Long-term Bonus Research Articles

Dynamic Bonus Pools

ABSTRACT We study the properties of long-term bonus pools (BPs) with rollover provision in a multiperiod moral hazard setting, where the principal uses subjective information to privately assess the agent’s performance and the agent is protected by limited liability (LL). To provide incentives, the principal funds a multiperiod BP with a fixed payment that may be distributed over time to the agent and a third party. We find that the optimal long-term BP contract features performance targets that are contingent on past performance. Specifically, high subjective performance implies an easy target, and low subjective performance implies a difficult target. To implement the long-term BP contract, the principal provides nondichotomous performance reports. The study contributes to the literature that discusses the mechanisms that make subjective performance information useful for incentive contracting. JEL Classifications: D82; M52; M54.

Gamification as a Strategy to Increase Motivation and Engagement in Higher Education Chemistry Students

In the last year, educational experiences have become increasingly challenging due to teaching classes remotely. For this reason, it has been necessary to develop educational strategies that accompany the use of new technologies to maintain student interest. One of these methodologies is gamification, implemented in school environments more frequently due to the pandemic and whose impact on student motivation and engagement needs to be explored. The literature shows that student participation in these contexts should be increased when applying this methodology, where teachers can also provide greater support. This research proposes improving these aspects by developing a gamification strategy that can be easily replicated in other environments. This study was carried out for a chemistry course at a university in central Mexico. This proposal details the short-, medium-, and long-term bonuses which stimulated and motivated students and achieved specific objectives. We also present the quantitative results of a questionnaire applied to 48 engineering students to identify their perceptions of how gamification could increase motivation and engagement in learning the subject of chemistry. In addition, pre- and post-knowledge tests were applied to determine whether there were changes in the learning outcomes. The results indicated that gamification increased student motivation and engagement, improved attitudes, promoted actions such as keeping the camera on during lectures and regular attendance, and improved student grades. This study fills the need for planning strategies to help improve student motivation in online classes and proposes an instrument to measure the results. It can be helpful to those interested in applying or adapting it in other disciplines.

Bubbles and incentives: an experiment on asset markets

We explore the effects of competitive incentives and of their time horizon on the evolution of both asset prices and trading activity in experimental asset markets. We compare (i) a no-bonus treatment; (ii) a short-term bonus treatment in which bonuses are assigned to the best performers at the end of each trading period; (iii) a long-term bonus treatment in which bonuses are assigned to the best performers at the end of the 15 periods of the market. We find that the existence of bonus contracts does not increase the likelihood of bubbles but it affects their severity, depending on the time horizon of bonuses. Markets with long-term bonus contracts experience lower price deviations and a lower turnover of assets than markets with either no bonuses or long-term bonus contracts. Short-term bonus contracts increase price deviations but only when markets include a higher share of male traders. At the individual level, the introduction of bonus contracts increases the trading activity of males, probably due to their higher competitiveness.

Optimal sales force compensation

We analyze a dynamic moral-hazard model to derive optimal sales force compensation plans without imposing any ad hoc restrictions on the class of feasible incentive contracts. We explain when the compensation plans that are most common in practice – fixed salaries, quota-based bonuses, commissions, or a combination thereof – are optimal. Fixed salaries are optimal for small revenue-cost ratios. Quota-based bonuses (commissions) should be used if the revenue-cost ratio takes intermediate (large) values. If firms face demand uncertainty, markets are rather thin, and the revenue-cost ratio large, firms should combine a commission with a quota-based bonus. If word-of-mouth advertising affects sales, a dynamic commission that increases over time can be optimal. When entering a new market or launching a new product, firms should install long-term bonus plans.

Compensation contracts and fire sales

This paper analyzes the impact of remuneration practices on banks’ risk-taking in a model with fire sales externalities. When these externalities are not internalized by a bank's shareholders and executives, borrowing and fire sales are higher than the socially optimal level. Our analysis shows that plain-vanilla equity fails to internalize fire sales externalities. Deferred equity and long-term bonuses unrelated to short-term profits can restore social efficiency. Bail-in bonds can achieve efficiency at a smaller cost since they allow for state-contingent payments. It is not the level but the composition of variable compensation that determines the inefficiency. Excessive regulation may lead to suboptimal levels of risk-taking. Government guarantees reinforce the fire sales externalities and the need for regulation.

