Market-based Compensation Research Articles

The Role of Transitory Earnings for Managerial Effort Allocation to Intangibles

There is a concern about the ability of earnings to adequately reflect managerial efforts to intangible-based activities. Agency theory suggests that when core earnings relay little information about managerial effort to certain activities, effort allocation will be insufficient. Risk averse managers consider costs of investing in RD they can send signals about the future and security prices reflect information about them. This means that even though the accounting system creates weak value relevant core earnings concerning intangibles, if transitory earnings can provide some additional information, they can play a vital incentive role. For example, unsuccessful prior intangible investments or obsolete inventory would be reported as transitory earnings (e.g., disposal of a poorly performing line of operation, asset write-downs, inventory write-offs), which can send signals to markets about managerial effort to tackle problems. These can be useful to convey information about managerial efforts exerted on intangibles. I show that under these conditions, market-based compensation helps to mitigate inefficient effort allocation to intangible-based activities. However, the reflection of transitory earnings in market-based compensation can also encourage earnings management. Managers may allocate their effort to a nonproductive activity such as shifting operating expenses to non-operation expenses to avoid a sharp decline in security price or/and meet analyst forecasts. Such activities do not increase economic value. Thus, the ability of transitory earnings to produce proper managerial effort allocation has to be weighed against the possibility of encouraging earnings manipulation.

Executive Compensation and Corporate Governance in Emerging Markets: The Theoretical Framework and Recent Developments

This chapter investigates the theoretical frameworks and recent empirical evidence 3 of executive compensation in emerging markets. The author outlines theoretical 4 evolutions and identifies unique aspects of institutional features in determining the 5 pay scheme in emerging markets. Due to family ownership and political influence 6 within state-owned enterprises (SOEs) in emerging economies, the agency-based 7 bargaining takes place in firms with strong governance while entrenchment-based 8 skimming takes place in firms with weak governance, and this could lead to a 9 relation-based rather than a market-based compensation contract. The literature 10 seems to be heading into the direction of considering executive pay as an outcome 11 of pay setting practices, embedded in socially constructed corporate governance 12 arrangements. The author highlights the importance of executive compensation 13 studies in emerging economies and calls for future research by integrating the 14 institutional features of emerging markets into investigations of the various pay 15 practices across different jurisdictions. 16

The Value and Incentive Relevance of Nonrecurring Items: Under Conservative Accounting

I find that the value relevant components of special items and discontinued operations at the industry-level provide useful information to assess the performance of intangibles. Special items send noisy signals about future growth opportunities for firms within an industry, while discontinued operation send clear signals about the values of intangibles in the sector. I also find a significant positive (negative) link between CEO market-based compensation and the signals sent by discontinued operations (special items). My results suggest that compensation committees in firms across an industry consider the information about intangibles relayed by discontinued operations and special items, and selectively alter the level of incentives to encourage managers to send informative signals when reporting these items.

Surf and Turf: Tourists’ Values for Multifunctional Working Landscapes and Water Quality in Colorado

Agricultural lands have long been valued for their productive benefits. More recently, farm and ranchlands (working landscapes) have come to be recognized for the many services that they provide beyond food and fiber. These multifunctional benefits provided by agricul tural lands can include the preservation of a rural lifestyle, aesthetic values from the agri cultural landscape, and the provision of ecosys tem services. While there is generally no market-based compensation to farmers for their stewardship of these and other nonmar ket services, the provision and value of mul tifunctional services represent an increasingly important?and in some cases dominant? motivation for agricultural policy in many re gions. Since the 1980s, nonmarket valuation meth ods have been used to estimate the value of farmland amenities to local residents. Bergstrom and Ready (2009) provide a com prehensive review of previous studies that measure the nonmarket benefits of farmland amenities over the last two decades. To date, most studies have focused on the value of , farmland to local residents and have not ad

