Compensation Structures Research Articles

Post-bureaucratic management goes global

Purpose The article reports on anti-hierarchical approaches to managing work outside the U.S. and independent of software development as evidenced in presentations at the November Drucker Forum by the French group, Vinci and the Chinese group, Haier. Design/methodology/approach The article looks at how radical innovations in organization structure, management processes and mindsets are being adopted by companies seeking the rapid-paced, customer-focused continuous innovation needed to survive in today’s dynamic marketplaces. These approaches are spreading throughout many established organizations. For traditionally managed hierarchical organizations, the transformation often involves radical shifts in power, attitudes, values, mindsets, ways of thinking and ways of interacting with stakeholders—customers, employee talent, shareholders and partners. Findings The Vinci Group is organized with 3,500 business units, so that there are in effect 3,500 entrepreneurs, all intent on developing good ideas. The Haier Groups has transformed its organization into a flat platform with thousands of micro-enterprises. There are no more than eight people in each one. Practical implications The Haier platform enables the microenterprises to interact closely and intensively with users, allowing them to participate in the development and production process. The goal is to align Haier’s people and the value they can create for customer users. The need is to unleash people’s potential so as to maximize value to users. Originality/value The article reveals that when companies disrupt the traditional “efficiency-based” organizational structure the do so in unique ways. Typical of the homegrown approach to post-bureaucratic organizations, Zhang Ruimin, CEO of Haier, pioneered a management model called “Rendanheyl,” which entails three disruptions: disrupting employees, disrupting organizational structures and disrupting compensation structures.

Portfolio Manager Compensation in the U.S. Mutual Fund Industry

ABSTRACTWe study compensation contracts of individual portfolio managers using hand‐collected data of over 4,500 U.S. mutual funds. Variations in the compensation structures are broadly consistent with an optimal contracting equilibrium. The likelihood of explicit performance‐based incentives is positively correlated with the intensity of agency conflicts, as proxied by the advisor's clientele dispersion, its affiliations in the financial industry, and its ownership structure. Investor sophistication and the threat of dismissal in outsourced funds serve as substitutes for explicit performance‐based incentives. Finally, we find little evidence of differences in future performance associated with any particular compensation arrangement.

The influence of organizational task environment and firm size on top-executive compensation contracts

This paper offers a fresh perspective on executive compensation by offering a new paradigm for choosing executive compensation structure based on environmental factors and firm size. This new perspective uses agency theory as a theoretical foundation. The availability of information, primarily information related to the agent, has typically been of utmost concern in the compensation selection process. However, a predominant focus on cognitive or behavioral information of the agent neglects the relative importance and impact of environmental forces in this process. This study evaluates the composition of the compensation contract using fluctuating environmental dimensions as the primary determinant. Specifically, we examine environmental munificence, dynamism, and complexity and the influence of varying levels of each of these variables and their interaction on the optimal choice of compensation contract utilized for both large firms and small and medium-sized enterprises (SMEs). This externally focused view of compensation contract creation underscores the significance of environmental factors in determining contract selection while also acknowledging the necessity of principals utilizing information related to both the agent and the environment. Furthermore, we argue that top executive compensation structures for large organizations and non-adaptive SMEs should differ from those of adaptive SMEs.

Impact of Managers’ Traits and Compensation Structure on R&D Investments

This study examines the relationships between the characteristics of top management and a firm’s R&D expenditure level. We measure management entrenchment using executives’ tenures, ages, cash compensation, and dual roles as a chairman. The result suggests that firms with less entrenched management (i.e., younger, newer, and non-chairman executives with less cash compensation) invest more in R&D. Our result also shows that executives whose compensation has a higher sensitivity to stock volatility are associated with higher degree of R&D expenditures implying that executives’ compensation structures tend to influence R&D decisions.

Deal-by-Deal Compensation Structures and Portfolio Diversification

This paper studies the relationship between compensation, investment strategies and performance in private equity. Some funds adopt deal-by-deal carried interest models. Under these rules, bonus payments to General Partners are a function of each deal within the fund. These are paid only when positive deal returns are realized, resembling a portfolio of call options. I show that deal-by-deal compensation induces greater heterogeneity in portfolio investments. Funds select firms with increased diversification across specific risk factors. Net performance is negatively affected by higher fee payments. This paper uses a new dataset that includes fee and investor cash flow data.