A Macroprudential Approach to Executive Compensation

This paper analyzes the impact of remuneration practices on banks' risk-taking in a model with fire sales externalities. When these externalities are not internalized by a bank's shareholders and executives, borrowing and fire sales are higher than the socially optimal level. Our analysis shows that plain-vanilla equity fails to internalize fire sales externalities. Deferred equity and long-term bonuses unrelated to short-term profits can restore social efficiency. Bail-in bonds can achieve efficiency at a smaller cost since they allow for state-contingent payments. It is not the level but the composition of variable compensation that determines the inefficiency. Excessive regulation may lead to suboptimal levels of risk-taking. Government guarantees reinforce the fire sales externalities and the need for regulation.

Analysis of Supervisory Board Compensation Structure, Employee Representation and the Relation to Earnings Quality: Evidence from German Boards

In this paper, I examine the compensation contracts of German shareholder and employee representatives as well as the role of co-determined supervisory boards and the impact on earnings management. The supervisory board participates in the firm’s decision-making, but also has the key fiduciary responsibility to audit and approve the annual financial statements. In numerous cases shareholder representatives’ bonus plans are tied to financial performance, raising concerns about the integrity of financial reporting. In contrast, employee representatives are required to forward their remuneration to the Hans Bockler Foundation and can only keep a small fixed amount. In my sample of 357 firm-year observations, the results indicate that supervisory boards that receive a larger proportion of their compensation as long-term cash incentives are more likely to have higher levels of absolute discretionary accruals. However, I find that employee representation can mitigate the positive effect of a higher proportion of long-term bonus payments on the magnitude of discretionary accruals. Finally, I also find a direct negative relation between co-determined supervisory boards and earnings management, indicating that co-determined supervisory boards are more likely to monitor the financial reporting process.

Earnings Management Practices in Sales and Strategic Accounts Survey Report

Section 1 reports findings regarding the expense and revenue management requests that sales leaders are asked to implement. Through a 2012 Strategic Account Management Association (SAMA) survey, we find that customers and strategic accounts are often shielded from these myopic forms of management, but that shortsightedness is an internal barrier that a vast majority of strategic account managers face. When the sale force is asked by finance to cut back in the fourth quarter, results suggest that conflict between the two groups is high (see Section 2). The perception among respondents is also that finance does not engage in earnings management actions a great deal and that sales is in a more opportune position to move the needle with earnings management actions, when compared to finance.Section 3 shows that customers selected to be strategic accounts have long-term growth potential, substantial amounts of current business, global presence, strategic fit, and leadership roles in their industry. Perhaps due in part to these characteristics, nearly a quarter of respondents reported that their strategic account business earned profit margins in excess of 20% over the past three years. Strategic account programs operate in relatively open waters, too – greater than three quarters of respondents indicated that they compete with five or less comparable offerings.Section 4 provides a snapshot of the compensation practices used in sales forces today. Many organizations arrive at performance targets for their employees based on their performance in the prior year and set such targets on an annual basis. Even still, sales employees’ performance often falls short of these targets, with approximately half missing the mark. The income of sales force members can generally be described as 70% salary, 15% commission, 7% short-term bonus, and 8% long-term bonus. Strategic account managers are paid the most in the sales force (approximately $120,000 for an average performer) and non-strategic account sales personnel the least (approximately $75,000 for an average performer).

Regulating Deferred Incentive Pay

Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may

Bubbles and Incentives: An Experiment on Asset Markets

We explore the effects of competitive incentives and of their time horizon on the evolution of both asset prices and trading activity in experimental asset markets. We compare i) a no-bonus treatment based on Smith, Suchanek and Williams (1988); ii) a short-term bonus treatment in which bonuses are assigned to the best performers at the end of each trading period; iii) a long-term bonus treatment in which bonuses are assigned to the best performers at the end of the 15 periods of the market. We find that the existence of bonus contracts does not increase the likelihood of bubbles but it affects their severity, depending on the time horizon of bonuses. Markets with long-term bonus contracts experience lower price deviations and a lower turnover of assets than markets with either no bonuses or long-term bonus contracts. Short-term bonus contracts increase price deviations but only when markets include a higher share of male traders. At the individual level, the introduction of bonus contracts increases the trading activity of males, probably due to their higher competitiveness. Finally, both mispricing and asset turnover are lower when the pool of traders is more risk-averse.