Executive perks: Compensation and corporate performance in China

Many studies have examined CEO compensation in developed countries, where a long tradition of disclosure renders data readily available. In emerging economies, particularly in China, where market-based compensation is a relatively new phenomenon, there are few studies of CEO compensation. In addition, information on the use of non-cash compensation is almost absent. Building on the general literature on CEO compensation, and Chinese economic and management studies, this article singularly contributes to the extant literature by (1) examining the motivational determinants of CEO perk compensation, on the one hand, and (2) exploring the relative contribution of perks to performance. We anticipate that perks can serve two roles in China: (1) to provide incentives to deter managerial shirking, and (2) to facilitate work and improve production. We find that perks are positively associated with current and future returns on assets, supporting the view that some types of perks may improve firm profitability and/or that perks are paid as a bonus to reward performance. Our findings from stratified samples suggest that perks may incentivize managers, even after controlling for firm fundamentals, such as firm size, growth opportunity, and leverage.

Determinants of family employee work performance and compensation in family businesses

This study highlighted the importance of establishing clear work roles and responsibilities in the family business, the measurement of family employee work performance and regular feedback on their performance and fair and market-based compensation of family employees in family businesses. An Oblimin oblique rotation was performed on the principal components of the exploratory factor analysis. In this study three factors describing the theoretical dimensions of family employee work performance, clear work roles and responsibilities and family employee compensation in family businesses were extracted. Although statistical significant differences were found between the perceptions of male and female as well as between senior and younger generation family employees regarding the constructs, these differences were not practically significant. This study, however, confirms the important role that an effective family employee work performance management and compensation strategy plays to ensure harmonious family relationships and at the end the sustainability of the family business. Practical recommendations are suggested to improve the effectiveness of family employee work performance and compensation in family businesses. Recommendations are also offered to utilise the questionnaire as a diagnostic tool.

The Link Between Valuation and CEO Compensation for Intangible-Intensive Firms Through Nonrecurring Items

Nonrecurring times are ambiguously defined and whether they play a role in valuation and CEO compensation is unclear. I focus on intangible-intensive firms and find convincing evidence that special items and discontinued operations contain useful information to assess the value of unrecorded intangibles. I also find weak evidence that heavy reliance on market-based compensation for intangible-intensive firms is associated with the ability of nonrecurring items to convey information about intangible related activities. My results link the valuation and compensation literature and suggest that the incentive relevance of special items and discounted operations depends upon a tradeoff between the value relevance and reliability of these items.

What Roles Can Nonrecurring Items Play?

Prior research on accounting conservatism suggests two distinct roles that nonrecurring items can play for firms with a high level of intangibles. One is for market participants to assess the value of operating activities and the other is to provide incentives for managers. For the valuation role, I find convincing evidence that special items and discontinued operations contain useful information about unrecorded intangibles. Discontinued operations signal a downward adjustment of the value of intangibles and special items signal an upward adjustment. In contrast, for the incentive role, I find only weak evidence of a relationship between the use of market-based compensation and the ability of nonrecurring items to explain goodwill. My findings have important implications for standard setters and accounting researchers because they indicate that even when core earnings cannot convey adequate information about important intangible projects, investors can assess the value of intangibles and related managerial decisions from reports of special items and discontinued operations. They also indicate that reliability is an important attribute for incentive relevance, and suggest the presence of a tradeoff between value relevance and reliability of special items and discounted operations in a compensation contracting.