Compensation structure of family business groups

We examine executive compensation structures with a focus on family business groups in Korea. Our results show that Korean family business groups provide 60% more total compensation to CEOs who are family members than to professional CEOs. This excessive increment is not based on performance-contingent payments, but on fixed payments. Our propensity score matching and difference-in-differences analyses robustly support these results. Further, we find that operation of internal capital markets, CEO talents, CEO stock ownership, and family board membership do not explain the excessive compensation of family CEOs in family business groups. The evidence indicates rent extraction through executive compensation in family business groups.

The implications of TARP: Evidence from bank performance and CEO pension benefits

This study examines the effect of compensation restrictions introduced by the Troubled Assets Relief Program (TARP) of 2008 on the performance of banks and their compensation structures. It documents significant performance improvement among TARP banks that experienced Chief Executive Officer (CEO) resignations after their banks accepted TARP funds. The improvement is most significant in the year following CEO resignation. In addition, TARP banks that kept their CEOs show a significant increase in CEO pensions post-TARP. TARP banks that did not experience CEO resignations, thus, appear to substitute pension increases for their CEOs to mitigate the TARP-induced decrease in conventional forms of compensation. Further analysis on all banks without CEO resignations shows that TARP banks have significantly higher increase in pension benefits post 2009 than banks that chose to decline TARP funds. The evidence shows that increased pension arrangements play a significant role in CEOs’ decisions to remain in their roles despite the constraints imposed by TARP.

The impact of within-firm pay disparity on workplace accidents

Based on a detailed and novel database including more than 40,000 firms and more than 2.4 million employees, we analyze the impact of vertical pay disparity on the magnitude of workplace accidents. Greater pay disparity has been associated with higher- powered incentives to compete for better-paid positions, which may increase workers’ willingness to take risks. We find that the number of days lost –as consequence of workplace accidents– is increasing in the level of pay disparity and that this relationship is negatively moderated by the proportion of female employees and by the state-ownership of companies, showing that the willingness to take risks varies by gender and by the incentives implied in different ownership structures. Our results also show that different wage layers respond differently to pay disparity. We highlight the need to consider costs that are usually hidden when analyzing the benefits of different compensation structures and to analyze the effects of these structures at different organizational layers.

The new hedge fund activism: activist directors and the market for corporate quasi-control

ABSTRACTActivist hedge funds increasingly seek and secure board representation in public companies. Representation on target boards may signal a longer-term commitment to target companies that can mitigate some of the typical criticisms of traditional hedge fund activism, such as short-termism. Hedge funds may hold shares for longer periods when they obtain board seats and often become heavily involved in corporate strategy and operations. This article argues that the phenomenon of activist board representation has created an active market for corporate quasi-control, defined as power that is greater than influence but that falls short of actual corporate control. It also discusses recent innovations in activist tactics which can promote the market for corporate quasi-control such as ‘wolf pack activism’, where more than one hedge fund descends upon a company, and ‘golden leash’ compensation structures, which incentivise activist appointed directors to increase the share price of target companies.

Risk, Preference, Capital Structure and Incentives

Using the surplus theory of the firm, we examine capital and labor as inputs of a surplus generating firm, and study the capital structure of the firm. We derive two equilibrium models on: (a) the capital structure and ownership of the firm and (b) alternative incentive compensation structures. Within the framework of the firm as a cooperative surplus generating enterprise, we introduce the concepts of risk, preference and resource constraints, to provide a framework for analyzing more sophisticated methods of dividing the risks and rewards of the firm’s surplus.

Compensation of Investment Advisors

The use of an investment advisor presents an agency problem: The firm works in the client’s interest while also managing its own growth. We use a dataset of over 30,000 advisor-year observations to investigate the potential for agency problems in the analysis of investment advisor firm characteristics. The compensation structures of investment advisors are not homogenous, varying by services offered. In addition, firm size is a large factor in determining the number of clients an advisory employee serves. This analysis lays the foundation for understanding the compensation component of the investment advisor relationship and the associated agency problem.