Stock investors’ preference for short-term vs. long-term bonuses

Bonuses in the finance sector may be based on too short time intervals for environmental and social factors to be taken into account in investment decisions. We report two experiments to investigate whether investors prefer short-term to long-term bonuses. In Experiment 1 employing 27 undergraduates, preferences were measured for four short-term certain bonuses, evenly distributed across a time interval, and one certain long-term bonus at the end of the time interval. A majority chose the short-term bonuses, and in order for the long-term bonus to be equally preferred it had to be about 40% higher than the four added short-term bonuses. Experiment 2 employing another 36 undergraduates introduced outcome uncertainty that more accurately reflects the choices stock investors face. The participants again choose between a long-term bonus and four distributed short-term bonuses. It was shown that uncertainty made more participants prefer the long-term bonus to the added short-term bonuses than when the outcome was certain. A smaller increase of the long-term bonus of about 20% was now required to make it equally attractive as the four added short-term bonuses.

Hank Shakes The Technical Ladder

following hypothetical human resources issue has, like so many of its ilk, no correct solution. To help your colleagues deal with such a situation, please tell us how you would resolve it. We'll print as many as space permits. Editor With the retirement of Tom Evers after 20 years as XYZ's R&D vice president, company management was forced to look outside for a replacement. eventually selected Henry (Hank) Sympson, a senior scientist from one of the company's suppliers. Hank boasted a long list of significant achievements, many of which had benefited XYZ, so it was not surprising that management looked to him to revitalize some of its R&D activities and improve the development of new or improved products, which had been lagging in the last few years. Hank set to work quickly to acquaint himself with the technical personnel makeup of R&D. Going over organization charts and personnel records with Pete Gettings, the director of R&D personnel, Hank commented, see a scattering of people-they seem to be fairly senior-with titles like 'Staff Scientist,' 'Staff Engineer' and 'Principal Scientist.' Who are they and what do they do? Pete explained that these were the top two levels of XYZ's technical ladder-its top technical talent. How do they get promoted to the top of the technical ladder and to whom do they report? Hank asked. Pete replied, Most of them were technically top notch and had run out of salary room in their present assignment-so we made two new grades at the 'staff and 'principal scientist' level to give them more salary room. But there is also one case of a senior researcher who was made manager of a department but didn't do well in that role. Because he had been an excellent researcher, we didn't punish him for his inept management, we simply relieved him as a manager and promoted him to a top spot on the technical ladder, which kept him at the same salary level he'd had as a manager (see RTM, Jan-Feb, 1988, pp. 52-53). The technical ladder as we use it is largely recognition for outstanding technical performance-sort of a long-term bonus, Pete explained. Technical ladder personnel continue to report to the same department they were in before their promotion to these top spots. These people are not a cohesive unit as I see it, Hank observed. They just keep doing the same research work and report in the same structure they previously did. That's correct, Pete replied. The technical ladder, as I said, is largely a reward for previous work. We expect them to continue to be good researchers and also to spend some time watching out for new technologies and also for any technologies that might threaten our business. However, mostly they have just continued in their normal research assignment. Misusing the Talent? Hank retorted that he didn't think XYZ was using its top technical talent properly at all. You are emphasizing recognition when I think the emphasis should be on utilization. You've just rewarded people for past efforts. I see the top levels of the technical ladder as a separate unit made up of folks who have demonstrated the following characteristics: * A source of sustained value creation for the company through their technological contributions. * A recognized innovator in their technical field. * A go-to person in their technical area for help on hard challenges and problems. * A mentor for young scientists and engineers. * A strategic business thinker who is adept at linking new technology programs to significant business results. * An idea leader with the skills to work an issue within the organization. also think it's wrong to leave top-level members of the technical ladder scattered throughout the organization, Hank continued. They need a definite amount of autonomy, access to resources, and interaction with top management. As soon as we can accomplish it practically, I want these folks organized into a separate unit and I want them to report to me. …

Behavioral Consequences of Corporate Incentives and Long-Term Bonuses: An Experimental Study

This paper examines whether long-term managerial bonus schemes change the allocative behavior of subjects in a laboratory setting. Using four different compensation schemes, we show that a necessary condition for reconciling divergent time preferences between principals and agents is a compensation scheme that induces behavior consistent with lower discount rates. Within subject results show that subjects recognize changes across compensation schemes and change their behavior as predicted by formal theory. Results also suggest that subjects become more myopic in their investment decisions if compensation contracts are incorrectly structured.