Market-Based Compensation, Price Informativeness and Short-Term Trading

This paper shows that there is a natural trade-off when designing market based executive compensation. The benefit of market based pay is that the stock price aggregates speculators’ dispersed information and there-fore takes a picture of managerial performance before the long-term value of a firm materializes. The cost is that informed speculators’ willingness to trade depends on trading that is unrelated to any information about the firm. Ideally, the CEO should be shielded from shocks that are not informative about his actions. But since information trading is impossible without non- nformation trading (due to the ”no-trade” theorem), shocks to prices caused by the latter are an unavoidable cost of market based pay. This trade-off generates a number of insights about the impact of market conditions, e.g. liquidity and trading horizons, on optimal market based pay. A more liquid market leads to more market based pay while short-term trading makes it more costly to provide such incentives leading to lower CEO effort and worse firm performance on average. The model is consistent with recent evidence showing that market based CEO incentives vary with market conditions, e.g. bid-ask spreads, the probability of informed trading (PIN) or the dispersion of analysts’ forecasts. JEL Classification: G39, D86, D82

Environmental “takings”

Environmental “takings”

Stock Trading, Information Production and Incentive Pay

This paper examines under what circumstances the market-based compensation scheme is effective in inducing managers' incentives. We combine the optimal contract theory with the market microstructure literature and endogenize both the optimal compensation scheme and the stock market equilibrium. We analytically show that the incentive pay works better in a more efficient (or more informative) stock market. Empirical tests justify our model prediction. Using residual analyst coverage as one proxy for market informativeness, we find that the coverage is negatively related to the compensation level and positively to the pay-for-performance sensitivity, suggesting that an efficient market induces managerial incentives as well as structures their behavior.

Intellectual Property and Antitrust: Music Performing Rights in Broadcasting

On June 11, 2001, the Southern District Court of New York approved a Joint Motion by the U.S. Department of Justice and ASCAP to enter a Second Amended Final Judgment (AFJ2) that vacates previous judgments. The new Consent Decree is generally a competitive improvement over its predecessor. With regard to licensing, rules are tightened in a manner that makes ASCAP's program license more competitive with its "all or nothing" blanket license; broadcasters and other users will now have more economic ability to substitute out of the blanket contract. This could save shareholders in the broadcast industry considerable amounts. With regard to writer payments, market adjustments and joint collective bargaining between writer groups and licensees will replace government rule-making as a means of valuing the relative worth of different types of music. Here the Decree may be too optimistic in its assessment of the health of competition in the market for performing rights and its ability to restore market-based compensation for all writers.

Market Based Compensation and Trading

This paper examines the role of trading and market liquidity on market-based management compensation. The paper recognizes the endogenous nature of a firm’s stock price - it is the outcome of trading motivated by anticipations of future firm value. Our central result is that the degree of market-based compensation is proportional to market liquidity. Even though no outside trader has better information than the inside owner of the firm, their trading results in a stock price that is useful for incentive contracting since it allows the filtering out of noise that is not related to performance.

Access to Networks: Economic and Constitutional Connections

A fundamental transformation is taking place in the basic approach to regulating network industries. Policy makers are in the process of abandoning their century-old commitment to rate regulation in favor of a new regulatory approach known as access regulation. Rather than controlling the price of outputs, the new approach focuses on compelling access to and mandating the price of inputs. Unfortunately, this shift in regulatory policy has not been met with an accompanying shift in the manner in which regulatory authorities regulate prices. Specifically, policy makers have continued to base rates on either historical or replacement cost. We argue that courts and policy makers have largely ignored the fact that this fundamental shift in regulatory approach demands an equally fundamental shift in the approach to setting prices. Economic theory suggests that regulatory authorities should base access prices on market prices. In addition, because compelled access to most telecommunications networks requires that competitors be permitted to place equipment on the network owner's property, access requirements constitute physical takings for which market-based compensation must be paid. Although the unavailability of market-based determinants once justified basing prices on some measure of cost, the shift in regulatory policy (especially when combined with the emergence of direct, facilities-based competition made possible by technological convergence) has caused the justifications for refusing to set rates on the basis of market prices to fall away. We then use these insights to analyze access pricing with respect to three emerging regulatory issues: (1) access to unbundled network elements mandated by the Telecommunications Act of 1996, (2) the access to utility poles compelled by the 19996 amendments to the Pole Attachments Act, and (3) open access to digital subscriber line (DSL) and cable modem networks providing high-speed broadband services.