Managerial Contracts Research Articles

Characteristics, Legal Nature and Taxation of Management Contracts According to the Macedonian Law

Managerial contracts are essentially synthesis of the power of management and the power of the leadership of the company. The conclusion of management contracts is not a simple and routine task which the contracting parties will easily access or, on the other hand, they will assign that task to other (third) persons. With the adoption of corporate decisions by the company, at the moment of appointment to the management body, and thus becoming a member of the body, rights and obligations determined by law arise. In the process of transferring the status powers to the management body or the manager, the owners of the companies or their representatives inevitably have to share a part of the power with the elected managers. The managerial contract is an act of free entrepreneurial will of the two parties that conclude the contract. Thus, this contract regulates the salary, allowances, participation in profit, reimbursement for expenses, reimbursement for life insurance, insurable income, and other employment rights and obligations. On the other hand, managers as individuals facing professional risk are to create a professionally based coalition of interests of all those involved in realizing the company’s corporate goals and business policy and thereby enable economic growth and development.

Board Refreshment: Like a Breath of Fresh Air

AbstractUsing a sample of firms listed on the S&P1500 index for the period 2006–2021, we develop a comprehensive board refreshment index to examine why firms refresh as well as to consider the effects of such changes on the monitoring efforts of the board. We measure refreshment as a within‐board measure of the changes in diversity based on gender, nationality, age, interlocks, classification, education level and financial expertise. We find that longer‐tenured boards with older directors are more likely to refresh. Better‐governed firms and more diverse boards are also more likely to seek refreshment. We find a positive relation between board refreshment and CEO turnover‐performance sensitivity, pay‐for‐performance sensitivity and pay‐for‐risk sensitivity. Thus, our findings suggest that board refreshment promotes more effective board monitoring as well as efficient managerial contracting. Analysing board refreshment addresses an important shortcoming in the board diversity literature by directly studying the dynamics of boards.

Managerial Contracting: A Preliminary Study

AbstractImportant types of contractual relationships—among them those between integrated product manufacturers and their suppliers—are neither fully transactional nor fully relational. The agreements that govern these relationships incorporate highly detailed written terms that focus not only on what is promised but also on the details of how it is to be achieved and how suppliers’ actions will be monitored and responded to over the life of the agreement. Together with the implicit relational contracts that support their operation, these provisions create an economic hybrid that lies between markets and hierarchies, a set of relatively standard institutional arrangements that give buyers the right (but not the obligation) to exercise a package of quasi-integration rights that enables them to obtain many of the most important benefits of vertical integration while simultaneously reaping most of the core benefits of outsourcing. The contract provisions used to govern these relationships are termed here “managerial provisions” because they employ the techniques of intra-firm hierarchy that managers use to organize relationships and increase productivity within firms. This article focuses on a subset of these provisions, namely those that are analogous to the eighteen management practices that the World Management Survey (WMS) reveals are closely associated with persistent performance differences across similarly situated enterprises. After documenting the convergence between these practices and the terms of procurement contracts, the article suggests that the contract governance regime these practices create is well designed to support the creation and maintenance of cooperative relationships, strengthen the force of network governance, and scaffold the emergence of the type of inter-firm process-based trust that is associated with better supplier performance. More generally, this article concludes that in the modern economy, where the value of so many types of contracts—from research and development alliances to business process outsourcing agreements and beyond—depends on employees of the contracting entities working together much as if they worked for a single firm, lawyers would be well advised to look to the broad array of managerial techniques successfully used within firms (not only those based on WMS practices) to develop new ways to better govern transactions between firms.

Mandatory disclosure of managerial contracts in NGOs

Nongovernmental Organizations (NGOs) have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival NGOs competing for donations in the fundraising market. We analytically study the impact of publicly available contract information on fundraising competition of NGOs. Although such a provision makes contract information available to multiple stakeholders and increases the transparency of the NGO sector, we argue that it also induces NGOs to use properly designed managerial incentive contracts strategically to influence rival NGOs. In particular, we find that the observability of incentive contracts reduces existing fundraising competition. This can be beneficial in terms of NGOs’ outputs and social welfare, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that when donors’ willingness-to-give for projects are sufficiently different, publicly available contract information can distort the NGOs’ choice of projects, leading to socially inefficient project clustering.