OUT OF THE CLOSET AND UP THE LADDER? DIVERSITY IN ONTARIO’S BIG LAW FIRMS

While Canadian law generally provides protection against sexual orientation discrimination, and social acceptance is growing, there are some indications that LGBTQ lawyers face barriers relating to their sexual identity. Although more LGBTQ lawyers are now ‘out at work’, quantitative data is incomplete, and little is known about the actual experience of LGBTQ lawyers, who enter big firms in Ontario with the hope to advance through the ranks. This article begins to address this gap by providing qualitative analysis of the personal experience of LGBTQ lawyers entering the profession and the extent to which in-firm diversity initiatives shape their experience. Three main themes emerged from the interviews. First, racialized gay lawyers more consciously described their experiences at big law firms as negative and related it to their minority status. Second, the interviews offer insight into the ways in which gays and lesbians are forced to negotiate and perform their identity in a heteronormative workplace. Finally, the insights gleaned from the interviews suggest that the diversity programs devised by law firms may have helped diversify the lower ranks of law firms, but they seem to have failed to address the barriers that equity-seeking groups continue to face in retention and advancement through the ranks. The heteronormative organizational culture, as well as the promotion and compensation structures in firms continue to drive the composition of the leadership ranks and it arguably perpetuates homogeneity.

Intricacies of connection between incentives and employee productivity

Both financial and non-financial incentives play a major role in influencing the productivity of the employees as they act as strong motivators for the people to work and aspire for higher productivity. The study intends to find out the financial and non-financial incentives awarded to employees at Mangalore Catholic Cooperative Bank Limited (MCC Bank Ltd.), which will have an influence on employee productivity. It was found that a variation in the incentive structure will have an impact on the level of productivity. The combination of both financial and non-financial incentives is responsible for the overall productivity of the employee, which results in feelings of belonging to the organisation. Thus it is essential to reward employees at the right time by revising the compensation structures and performance appraisal systems to motivate employees.

Topological Approach to Symbolic Pole–Zero Extraction Incorporating Design Knowledge

This paper addresses the problem of automatic analytical pole-zero (PZ) extraction for multistage operational amplifiers (opamps) with frequency compensation. Traditional methods mainly rely on numerical reference to derive approximate PZ expressions without incorporating any design knowledge. Such methods suffer from bad interpretability of the auto-generated results. This paper takes a topological approach and attempts to advocate that certain form of design knowledge can be incorporated in the symbolic term selection process for PZ generation. The generation engine selects the dominant terms by a formal inspection on the token patterns that are correlated to gain factors and compensation elements. Since the gain factors and compensation elements of an opamp are pertinent to the topological details of a circuit, the proposed PZ extraction method is closer to design conception than other numerical reference-based methods. Consequently, the generated pole/zero results are better interpretable. Application to a class of multistage opamps with a variety of compensation structures demonstrates that the proposed method is effective and can match human-derived results.

A low-cost W-band SPDT switch with Q-MMIC concept using quartz substrate

In this paper, a high-performance PIN diode single-pole-double-throw (SPDT) switch for W-band application is developed. By employing quasi-monolithic millimeter-wave integrated circuit (Q-MMIC) technology, the cost of the switch is significantly reduced while maintaining performance and size with conventional MMIC counterpart. A 3-D PIN diode model is used to describe the diode characteristic under both forward and reverse biasing states. In order to alleviate parasitic parameters effect on performance of the switch, compensation structures are analyzed and adopted. The measurement results show the insertion loss is less than 2 dB from 82 to 100 GHz and the isolation is greater than 32 dB from 82 to 105 GHz. The total size of the SPDT switch is 2.1 mm × 4.3 mm.

Mixed Ownership Structures and Firm Performance in China Listed Firms

China has achieved impressive economic growth since market reforms. The design of appropriate compensation structures is imperative so as to incentivize top managers, but little research has been done to examine the top management compensation structure in China. This study investigates how listed firms in China relate executive compensation to their firm performance and how such relationships are influenced by firm ownership structure. The results provide evidence showing strong link between compensation and performance varies across firms with different ownership structure. Private ownership enhances the link between firm performance and top CEOs compensation, while government ownership weakens executive pay-performance relation and thus makes the firms less effective in solving the agency problem between shareholders and management. It suggests enterprise reform in China will need to be supplemented by change in ownership structure in order to ensure fully success by transforming its State Owned Enterprises (SOEs) to corporations in the direction of converting state shares to public shares.

An Investigation into the Relationship between Executive Compensation in the Financial Services Sector and the Credit Crisis in the U.K.

