep consideration. Firstly, the value creation mechanism and collaborative process of the digital-driven photovoltaic–storage–use value chain are analyzed from a value intelligence creation perspective. Secondly, the tripartite evolutionary game model of photovoltaic power generator, energy storage provider and user is established. Finally, the influencing factors of digital- driven photovoltaic–storage–use value chain collaboration are explored through a numerical simulation, and management suggestions are put forward. The study finds the following: (1) The behavior choice of each agent in the value chain will affect the decision of other agents. In particular, the photovoltaic power generator has a great influence on the cooperative willingness of other agents. To promote value chain collaboration, the guiding role of the photovoltaic power generator should be fully realized. (2) Agents on the value chain can use a variety of digital technologies to improve enabling benefits, which is conducive to promoting value chain collaboration. (3) The driving costs and potential risks are obstacles for value chain collaboration. Cost reduction and risk prevention are effective ways to improve the willingness of collaboration. (4) Reasonable incentive compensation mechanisms and information asymmetry punishment measures are the keys to enhancing collective willingness. This research provides theoretical support for photovoltaic–storage–use value chain collaboration from a value intelligence creation perspective.

Media Coverage and Labor Investment Efficiency: Evidence from China*

AbstractUsing 2.09 million pieces of media coverage associated with Chinese firms during 2006–2019, we find a significantly positive relationship between media coverage and labor investment efficiency. Both newspaper and online media coverage can effectively reduce firms' labor over‐investment and under‐investment. Our results are robust after addressing a range of endogeneity concerns. Further analyses show that the positive relationship between media coverage and labor investment efficiency is more pronounced for firms with higher labor cost stickiness or when human capital is more important to the firm's business model. Mechanism analyses reveal that media coverage improves labor investment efficiency through the compensation incentive mechanism, supervision mechanism, and information disclosure mechanism.

CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R

AbstractThis article uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial “playing it safe” behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q, segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.

Financial Models for an Academic Practice in Plastic Surgery.

Thirteen divisions or departments of plastic surgery were surveyed to obtain information regarding reimbursement models for plastic surgery. Of the 13 plastic surgery groups surveyed, 11 were divisions within the department of surgery. The department chairs/chief and/or chief administrative officers were questioned regarding the following areas: (1) total compensation, 2) bonus and incentive compensation models, and (3) cosmetic and cash reimbursement. There were no regional differences that could be identified. As such, we grouped institutions into Western, Midwest, and Eastern regions. COVID-19 did not change any of the financial models that were established before the pandemic. There is no ideal model for compensation, which varied among the institutions surveyed. All of these financial models were established before COVID-19 and did not significantly change with the pandemic. It appears that within this small sample size, compensation is based mainly on a $/wRVU model. Funding for research and educational teaching remains a challenge, which is not reimbursed well. Although faculty compensation may vary based on the institutions, the decision to enter and remain in academic practice includes a series of decisions. However, compensation is a significant factor, which should not be minimized.

The executive pay gap and stock price crash risk: Promotion or suppression?

In recent years, cases of stock price crash have continued to emerge. However, yet little research to date has investigated the compensation incentives of top management team (TMT) affect the risk of stock price crash. Nor has research considered the impact of the executive pay gap on the stock price crash risk. Especially, as the "egalitarianism" was broken in the compensation system, and the increase of the degree of marketization of salaries, the executive pay gap has shown an expanding trend. Under this circumstance, we would systematically examine the association between the extent of executive pay gap and its future stock price crash risk. Based on the sample of A-Share non-financial listed companies in Shanghai and Shenzhen Stock Exchange, we used firm FE regression method to empirically examine the relationship of the internal and external compensation gaps of executives and crash risk, as well as its contigency variables and inner mechanism. The empirical results show that there is a U-shaped relationship between the internal and external pay gap of executives and future crash risk. After passing the endogenous test and the robustness test, the conclusion still holds. Further research shows that the U-shaped relationship between the pay gap and crash risk is more pronounced, when firms are affiliated with the non-state-owned enterprise or its compensation fairness is lower. Finally, the quality of information disclosure plays a mediation effect when executive pay gap affects stock price crash risk. According to the economic and behavior perspectives, we explored the impact of compensation structure on stock price crash risk from the pay gap of executives for the first time, and extended the emerging literature of forecasting future stock price crash risk and executive pay gap. In addition, a key implication of our findings is that more guidance for firms is provided to design the compensation structures and to reduce stock price crash risk.

Executives’ financial experience and myopic marketing management: A myopic loss-aversion perspective

This study investigates how executives’ financial experience (EFE) impacts myopic marketing management (MMM) from a myopic loss aversion (MLA) perspective and ways to mitigate the strategic bias induced by personal cognitive bias. It discovers that executives with financial sector working experience and educational experience are positively associated with a propensity toward MLA, which positively impacts MMM. By introducing compensation incentives, capital market, and performance pressures as moderators, this study reveals positive moderating impacts and identifies the theoretical mechanism of MLA. Finally, it explores debiasing strategies and finds that the myopic marketing strategy caused by the MLA from executives with financial experience, can be corrected by equity incentives, the top management team’s marketing power, and marketing capabilities. These findings contribute to the current literature on formulating marketing strategies and MMM. They also provide expanded implications from the MLA perspective while integrating behavioral theory into marketing strategies and offer some managerial suggestions.

The Impact of Intellectual Worker Motivation on Perceived Innovation Value and Innovation Output: A Study of Guangdong Insurance Companies

This study aims to explore the relationship between intellectual worker motivation, perceived innovation value, and innovation output in Guangdong insurance companies. The study distributed 300 questionnaires to 15 insurance companies in Guangdong province, and the data was analyzed using correlation and hierarchical regression analysis methods. The results showed that compensation incentives, benefits incentives, development incentives, and workplace incentives for intellectual workers have a significant positive effect on perceived innovation value. Workplace incentives were found to be the most effective incentive for improving perceived innovation value, while compensation incentives had the least impact. The study also found that different incentive measures have different effects on improving innovation output. Workplace incentives had the greatest impact, followed by benefits incentives, while development incentives and compensation incentives had a relatively low positive effect on innovation output. Therefore, strengthening incentive measures for intellectual workers in the management process can be significant for improving innovation output.