Managerial Contracting: A Preliminary Study

Managerial Contracting: A Preliminary Study

Investment restrictions and fund performance

We examine the effect of investment restrictions on mutual fund performance. Utilizing a unique panel of mutual fund contract changes, we explore several ways these changes affect a fund, including: performance, funding risk, and managerial contracting. We find that the general shift towards fewer restrictions over the period 1996–2011 has provided little benefit to mutual funds. Specifically, neither performance nor flow increased and we observe no changes in risk on average. We do find, however, an increased likelihood of management turnover when restrictions are removed. We conclude that contract restrictions do not explain the general underperformance of mutual funds, and that these investment restrictions are not binding. • The mutual fund industry has broadly decreased many of the investment restrictions. • The general shift towards fewer restrictions has provided little benefit to mutual funds. • Contract restrictions do not explain the general underperformance of mutual funds. • The investment restrictions on mutual funds are not binding.

Industry centrality: Weak ties, industry attributes, and managerial contracting

AbstractCentrality in the network of interindustry trade relationships provides novel insights into an industry's economic attributes and managerial incentive contracts prevalent in the industry. More “central” industries trade with a large number of industries, implying numerous but relatively weaker interindustry ties. Weakness of interindustry ties suggests that relationship‐specific investment (RSI) will be less important and output will be relatively more commoditized in central industries. As predicted, central industry firms are less innovative, face greater competition, and have lower idiosyncratic risk. Further, CEOs in central industries receive lower pay and weaker incentives. Tournament incentives are also weaker in more central industries.

The Building Blocks of Network Governance: Rules, Norms and Culture

Cooperation within and across organizations is key to organizational and managerial performance. Starting with Granovetter (1985) scholars in management, sociology and economics have shown that social networks can be used as a governance mechanism to facilitate cooperation. These scholars attributed the network effect on cooperation to social networks’ ability to facilitate trust, monitoring and the distribution of reputation-relevant information about past performance. More recent work on cooperation has emphasized two core considerations: First, the importance of shared norms and culture for successful cooperation, and second the underappreciated role formal rules play in scaffolding cooperation and leveraging these forces. These advances together with network scholars’ long-standing insight that network structure can both shape actors’ culture and norms, and be shaped by them, suggest many new avenues for research into network governance of cooperation. To further advance our understanding of network governance, this symposium brings together scholars of networks, contracts, norms, and culture to explore the ways that rules, norms, and culture can support network governed cooperation, and help managers facilitate cooperation within and across organizations. Managerial Contracting: A Preliminary Study Presenter: Lisa Bernstein; U. Of Chicago Presenter: Brad Peterson; Mayer Brown LLP Revisiting Economic Action and Social Structure: Embeddedness in the Age of Amazon Presenter: Hagay Volvovsky; MIT Sloan School of Management Rewiring Social Networks Changes Culture and Language: Evidence from Alt-Right Echo Chambers Presenter: Matthew Yeaton; Columbia Business School It’s Your Turn vs. It’s My Pleasure: Theory and Experiments on the Norm of Reciprocity Presenter: Simon Friis; MIT Sloan School of Management Presenter: Ezra Zuckerman; Massachusetts Institute of Technology

Sharing managerial contract information in a vertically related market

Recent research shows that in duopolies with strategic delegation, firm owners have an incentive to always share information about managerial compensation contracts. We study how sharing of contract information is affected by the presence of a supplier. We find that under quantity competition, a partial information‐sharing equilibrium may occur. Firms that share contract information punish their managers for sales to soften supplier pricing. Mandating information sharing increases total welfare but decreases consumer surplus. Under price competition, firms always want to share managerial contract information. Finally, firm profits can be higher under price competition than under quantity competition.

