Design Of Compensation Plans Research Articles

Compensation Discretion as Insurance: How Are Targets and Bonuses Affected When Superiors Have a Back-Up Plan?

Target setting by superiors and their discretion in compensation decisions are important interrelated pieces in an organization’s control system. Thus, we examine how these processes affect each other and superiors’ decisions therein. We predict, and experimentally find, that superiors with ex post compensation discretion set more aggressive targets and put less effort into the target-setting process, as they rely on their discretion as insurance against setting an overly aggressive target with insufficient effort. This is an important finding, as targets are often used in performance evaluation and compensation decisions, as well as organizational planning, coordination, and resource allocation. We further examine the target-setting process by analyzing the effect of Dark Triad personality traits on superiors’ target-setting decisions. We find that high Dark Triad superiors with ex post discretion set the most aggressive targets, but without ex post discretion they set the least aggressive targets. This facet can be considered in the design of compensation plans and provides insight as to why compensation plans affect individuals differently. In supplemental analyses, we find that superiors’ target setting affects how they use their ex post compensation discretion. Thus, our study illustrates that target setting and compensation discretion influence each other to affect superiors’ decisions concerning subordinates, providing insight into the use of these processes within management control systems.

Influence of TARP regulations on executive compensation plans and corporate governance of ‘exceptional assistance’ recipients

Our article examines proxy statement disclosures to gain insight about the role of the Special Master, the requirement of a risk analysis of compensation plans and the requirement of a provision for compensation clawbacks for firms receiving ‘exceptional assistance’ under the Emergency Economic Stabilization Act of 2008. We examine the only three firms – AIG, Citigroup and Bank of America – that both received exceptional assistance and provided 2010 proxy statements. We find that the Special Master, in his capacity of reviewing and approving compensation payouts and compensation structures as a government representative, mitigated the costs of TARP restrictions by using his discretion to override some restrictions, such as allowing cash compensation in excess of the $500 000 maximum. We also observe significantly more compensation-related risk disclosures and a greater focus on risk in the design of compensation plans and choice of performance metrics after firms were required to analyze whether compensation plans motivate excessive risk-taking. All three firms appear to acknowledge concerns about their compensation plans, either explicitly by formally stating their concerns or implicitly by adopting new risk-related performance measures. In addition, we note that the amount of disclosure the three firms provide in responding to the same regulations differs significantly. Finally, we find that some firms adopted clawbacks beyond what is required, suggesting that firms find clawbacks beneficial in curbing excessive risk-taking. Our analysis of disclosures suggests that it would be useful for the SEC to review the resulting TARP disclosures as it determines whether such rules would be beneficial to impose on all firms.

A framework for compensation plans with incentive value

Although Vroom's expectancy theory and its later application to the workplace by Lawler have significant implications for the development of compensation plans with incentive value, they do not consider at least two critical components of incentive plan design: individuals' initial commitment to their goals and the relative value of rewards individuals receive for accomplishing their goals. This article integrates expectancy theory, goal theory, and equity theory into a comprehensive framework for the effective design of compensation plans with incentive value.

Relative explanatory power of agency theory and transaction cost analysis in German salesforces

In this paper, we take an integrated view of Transaction Cost Analysis (TCA) and Agency Theory (AT) in order to study the direct salesforce vs. rep decision and the design of compensation plans in German salesforces. We test, with a single data set, a set of established and new hypotheses of both theories in the context of both decisions. This allows us to assess the complementarity of AT and TCA by estimating the relative explanatory power of the two frameworks for each of the two decisions. On the one hand, we find support for most of the established hypotheses. However, the hypothesized effect of uncertainty is rejected in our data set. Moreover, we document the impact of some new variables. We also find that, while AT does not add much to explain the decision of direct vs. rep in our data, TCA is equally limiting in helping understand the design of salesforce compensation plans. Therefore, one has to be cautious in treating AT and TCA as complementary theories.