Executive compensation has been a controversial topic for many years and it has accumulated a wealth of research. The most recent financial crisis of 2007-2008 has accelerated this debate. There is a general consensus amongst market participants that incentive misalignment was one of the biggest contributory factors to the crisis. It has been argued that one of the most important elements of executive compensation is performance-related pay. Traditionally, this is used as a corporate governance mechanism to reduce agency costs and mitigate moral hazard. Many studies have shown that the divergence of interest between agents and principals has been accurately, or commensurately, reflected in their respective performance and compensation structures. This paper has used a combination of research and literature-based approaches by reviewing past theories and also investigating the relationship between executive compensation in the financial services sector during the relevant period of the credit crisis in the U.K., primarily by observing the evolution of compensation structures of financial intuitions and performance measures between 1997 to 2016. In order to bridge the gap in the literature between the disciplines, a variety of performance indicators have been considered including market-based and accounting-based indicators. The analysis of the paper has focused on three key areas. Firstly, an analysis on the entire sample from 1997-2016. Secondly, an analysis on each time period (before, during and after the crisis). Finally, an analysis based on the size of the firms (small, medium and large). Consequently, this study concludes: (1) The U.K. financial market has an oligopolistic nature, with few firms (mainly banks) holding a significant portion of market share. (2) When comparing each period, the average salaries and fees of executives have decreased whilst the equity-based pay has increased. (3) When comparing firms by size, smaller firms paid a greater portion of total compensation toward fixed pay such as salaries whilst larger firms paid the biggest portion in bonuses, suggesting a greater bonus-oriented culture. (4) Smaller firms had a better return on assets figure compared to medium and large firms, suggesting they are more efficient at generating income using fewer assets. (5) On average, a higher return on equity corresponded to a higher debt burden and lower equity position, indicating a possible risk-return trade-off that contributed to the crisis.

CEO equity incentives and the remediation of material weaknesses in internal control

AbstractThis study examines how CEO equity incentives affect the remediation of material weaknesses (MWs) in internal control disclosed pursuant to the Sarbanes‐Oxley Act (SOX). We find that the sensitivity of CEO equity portfolios to stock price (CEO price sensitivity, or delta) has a positive impact on firm promptness in remedying MWs, whereas the sensitivity of CEO equity portfolios to stock return volatility (CEO volatility sensitivity, or vega) has a negative impact on firm promptness in remedying MWs. In addition, we provide evidence that effective boards of directors mitigate the undesirable, negative effect of CEO volatility sensitivity on remediation of MWs. Our results shed light on the effects of equity compensation structures on internal control quality in the more transparent, post‐SOX environment.

Examining the coherence of legal frameworks for ecosystem services toward sustainable mineral development in the Association of Southeast Asian Nations

Within the context of growing economic integration in the Association of Southeast Asian Nations (ASEAN), recent questions have been raised with regard to how member states employ law as a means of regional integration to promote sustainable development. Taking into account the primacy of ecosystem services for sustainability, this study examines the coherence of legal frameworks for ecosystem services among ASEAN member states toward a unified regional legal agenda for sustainable mineral development. Analyzed along three aspects of the Ecosystem Services Approach, the paper reviews the different mining related legislations and implementing regulations of member states, and examines whether there is convergence in their legal provisions for ecosystem services. The study shows that all member states provide legal mechanisms for ecosystem management in their mining operations. However, the following could be noted: 1) a lack of coherent identification and targeting of ecosystem services despite ‘intermediate’ services being embedded in provisions for ecosystem conservation; 2) a lack of legal provisions for integration of ecosystem services in mining impact assessments, and for ecosystem services valuation, which render environmental impact assessments, compensation structures and royalty regimes inadequate; and 3) a density of legal differentials around how states allocate regulatory authorities for ecosystem management in mining. These represent a prevailing fragmentation among member states’ legal frameworks for ecosystem services, which does not create an enabling condition for legal integration in ASEAN’s regional mineral strategies for sustainable development.

Executive Gender Pay Gaps: The Roles of Female Risk Aversion and Board Representation

AbstractUsing a large sample of executives in S&P 1500 firms over 1996–2010, we document significant salary and total compensation gaps between female and male executives and explore two possible explanations for the gaps. We find support for greater female risk aversion as one contributing factor. Female executives hold significantly lower equity incentives and demand larger salary premiums for bearing a given level of compensation risk. These results suggest that females’ risk aversion contributes to the observed lower pay levels through its effect on ex ante compensation structures. We also find evidence that the lack of gender diversity on corporate boards affects the size of the gaps. In firms with a higher proportion of female directors on the board, the gaps in salary and total pay levels are lower. Together, these findings suggest that female higher risk aversion may act as a barrier to full pay convergence, despite the mitigating effect from greater gender diversity on the board.