Working capital management and managerial talent

PurposeTalented managers arguably remain quintessential to firm value and performance. While the literature offers evidence for the long-term orientation of talented managers, there is a paucity of evidence on the short-term performance of managers. Here, we examine the relationship between managerial talent and working capital management (WCM).Design/methodology/approachThis study primarily employs a panel fixed-effect method controlling for firm-year and firm-industry for non-financial and non-utility firms for the years 1980 through 2016. Also, the authors control of potential bias that may impact the result. These controls include social capital, financial constraints and tests for endogeneity and spurious correlation.FindingsThe authors find the association between managerial talent and WCM to be positive and significant. The results indicate that talented managers have a higher cash conversion cycle. The empirical evidence still holds after controlling for social capital, religiosity and financial constraints. Also, the evidence still holds by employing an interaction term between Tobin's Q as a proxy for investment opportunities and talented managers.Practical implicationsThe finding may lend credence to executive contracts. Human nature, by default, is only vested on a net benefit for self-aggrandization. Self-aggrandization can be evident through structures in managerial contracts. These contracts usually tie consequences to long-term growths. If a benefit is offered based on short-term operational goals, talented managers may do more to the management of working capital.Originality/valueIn the managerial talent literature, talents reflect a holistic picture of one that can succeed in both the short-term and long-term goals of a company. Here, the authors show that talented managers are inefficient in meeting short-term goal – working capital management. Thus, the authors add to the research by providing evidence that talented managers are myopic.

Incentive pay and rent in oligopoly

Our purpose is to examine strategic delegation in nonlinear Cournot oligopoly. The findings generalize earlier results and show that managerial contracts reward sales under the condition of a fixed input price. Alternatively, under a variable input price, owners might punish sales even when goods are strategic substitutes. We conclude that optimal strategic motivation depends critically on the input price. For example, motivation that supports positive owner profit under a fixed input price nullifies owner‐profit if an upstream monopolist with convex costs sets the input price. In a vertical relationship between a duopoly and an upstream monopolist, strategic delegation punishes sales.

Voluntary Disclosure in a Cournot-Bertrand Duopoly

The literature on voluntary disclosure in oligopolies concentrates either on Cournot markets where firms compete in quantities or on Bertrand markets where firms compete in prices. In this paper we study voluntary disclosure of managerial contract information in a Cournot-Bertrand duopoly where one firm sets quantities while the other firm sets prices. Such a hybrid structure frequently captures firm behavior in real-world markets. Accordingly, this paper contributes to our understanding of how firms' choices of strategic market variables influences firms' voluntary disclosure incentives. In a setting where firm owners provide strategic incentives to their managers and can either disclose the details of the managerial compensation contract or keep them secret, we find that the Cournot firm punishes its manager for sales and the Bertrand firm induces more aggressive market choices by rewarding sales. Firms' disclosure choices in equilibrium depend on the level of product substitution. A full disclosure equilibrium where both firms reveal the details of their managerial contract information occurs if the firms' products are sufficiently differentiated. In this case, voluntary disclosure leads to lower consumer welfare, but higher total welfare than if contract information is kept secret by both firms. If product differentiation is low, then we find two partial disclosure equilibria where either the Cournot firm or the Bertrand firm keeps contract information private. In this case, we argue that mandating disclosure can lead to an increase consumer and social welfare, but might decrease firm profits.

Disclosure of Managerial Contract Information in a Vertically Related Market

The observability of managerial contract information in duopolies with strategic delegation has been an issue of controversial discussion. In a recent paper, Baik and Lee (2019) endogenize the decision to disclose the details of managerial contracts and show that in equilibrium, the owners of both firms have an incentive to always voluntarily reveal contract information, independent if firms compete in quantities or prices. We study how voluntary disclosure of contract information is affected by the presence of a supplier that provides an input to both firms. We demonstrate that under quantity competition, a partial disclosure equilibrium may occur if product differentiation is low. Disclosing firms punish their managers for sales to soften supplier pricing. Mandating disclosure increases total welfare, but consumer surplus decreases. Under price competition, firms always want to disclose. Finally, firm profits can be higher under price competition than under quantity competition.

The Similarities and Differences between Earnings Management and Fraud

Objective: The main objective of this article is to indicate differences between earnings management and fraud.Research Design & Methods: The research methods applied are based on a critical analysis of the literature on the subject, both in Polish and English, a comparative analysis of legal acts and inductive reasoning.Findings: Earnings management involves intentional and lawful actions undertaken by an entity’s management, aimed at changing the figures it reports, particularly earnings, in order to present the desired picture of the entity’s financial standing and economic position, as well as its achievements in financial statements for the purpose of misleading financial statement users or obtaining benefits guaranteed in managerial contracts. This is achieved by applying accounting judgment and estimates, changing these estimates, choosing specific methods from among the acceptable accounting methods allowed by the applicable accounting regulations, structuring of economic transactions or undertaking actual activities.Implications / Recommendations: Earnings management should not be identified with fraud, as earnings are managed within the framework of legal regulations in the field of accounting and taking account of solutions adopted in the accounting policy of a given entity. However, any abuse in this field, whether it involves departing from or violating the accounting principles or standards, may lead to intentional misstatements in financial statements – that is, fraud in its broad sense.Contribution: Inspiring further development of research on earnings management from the viewpoint of determinants or tools applied.

Mandatory Disclosure of Managerial Contracts in Nonprofit Organizations

Nonprofit organizations have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival nonprofit organizations competing for donations in the fundraising market. Our aim is to investigate the impact of publicly available contract information on fundraising competition of nonprofit organizations. We argue that, although such provision makes contract information available to multiple stakeholders and increases the transparency of the nonprofit sector, it also induces nonprofits to use managerial incentive contracts strategically. In particular, we find that the observability of incentive contracts relaxes existing fundraising competition. This is beneficial in terms of nonprofits’ outputs, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that publicly available contract information distorts nonprofits’ choice of projects, thus potentially inducing socially inefficient project clustering.

Mandatory Disclosure of Managerial Contracts in Nonprofit Organizations

Nonprofit organizations have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival nonprofit organizations competing for donations in the fundraising market. Our aim is to investigate the impact of publicly available contract information on fundraising competition of nonprofit organizations. We argue that, although such provision makes contract information available to multiple stakeholders and increases the transparency of the nonprofit sector, it also induces nonprofits to use managerial incentive contracts strategically. In particular, we find that the observability of incentive contracts relaxes existing fun draising competition. This is beneficial in terms of nonprofits’ outputs, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that publicly available contract information distorts nonprofits’ choice of projects, thus potentially inducing socially inefficient project clustering.

Agency conflicts and short- versus long-termism in corporate policies

We build a dynamic agency model in which the agent controls both current earnings via short-term investment and firm growth via long-term investment. Under the optimal contract, agency conflicts can induce short- and long-term investment levels beyond first best, leading to short- or long-termism in corporate policies. The paper analytically shows how firm characteristics shape the optimal contract and the horizon of corporate policies, thereby generating a number of novel empirical predictions on the optimality of short- versus long-termism. It also demonstrates that combining short- and long-term agency conflicts naturally leads to asymmetric pay-for-performance in managerial contracts.

Executive compensation, macroeconomic conditions, and cash flow cyclicality

I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial wealth-for-performance sensitivity. The model shows that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. Moreover, this reduction should be larger in highly procyclical firms. These novel, testable predictions provide insights into optimal shareholder responses to agency costs of debt throughout the business cycle.

On the collusive nature of managerial contracts based on comparative performance

We show that managerial delegation based upon comparative performance may generate collusive outcomes observationally equivalent to those typically associated with repeated games or cross ownership. This happens when rivals’ profits are positively weighted in the managerial incentive scheme. We also identify the level of time discounting at which a repeated game based upon Nash reversion would achieve the same degree of collusion. Accordingly, such managerial contracts should attract the attention of antitrust authorities.

Corporate Provision of Public Goods

Milton Friedman famously suggested that firms ought not divert profits toward public goods because shareholders can better make these contributions themselves. Despite this, activist shareholders are increasingly successful in persuading firms to be “socially responsible.” We study firm behavior when shareholders care about public goods as well as profits and when managerial contracts reflect these concerns. Under these ideal conditions, managers redirect more profits toward public goods than shareholders would when acting separately—shareholders are poorer but happier. Further, so long as the public good is sufficiently desirable, the manager selects the socially optimal level of output, despite the mismatch between shareholder preferences and those of society at large. This paper was accepted by Joshua Gans, business strategy.